Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems’ third quarter 2022 results conference call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now 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 Mr. Rami Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead.

Thank you Michal. Good day everyone and welcome to our third quarter 2022 earnings call. On the call with me today are Butzi Machlis, our President and CEO; Kobi Kagan, our CFO, and Yossi Gaspar, Senior EVP, Business Management. Before we begin, I would like to point out that the Safe Harbor statement regarding the press release issued earlier today also refers 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 reconciliations in today’s press release. Kobi 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 Kobi. Kobi, please.

Thank you Rami. Hello everyone and thank you for joining us today. The third quarter results reflect the strong demand for our solutions and the investments we are making to realize the growing potential presented by increased geopolitical tensions and growing defense budgets. Third quarter revenues were similar to 2021 as growth in Europe offset lower Asia Pacific revenues. Our revenues by geography tend to fluctuate on a quarterly basis based on specific programs and project performance, as well as milestones reached in a particular quarter. We believe the longer term revenue trends supported by the growth in the order backlog are more representative, as we have discussed with you in the past. I would note the sale of Ashot Ashkelon Industries to FIMI was completed at the end of the second quarter of 2022 and our results in the third quarter of 2022 do not include a contribution from Ashot. The current operational environment is challenging due to supply chain disruptions and labor cost inflation. Profitability in the third quarter includes expenses related to [indiscernible] stock price-linked compensation plan. This plan helps align employee compensation with share price performance, incentivizing our employees to generate long term value for all of Elbit Systems stakeholders. Our GAAP and non-GAAP results have always included these expenses, but this year they are higher than in recent years following the share price appreciation. Our conservative balance sheet management policies have enabled us to increase inventories and partially offset the supply chain disruptions to maintain deliveries to our customers on schedule. Our budget and longer term planning assume that the global economic trends of supply chain and wage inflation headwinds will gradually subside from the second half of 2023. We continue to invest in R&D to enhance our portfolio and maintain our competitive edge. We…

Thank you Kobi. Firstly, I would like to thank the investors on the call and all our shareholders for their continued support. In a volatile world, we, Elbit’s management team have to make hard choices and decisions as we strive to create value for all our stakeholders and ensure we find the right balance between long term value creation and short term performance. We are fortunate that Elbit System shareholders understand the strategy, the potential, and the long term investment horizon that has supported the growth and the success of the company for decades. We are also aware that you expect a better operational performance, including higher profitability than what we delivered in the third quarter. We are working to improve the short term performance while maintaining the balance with the long term success of Elbit Systems by investing in our people, our portfolio and our customers. This year, we increased investment in our people. Elbit’s employees are the most critical contributor to our long term success. We invested to retain talent in a competitive labor market in Israel and around the world, including stock price-linked compensation plans that had a material impact on the profitability in 2022. I would like to remind you that our executives and employees come to work at Elbit for more than just a salary. They joined Elbit because we are an attractive employer that provides them with an opportunity to work on some of the world’s most advanced technologies and to support those responsible for the protection of our loved ones and our countries. Our business is growing and we continue to recruit around the world to deliver our record backlog and support our customers. We continue to invest in R&D to develop leading solutions that provide our customers with valuable competitive edge leveraging…

[Operator instructions] The first question is from Pete Skibitski of Alembic Global. Please go ahead.

Yes, good afternoon everyone. Hope everyone is doing well.

Hey Pete.

Guys, I had a question about the airborne systems unit. Revenue was down quite a bit this quarter - I think, Kobi, you mentioned it was on airborne precision guided munitions. It was also down a little bit in the second quarter. I’m just wondering if there was maybe one large program that’s ending that’s driving that weakness and that maybe as we get into the fourth quarter or first quarter, we’ll see easier comps there and a return to growth.

Thank you, Peter, for the question. This is Kobi. You are right - it is a large program that we announced early last year that we had concluded in the previous quarter, and in this quarter we don’t have any sales from this large program. We announced a new airborne precision munitions sale that we got this year, so we expect that next quarter, we will continue to sell on this issue.

Okay, that’s helpful. Thanks so much for that. Then I just wanted to switch now to maybe underlying gross margin issues, in particular pricing. I’m just wondering--you know, as we’ve heard the U.S. defense contractors, worked our way through the third quarter, they are also experiencing, of course, higher labor rates and there’s sort of a delay effect in terms of not being able to pass on the higher labor rates through updated pricing until they start new contracts, essentially, and so you’ve got this mix of current contracts with higher labor rates but pricing that reflects labor rates from maybe a year or two ago. I’m just wondering, have you--has Elbit had success in terms of the ability to pass on the cost of higher labor rates through pricing on new contracts, and so maybe ignoring for you stock-linked compensation but just in terms of base labor rates, are you getting better pricing on new contracts as opposed to the contracts that maybe were awarded a year ago when labor rates were a bit lower?

Hi Pete, this is Yossi. I would address it in the following way. First of all, the extraordinary costs related with our stock option plan, that is something kind of one-time and it goes away, and it’s not something of the baseline of cost of the company, so that should be neutralized. It does impact present year, but that is not something that we’re continuing to witness. On the baseline cost, I would say the following. Some of our contracts with customers do have economic price adjustments and therefore we are getting compensation because of the growth in the cost of the labor, and also to some extent growth in the cost of basic materials which is also price adjusted according to what happens in the market. However, we don’t have that in all of our contracts and therefore we are suffering to some extent because of that. We definitely take all these changes into consideration when we bid for new contracts, and I would say that even in the recent growth of backlog that we have experienced, that already include backlog that takes into account these economic adjustments and we hopefully will--these contracts will result in improved profitability in the future.

Okay, that’s very helpful. Great color there, I appreciate it. I’ll just ask one last one and then get out of the queue there. On the backlog growth - that’s a good transition, Yossi, it was very strong this quarter, year-to-date backlog growth has been strong. I’m just wondering, can you bifurcate it a little bit by region for us? Is there any one region that’s been very, very strong and maybe some laggards? I’m sure a lot of people are wondering if Europe, and even Eastern Europe is driving that growth, or if you’re seeing strength kind of across the board. Appreciate any color on that topic.

Yes, first of all, I would say the following about that. We have kind of steady state business flow which we were exposed to years ago, and we continue to have these, what we call the medium sized contracts of tens of millions of dollars each, and that continues and we will increase. Then we have on top of that some significant number of what we call three-digit contracts, that are in the hundreds of millions of dollars per contract, that we have seen in recent two years an increase of number of those contracts, and definitely the high level dollar value contracts have the potential to improve future definitely revenues, but also the bottom line. Regarding the areas, geographic areas, you can look at our press releases of the various major contracts that we have announced, and if you analyze those, I would say that the contracts in the U.S. are more or less in the steady state growth that we have seen in past years. Contracts in Europe and Asia Pacific are higher in the growth than what we have seen in the past, especially related with some of these [indiscernible] contracts that I mentioned earlier. The contracts in Israel, of course, are more or less at the level that we have seen in the past, maybe with some middle, single digit growth from what we have seen in the past. In total year over year, our backlog has increased by $1.1 billion, which is a significant number, and the spread, the global spread, as I said, the more higher level growth is in Asia Pacific, Europe, and all the others are the normal level.

Okay, that’s great. Appreciate the color, guys.

Thanks Pete.

Thank you Pete.

The next question is from Ellen Page of Jefferies. Please go ahead.

Hi guys, thanks for the questions. Just to start, looking at both from a cash and margin perspective, how would you describe supply chain disruptions today relative to where they were in Q2? Are things improving at all, both from an ability to source materials and also from an inflation perspective?

Hi Ellen, this is Butzi. With regards to supply chain, we see an improvement in shipments. Shipment costs are going down, not yet at their historical levels but they are going down, and we see also prices going down in metal parts and materials going down, once again not yet at historical levels prior to COVID but going down. We don’t yet see it in electronic components - there, we still see a shortage. The main challenge we face right now is mainly around the electronic components. That’s also the reason why our stock went up and inventories. We--from what we understand and from what we estimate, we believe that improvement there will happen during the second half of next year, and we are taking all the required measures in order to overcome some of these challenges.

Helpful. Just looking at land systems, it was very strong in this quarter, and I believe that’s where Ashot came out. Am l--is that accurate, and how do we think about growth going forward as [indiscernible]?

Are we talking about land systems, Ellen?

Yes, and Ashot, the divestiture.

Yes, we had--hi Ellen, this is Kobi. We had stronger artillery sales this quarter, and remember that the Ashot Ashkelon part was nearly $20 million, so it is not so significant, but we had stronger artillery and ammunition sales due to the situation mainly in Europe, so we had a stronger quarter in the land system business.

Helpful. I’ll hop back in the queue. Thank you.

Thanks Ellen.

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

Good afternoon. Thank you for taking my questions. Most of them were answered, but I have one left. [Indiscernible] is one of your strategic moves into the next year, and also you have this conversion of product and technologies from here and from them into the sea. Could you give us some milestones of when and how much this will be felt over the next year?

Hi Ella. As you remember, we acquired Sparton in the U.S. around two years ago, and we are--we continue to be an important supplier to the Navy of sonobuoys, and as was mentioned, the $5.1 billion ID/IQ contract which should come, which is split into three suppliers, will also--will be also a good indication that our revenues in Sparton will continue to grow in the future. We also made another acquisition a few years ago in Canada, a company by the name of GTI - they do sonar, and they are very successful and the company is growing as well, and they have already several international sales and we see a growing potential for them also. A year and a half ago, we won a very important EW naval contract with the U.K. It was a very difficult competition against local providers, and still we won it because of the superior technology we have here in Israel, and this technology is similar to the technologies that we are deploying these days in the [indiscernible] of the Israeli Navy, so based on our EW capabilities here and based on our capabilities in the U.S. and in Canada, I’m happy to say that we have position in the U.S., we have position in Canada, we have positions in the U.K. and Israel, and we--and this is--and we also have here a nice, very advanced autonomous solution by the name of Seagull which can--which the importance of a naval autonomous vessel was demonstrated just recently in the Gulf, as well as in the conflict between Ukraine and Russia. We have several elements. We are combining them together to deliver integrated solutions to our customers - we see a growing potential for that, and our long term focus is to have activity which will enable customers, which should be around $1 billion of [indiscernible].

Okay, thank you. I have a follow-up question, unsurprisingly, on the bottlenecks in the industry also [indiscernible] about. The question is if you could give us a bit more color and a bit more specifics about where--I mean, they are in the chips, but is it mostly Asia or it’s all over, and also because there is such a ramp-up in the industry, especially in the U.S., is there competition between companies and you have sometimes just to stand aside and wait for a more rational price? How is it impacting you, because the others, the American companies, they were ahead of you in the supply chain disruptions and you were much better off all this time, and now it’s reached you as well, so I would like to see how is it happening in the industry.

Hi Ella, this is Yossi. I would say the following. We all, the whole industry, and not only aerospace and defense, were significantly affected by what’s going on in the supply chain; however, as Butzi explained before, we already see some improvement in areas like the mechanical parts, like transportation and deliveries, and so on and so forth. However, the electronic parts are still with us and impacted. The good thing that we did two years ago is that we have anticipated this thing that’s going to happen, and we have increased our inventories significantly, which did hurt our working capital. You have seen that in our reports. By the end of--and we continued to work along those lines during the last year and a half to two years, however initially we thought that this would be--that this will be over or significantly over by this time, and this has not happened. This explains why we were quite well organized for the initial year, year and a half, and it did not affect us as much as it was done by the U.S. companies. However, by the end of the day, we are part of the full global supply chain, and now it does affect us more. We do anticipate by the second half of 2023 this will decline, and what has happened in the mechanical parts and in the transportation and other areas, that will improve also in the electronic parts, and we will be back on track somewhere towards the second half of 2023.

Do your competitors also feel optimistic about this timing--?

That we give out as a market estimate right now, and we are in daily contact with all the suppliers to understand exactly when can we get the missing parts, to understand. In some cases, we have the entire product ready and we are just missing one transistor or one piece of electronic, you know, that’s delivered to a customer and they can do it, so we are on a daily--we are on a daily contact with the relevant suppliers. We start to see some improvement, but the estimation right now in the market is that it will be solved, or most of it will be behind us during the second half of next year.

Okay, and last question about the hedge. I know that you have now a new hedge policy and it’s less sporadic than it used to be, but this recent month presented quite an opportunity for hedge, so did you stick to this structured hedging or did you take also some opportunities in this sense?

Hi Ella, this is Kobi. We are sticking to our policy, which is we are not prophets and we cannot anticipate what happens with exchange rates - for instance, nobody anticipated the sharp decline in the British pound, so we are trying--we are sticking to the policy. Next year, of course, we have some stronger hedges due to the improvements in the energy rates, and we sometimes take picks and when we identify picks, we actually take the opportunity and increase our hedges. But this is--everything is around [indiscernible], so we maintain this policy which gives us--we want to work on steady platform of exchange rates, and sometimes it’s [indiscernible] to understand what is the neighborhood of the exchange rates which we are working, again with taking advantage on spikes that we have identified.

So it will be more closer to the average and less the spikes, if I read you right?

Yes, this is right, because we are--we think that the steady platform for the company is very advantageous forward, and of course we have a significant improvement for next year in terms of the platform of exchange rates that we are going to work with.

Okay, thank you very much, and thank you for taking my questions. Good afternoon.

Thank you.

The next question is from Ilya Fainer of Leader. Please go ahead.

Thank you for taking my questions. Most of my questions were answered, but I want to ask you what’s your opinion about the [indiscernible] will eventually lead to a lower growth in the defense budget and how it’s going to influence the company. The second question, with the impressive growth in the backlog, do you have a range or guidance when we’re going to see the growth in the revenue and what’s your guidance for the next two years?

Hello. With regards to the first question, we do not see any signs of recession in defense spending; on the contrary, we see growth. We see growth in Europe, we see growth in Asia Pacific, and we see also expect growth in our positions in the U.S. and North America, and also here in Israel. After the election, we hope to see stability which will enable a long term program to be executed, so we anticipate growth in defense spending. We see growing potential for the company, we see more opportunities, we deliver more offers, and the funnel of new positions is increasing, so that’s with regards to the first question. With regards to the second question [indiscernible].

I think that the best indicator for the future growth in revenues is the backlog. If you look at our press release, we always give the breakdown of the backlog for the rest of the year plus the following year, and the backlog to be sold after the following year. By the end of the third quarter, we had a backlog of $14.7 billion. If you--and we also said that 40% of that backlog is going to be performed during the fourth quarter of ’22 and ’23. Just by making a simple calculation, that gives you about $4.7 billion of revenues that are going to happen in 2023. We usually have a coverage of backlog for approximately 80% for the following year, so just making a simple mathematics, you can find out that we’ll have very nice growth for the top line for next year.

Okay, thank you.

Thank you Ilya.

The next question is a follow-up from Pete Skibitski of Alembic Global. Please go ahead.

Yes, thanks guys. I wanted to ask on the cash flow statement, the contract liabilities line, which I think relates to customer advances, advances were a little soft in the first half of the year but they were very strong here in the third quarter and historically they’ve been very strong in the fourth quarter, so I just wanted to see if maybe some advances were pulled forward from the fourth quarter into the third, or do you expect the fourth quarter to be another good quarter for advances, because typically a good advances quarter for Elbit means a good free cash flow quarter as well. Just wanted to get a sense of that. Thanks.

Hi Pete, it’s Butzi. The answer is no, we didn’t change anything. What you see right now is a reflection of the third quarter only. There is a lot of--we put a lot of emphasis on cash flow in the company these days, and this is also for advances. That’s why you see growth in advances in the company, and we expect it to continue.

Okay, great. Thanks so much.

Thank you.

If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. 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 9723-925-5900. 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?

Thank you. I would like to thank all of our employees for their continued hard work and contributions to Elbit Systems’ success. 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 Limited third quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.