Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Third Quarter 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. You should have all now received the company’s press release that is available in the News section of the company’s website www.elbitsystems.com. I would now like to hand over the call to Rami Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead.

Thank you, Shantel. Good day, everyone and welcome to our third quarter 2021 earnings call. On the call with me today are Butzi Machlis, our President and CEO; Yossi Gaspar, our Chief Financial Officer; and Kobi Kagan, who will take over from Yossi on April 1 next year. Before we begin, I would like to point out that the Safe Harbor statement in the company’s press release issued earlier today also referred to the contents of this conference call. As we do every quarter, we will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today’s press release. Yossi will begin by providing a discussion of the financial results, followed by Butzi, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a question-and-answer session. With that, I would like now to turn the call over to Yossi, please.

Thank you, Rami. Hello, everyone and thank you for joining us today. I would like to begin by welcoming Kobi Kagan to this call. I have worked closely with Kobi since he joined Elbit in 2008. We are currently conducting a handover process before he takes over the role of Elbit’s CFO from April next year. The results of our third quarter reflect the successful execution of our global diversification strategy that is delivering strong revenue growth and an improved operational performance, which is a result of efficiency measures we discussed in the past. We continue to implement mitigation plans to limit the impact of the strengthening of the Israeli shekel. In the short-term, this includes the adoption of a rolling hedge policy and efficiency measures. Over the longer term, we plan to expand our manufacturing footprint in high-quality lower cost countries to better balance our currency exposure and reduce risk. I will now highlight and discuss some of the key figures and trends of our financial results. Third quarter revenues were $1.363 billion and increased by over 20% year-over-year. A major part of the growth was organic in addition to the contribution from Sparton, which we acquired in the second quarter of 2021. In terms of revenue breakdown across our areas of operation, airborne systems accounted for 37% of the total quarterly revenues and increased year-over-year mainly due to airborne precision-guided munition sales. Land systems accounted for 23% of total revenues, a similar level to the revenues of the third quarter of 2020. C4ISR at 27% of revenues increased year-over-year, primarily due to the acquisition of Sparton. Electro-optics accounted for 10% of total sales and increased year-over-year due to the ramp of Elbit Night Vision programs. Other sales were 3% of revenues and increased year-over-year due to the growth…

Thank you, Yossi. I would like to welcome Kobi to the call and wish him luck. I have worked with Kobi for many years. As you may know, Kobi was VP, Finance at Elbit System Land and C4I when I was General Manager. Turning to the financial results, the recent months have been busy and productive with a number of strategic contract awards. We continue to see good momentum across almost all our end markets, including Israel following the approval of defense budgets. At our Investor Day in April, we discussed the increased importance of maritime domain and the investment Elbit has made to develop solutions for the growing market. In November, our UK subsidiary, Elbit System UK was awarded a $100 million 13 year contract from Babcock to provide the Royal Navy with new Electronic Warfare capabilities. As part of this contract, Elbit System UK will design and manufacture Maritime EW suites comprised of digital full-spectrum radar electronic support measures and EW command and control systems. These latest generation technologies will enhance the situation awareness and anti-ship missile defense of Royal Navy ships improving the capability to exploit the electromagnetic environment. Elbit Systems supplies electronic warfare systems for air, land and naval platforms and in recent years, has signed a number of contracts to supply EW systems for the U.S. Air Force National Guard, F-16 and German Air Force helicopters. We are also installing EW systems on the Israeli Navy’s new Sa'ar 6 corvette. In September, we received a $56 million contract to provide an integrated anti-submarine warfare solution to the Navy of an Asia-Pacific country. Elbit will provide civil unmanned surface vessel consumed to perform anti-submarine warfare missions and our Towed Reelable Active Passive Sonar or TRAPS systems. This award follows a contract earlier this year to provide…

[Operator Instructions] The first question is from Greg Konrad of Jefferies. Please go ahead.

Good morning.

Good morning, Greg.

Maybe just to start on revenue kind of a two-part question, one kind of more short-term, one longer term. I mean just in the short-term, is this year any different where you typically have a Q4 ramp for sales? Or were there some items kind of pulled into Q2 and Q3? And then kind of the second part, longer term, I mean organic growth has been running well ahead of our expectations and also kind of the mid-single digit target you’ve laid out in the past? I mean, has the growth profile been reset? Or are there headwinds heading into next year we should be thinking about just kind of how we should think about the overall growth target?

Well, usually, as you have mentioned, the fourth quarter is usually a strong quarter at Elbit Systems from point of view of revenues, and we expect this to be the case for 2021 as well. We did see the transformation of the strong backlog growth that we had in recent years into revenues. Actually, I would say that repeatedly, we were asked by the markets, outcome that we grow so strongly in the backlog, and we do not see a simultaneous growth in revenues. As we explained, it takes some time from the growth of the backlog until it transforms into revenues. And presently, we do see that effect happening this year. Looking forward, I think the transformation of the backlog into revenues will continue. The continued growth in backlog will create continuous growth in revenues. However, I am not sure at this point in time that we will be able to deliver strong double-digit growth through all of next year. We do believe that the growth will happen because of the backlog numbers and that next year, we will see growth in the top line as well.

Thank you for that. And maybe just transitioning to margins, I mean, you mentioned cost control measures and a number of maybe efficiencies around manufacturing. I mean, how are you thinking about the margin target. I think you’ve laid out a 10% longer term margin target in the past. I mean how do we think about the path to get there between maybe mix, some of the efficiency measures you’ve kind of put in place and just overall volume leverage?

I think that our long-term plan is definitely underway, and we started to see the positive results of our long-term strategic plan of reduction of overheads of cost of improving efficiencies of combining production lines and all the other efficiencies, including centralized big acquisitions and so on. All of this is happening. In the past, we mentioned also the – what we call the one ERP system that is implemented across the whole organization. We are well over 50% already implemented and we expect to complete that somewhere, most of it during next year. There may be some very small parts in the year after that. And we already start to see to see the benefits of that, although the biggest part will come in 2022 and 2023, when we have most of the company under the same ERP system. This all effort will continue. And as I said it’s part of the long-term plan that is implemented and thus help us in the improved performance from the point of view of profitability. Together with that, we have some headwinds because of the local currency exchange rate. We are making all the efforts possible in order to mitigate that. And that effort will also continue into the future. We also are looking at various production sites in order to enable us to manufacture and do some as well as engineering efforts in high-quality, low-cost countries that will enable us to reduce our cost base in the various areas of cost in the company, one of the elements that helps us to reduce the overall percentage of costs of the operating expenses. So of course, the very strong growth in the top line, and when the company growth is growing, then the reduction in percentage of cost in the G&A, percentage of cost of R&D and other expenses is also helpful in improving the operating profit line.

I will leave it there. Thank you and good quarter. Thanks.

Thanks, Greg.

The next question is from Pete Skibitski of Alembic Global. Please go ahead.

Yes, nice quarter, guys. And Yossi, congratulations on your pending retirement.

Thank you. I will be around for some time.

He’s not retiring yet.

Understood. So yes, second straight quarter of – it looks, by my math, sort of mid-teens organic revenue growth. And I think the last quarter, you talked about a large precision-guided munition sale to an Asia Pacific nation as being a key driver of that second quarter growth. And so I’m guessing maybe that, that was a big driver in the third quarter as well. Can you give us a sense for when that large program may start to run off, just so we can maybe get an idea for the timing of maybe transitioning from this kind of mid-teens growth to more of a like you talked about your long-term goal of mid-single-digit plus type growth?

Our revenues are definitely impacted by various programs of this kind. This is not the only program that we are running. This specific program, it goes through the next year as well. And however, there are some significant other programs with similar characteristics that we have received in our backlog and will eventually replace the revenues from this program as we usually do over the years.

Okay. Okay. And then can we talk cash flow for a second. There is a large receivables billed this quarter. I think I heard you got – I don’t know if that’s related to the PGM sale or – but I also heard you guys say that the Israeli defense budget was approved, which I think you were hoping that, that could improve cash flow. So I’m just wondering maybe you could speak to expectations for fourth quarter cash flow and kind of catching up on some of the receivables build?

Well, the one good thing that has happened in November is that the Israeli government has approved and department has approved the budget for the rest of 2021 and 2022. This of course has been reflected in approving all the expense elements, the budgets of the MOD in Israel, and that has translated in payments, significant payments that were delayed by the Israeli Ministry of Defense for many quarters, actually, so that at this point in time, I can – I am happy to report that a significant part of the delayed payments have been paid. And we expect by the rest of this year to get paid for most of the delayed payments of the Ministry of Defense. So, from that point of view, that’s very good news and things are back on track as they should have been for normal course of business. And I would emphasize that this is not reflected yet the improved collection from the Ministry of Defense in Israel is not reflected in the third quarter numbers, because the budget was approved in November, we will see that in the fourth quarter. From a point of view of the other elements, yes, when you have increased revenues, then of course, you have increased receivables and we expect to collect all of that in time. So, looking at the next quarter, I would cautiously be optimistic by saying that we probably will improve our working capital and we will see stronger cash generation.

Okay. So, that’s great news. I appreciate that. Maybe I can sneak one last one in, maybe for Butzi. Butzi, a lot of news, I think about opportunities for Israeli firms in general, but certainly for Elbit for, I will call it, non-Israel defense sales. I think you guys have tended to Dubai Airshow recently, and there was an announcement that you are setting up a new unit in UAE. So, can you talk about maybe how optimistic you are about these kind of new opportunities and kind of timing and magnitude and it just kind of seems like a whole new market has opened up to you fairly quickly?

Thank you. It’s true. We participated for the first time in the Dubai Airshow. The Abraham agreements are opening new opportunities in new markets for Elbit, and I can tell you that there is a lot of interest in several countries for technology. And I am optimistic that it will generate revenues in the future for us in this new market. We are working with the local industries already. And we know the market quite well. And I am quite optimistic that we will continue to see revenues in this market in the future as well. And this is not true just for UAE. It is true for additional countries, which are open for us right now based on the agreement, which was declared 1.5 years ago.

That’s great. I appreciate all the color guys.

Thank you.

The next question is from Ella Fried of Bank Leumi. Please go ahead.

Hello. First, I would like to congratulate the new CFO, Kobi on his appointment and wish him a lot of success. And I have a few questions. The first question relates to the operational profit and the hedge level. You have achieved in this quarter quite a nice rate of operational profit, certainly non-GAAP. And we also remember that this year, you set the hedge level at ILS3.3 for dollar. What about going – I also remember that you established now a continuous hedge. So, what are you expecting the next year? Did you catch a nice level for the forward-going quarters?

We have hedged our shekel expenses for this year, and that includes the fourth quarter. For next year, we have been successful to hedge part of that, mainly in the first half of next year. And we of course, are keeping track on the changes in the currency and looking for opportunities to continue our policy of continuous hedging as it comes along.

So, you have two certain quarters. You had a few that are fully – almost fully hedged at the current level. And then you have to try and keep it on.

I said and I say part of next year, yes…

Part of next year. I decided it’s my decision that it’s half of next year. Okay. And the next question is actually about – I don’t know to whom it’s related, but it’s about removing facilities. You mentioned it for many years, and now I think the time is now because the level are really – the exchange levels are really unheard of. And when you mentioned Charleston, could it be one of the facilities to actually accept the removed operations or it’s just a different project and the operations will be removed to countries with – was even at cheaper labor costs?

Hi Ella, good afternoon.

Good afternoon.

As you know, we have dozens of companies all around the world, in Brazil, in the U.S., in the UK, in Germany, in India and many other places. And we, in all these markets, it’s very important to create local jobs and to do development and to do production. So, we are taking advantage of the positions we have in these markets. And we are expanding our facilities there. It helps us first to be more local, to be more crafted and to do more jobs on the ground. And secondly, also to hedge some of our activities, which we do in Israel and other facilities. So, it’s a long-term process, and it’s part of improvement we are trying to gain in the OP. As Yossi mentioned, it’s one element there. It’s already effective, as you all saw in the last results. Other parts are increasing productivity, which is Boca – the Raton Boca facility will help us with that and centralized procurement and the new ERP, other measures, which were mentioned by Yossi earlier. So altogether, we have a long-term plan to improve the profitability of the company, and we are implementing it. It’s quite effective and we will continue to do it in the future. Just on facilities just one piece in this quarter.

Okay. Thank you. And the last question was actually also for you and more marketing question. Do you intend to keep in the long-term IMI label or you plan to integrate it a certain – within the few years into Elbit Systems label because there are different sites to it. So, what – do you have a definite plan now?

It’s a good question. And for that – I can tell you that I have very good reputation all around the globe, mainly for mission and for land platforms. So, for the time being, we intend to keep the name of the product. We would like to gain benefits of the reputation – of the good reputation IMI is having in many countries.

Okay. Thank you. Thank you for taking my questions.

Thank you, Ella.

The next question is from Elad Kraus of Excellence. Please go ahead.

Thanks. Hi Butzi and Kobi. I have a couple of questions. First, regarding the sales, I see that Israel is only 19% of the sales. Do you see that a trend that Israel should go lower or it’s one-time that usually will come back to the normal where it used to be a few quarters ago? And the second question is also regarding the margins. Do you see any changes in the environment right now that you can say that the margins should be higher or lower or the same compared to the last quarters?

As you know, Elad, the Israeli market is a limited market. As the company grows, then a big part of our growth is international, so, with all the optimism that the Israeli defense budget continues to grow and it does. It looks like we are doing – we are growing faster, and our expansion is in the international market. So, based on that, looking at the longer term and assuming that the company will continue to grow at a relatively high rate, then the percentage-wise the Israeli market will probably be – will be declining. However, the absolute value expected to grow at some rate. So, this is regarding your first question. Regarding the profitability stuff, I think we explained that and we are doing everything possible in order to improve it. I think we are on track. The prices in the market are defined by the market itself. So, the improvement in the profitability, we expect it to come from improvement in operations of the company. So, this is actually the plan and we see very successful results out coming from that plan.

So, that is still at the same level, I mean there is no higher competition?

Well, the competition is essentially there. It was there. It continues to be there, and we expect it to be there in the future as well.

Alright. Thanks.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5900. And internationally, please call 9-723-925-5900. A replay of the call will also be available at the company’s website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

Yes. Thank you. I would like to thank all our employees again for their continued hard work, particularly in these challenging times. To everyone on the call, thank you for joining us today and for your continued support and interest in our company. Have a good day, and goodbye.

Thank you. This concludes the Elbit Systems third quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.