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Operator: Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems’ fourth 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 Rami Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead.

Rami Myerson: Thank you Yanni. Good day everyone and welcome to our fourth 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 and the company’s 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 on-going 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. Earlier today we hosted an investor conference at the stock exchange. A recording of the event is available in the investor relations section of our website at www.elbitsystems.com. Investors and analyst who wish to ask questions related to this topic €“ at the investors conference are welcome to present their questions during the Q&A session of the call. With that, I would like now to turn the call over to Kobi. Kobi, please.

Kobi Kagan: Thank you Rami. Hello everyone and thank you for joining us today. The 2022 annual results reflect to help the business environment supported by growing defense budgets around the world and another year of significant contract awards. We ended the year with a record order backlog of $15.1 billion up 11% relative to the end of 2021. Our financial performance in 2022 also includes the impact of supply chain disruptions and labelled cost inflations. This includes a $62 million expense related to employees stock price link compensation plans and an additional $10 million of retention bonuses. Our GAAP and non-GAAP results have always included these expenses but this year they were higher than in recent years following the share price appreciation.

Our budgets along the term planning assume that the global economic trends supply chain and wage inflation head wind would gradually supply from the second half of 2023. We continue to invest in R&D to enhance our portfolio and maintain our competitive edge. We invest in sales and marketing to extend our customer base and also continue to invest in CapEx to improve and expand our manufacturing footprints. I would note that the sale of Ashot Ashkelon to FIMI Opportunity Funds was completed at the end of the second quarter of 2022 and now result in the second half of 2022 do not include a motivation from Ashot Ashkelon. I would now highlight and discuss some of the key figures and trends in our financial results. Fourth quarter revenue were $1.506 million compared to $1.494 million in the fourth quarter of 2021.

For 2022 as a whole, our revenues were $5.5 billion versus $5.3 billion last year. In terms of annual revenue breakdown across our areas of operations. C4ISR it’s 29% of revenues increased year-over-year mainly due to UAS and anti-submarine warfare sales. Airborne systems accounted for 37% and declined year-over-year. The growth in training and simulation sales helped offset lower airborne precision guided munitions sales. Land systems was 22% of total revenues and year-over-year decline is mainly due to the sale of Ashot Ashkelon. Electro-optics accounted for 10%, and increased year-over-year due to increased sales of night vision systems. Other sales accounted for 3% and declined year-over-year mainly due to lower sales with our U.S. medical instrumentation subsidiary.

Our diverse geographic revenue base is important to the long-term sustainability of our business. In 2022, North America contributed 27%, Europe 23%, Asia-Pacific 26% and Israel contributed 19% of revenues. European revenues increased mainly due to growth in UAS, munitions and training and simulation sales. North America revenues were lower mainly to the decline in medical devices sales. Asia-Pacific revenue declined mainly due to lower precision guided munitions and C4ISR sales. The non-GAAP growth margin for the fourth quarter was 25.7% compared to the fourth quarter of 2021 at 25.5%. For the full year of 2022 non-GAAP growth margin was 25.5% compared with 26.2% last year. GAAP gross margin in the fourth quarter was 25.3% of revenues compared to 25.1% in the fourth quarter of 2021.

GAAP gross margin in 2022 was 24.9% compared with 25.7% in 2021. Gross margin in 2022 reflect an unfavorable mix with inflation and supply chain disruption. GAAP and non-GAAP gross profit in 2022 include expenses related to stock price linked compensation plan. The fourth quarter non-GAAP operating income was $103 million or 6.8% of revenues compared with $120 million or 8% of revenues last year. GAAP operating income for the fourth quarter was $120 million versus $107 million in the fourth quarter of 2021. Non-GAAP operating income in 2022 was $357 million or 6.5% of revenues compared with $451 million or 8.5% of revenues last year. GAAP operating income was $368 million versus $419 million last year. Operating margins declined year-over-year due to higher R&D and sales and marketing expenses.

The operating expenses breakdown in 2022 was as follows; net R&D expenses were 7.9% of revenues, versus 7.5% in 2021. Marketing and selling expenses were 5.9% of revenues, versus 5.5% last year. G&A expenses were 5.7% of revenues, compared to 5.1% last year. We have increased investment in R&D, and, and in sales and marketing to realize the potential opportunities provided by defense budget growth and increased demand for our capabilities. Other operating income of $68.9 million in 2022, included capital gains related to the sale of buildings in Israel and the U.K., as well as facility relocation grant of $28.6 million received by a subsidiary in Israel in the fourth quarter. Operating profit in 2022 include expenses of approximately $62 million related to stock price-linked compensation plans and an additional $10 million of retention bonds.

Financial expenses were $27 million in the fourth quarter, compared to $20 million in 2021. Financial expenses in 2022 were $51 million, compared to $40 million last year, and reflect the higher interest rate environment. Other expenses were $24 million in 2022 and resulted mainly from the re-evaluation of holding in affiliated companies and expenses related to non-service costs of pension plans. We recorded a tax benefit of $5 million in the fourth quarter, compared to a tax expense of $92 million in 2021. Taxes on income in the fourth quarter of 2021 included a onetime expense of approximately $80 million related to the amendment of legislation regarding exempt earnings from approved enterprises in Israel. The effective tax rate in 2022 was 8.2% compared to 34.3% in 2021 that included debt extraordinary expense.

Our non-GAAP diluted EPS was $1.68 in the fourth quarter, and $6.03 for the full year of 2022. GAAP diluted EPS was $1.91 for the fourth quarter of 2022 and $6.18 for the full year. The stock price-linked compensation expenses in 2022 were $1.26 on an EPS basis, and an additional $0.20 of retention bonuses on an EPS basis. Our backlog of orders as of December 31, 2022 was $15.1 billion a $1.4 billion higher than the backlog at the end of 2021. Approximately 60% of the current backlog is scheduled to be performed during 2023 and during 2024 and the rest is scheduled for 2025 and beyond. Operating cash flow for the fourth quarter was a $195 million inflow compared to $260 million inflow in the same quarter last year. For 2022 we reported a $240 million operating cash inflow versus a $417 million cash inflow in 2021.

Cash flow from investing activities includes the high CapEx related to the new facilities in Israel, and in Charleston, South Carolina, as well as the rollout of the ERP system. The Board of Directors declared a dividend of $0.50 per share. I will now turn the call over to Mr. Machlis. Over to you Butzi, please go ahead.

Butzi Machlis: Thank you, Kobi. 2022 was another good year for Elbit Systems with sustained growth and record order backup. We’ve continued the strategic transformation of Elbit Systems moving up the value chain from the system provider into a company that provide comprehensive and relevant solutions to the growing global customer base. We initiated this transformation during the previous decades. And you have seen the successful implementation as the order book and revenue growth accelerated in recent years. We have also seen a step up in the number of large three digit contract awards. As part of the bolder transformation of Elbit Systems, we have invested in an operational transformation to improve performance and our ability to deliver the growing backlog.

At our 2023 investor conference earlier today, we presented some of these investments. We have increased our investment to upgrade and expand our manufacturing footprint. We have acquired new machines, we have adapting, we are adapting new technologies and implementing processes to increase the throughput and efficiency of our production facilities. For example, we have increased the capacity of our till high radio production factory in the northern in northern Israel by 60% or 10,000 additional values a year. We are also building new facilities around the world. Construction of our new ammunition production site in Ramat Beka is progressing on schedule and should be up in running for 2024. This new state of the art facility should benefit from going demand or munition.

We have invested in new production facilities across Europe, in the U.K, Germany and Romania. In 2023, we plan to open a new ground combat vehicle assembly and integration center in Charleston, South Carolina. In 2022 and 2021 we increased our CapEx to fund the bidding of these of these and other new facilities. We believe this investment will deliver good returns and support growth over the coming years. We plan to complete the implementation of the new ERP system across the company by the second half of 2023. As a reminder, Elbit System is moving from 11 different ERP Systems we used in the past to a signal ERP System. We expect the total investment in the new ERP system to close to $2 million — $200 million. Approximately two thirds of this investment is the cost of the system that will be amortized over the coming years.

Approximately a third of the investments are the expense cost related to the implementation that impacted our profitability in recent years. We expect a successful implementation of the new ERP System to support an improvement in profitability and cash generation. Elbit System has been impacted by the global supply chain disruption in recent years that slowed revenue growth and increased our cost to mitigate the impact of this disruption and maintain timely deliveries to our customers as we increased inventory. Our working assumption is that global supply chain pressure gradually eased over 2023, with the most significant improvement on the second half of 2023. In 2022, we increased our investment in R&D to sustain development of leading solutions that provide our customers with valuable, comprehensive advantage.

A significant award we received in 2022, and in recent months have validated the alignment between Elbit System portfolio and our customers priority areas for defense spending and the mission critical requirements. The potential for orders from European countries have come up often during investors call and meeting over the last year. Following the announcement of the defense budget increases by multiple federal governments. We describe that noticeable increase in customer interest across Europe and told you that we expect this interest to gradually convert into orders. In recent months, we announced a series of European customer contracts across a range of capability areas, including artillery and rocket artillery, UAVs, and armed vehicles.

We also reported strong growth in your opinion revenues in 2022. We expect this trend to continue over the coming years as European government increased defense spending and recapitalize both the military forces and the domestic defense industrial base. Elbit System is well positioned to benefit from this trend, following the significant investment made to expand our presence across Europe over the last decade. Our subsidiaries, across Europe from the U.K. to Romania, employ hundreds of employees support the local supply chain and are an integral part of the domestic defense industrial base. We have also partnered with most of the large European defense companies. In 2022, we announced a joint venture with KMW, the German armed vehicle manufacturer to cooperate on the Euro-PULS, the next generation of Rocket Artillery System for European customers.

The $17 million contract we have seen in January 2023 and the €133 million contract announced in March for European countries highlight both the demand for Rocket Artillery in Europe and Elbit’s leading position in this market. UAV is a second capability area where we are benefiting from increased demands. In December 2022, U-TacS our U.K. subsidiary was awarded a $400 million 5 years framework contract by the Romanian Ministry of Defense for Watchkeeper X tactical unmanned aero systems. In December we also received the contract on the Australian MOD for Skylark UAVs. Elbit System is Israel’s largest defense contractor, and an important part of the Israeli economy. So recent political development and judicial legislation proposed by the government have not impacted our business until now.

However, sustained political instability have had implications for the local defense industry, as we have seen in the past and could also increase economic uncertainty. I am confident that Israeli leadership will act responsibly to stabilize the situation and ensure Israelis long-term security and prosperity. In recent months, we were awarded significant long-term contracts by the Israeli MOD. In January we received a $180 million contract to provide and operate a new Mission Training Center to train the Israeli Air Force F-16 and F-16 aircraft. In January, we received a $107 million contract to provide and operate Advanced all training center for the Israel Defense Armed Forces. Elbit Systems has developed a broad portfolio of market leading training and simulation solutions for militaries around the world.

Our training and simulation technologies have been selected by a range of customers including the U.S., U.K, Greece and Poland. We believe there is a significant potential in this market for solutions that provide more realistic training that better prepare soldiers for a wide range of scenarios at a lower cost. And with that, I will be happy to take your questions.

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Operator: Thank you. The first question is from Ellen Page of Jefferies. Please go ahead.

Ellen Page: Good morning, guys. Thanks for the question.

Butzi Machlis: Good morning, Ellen.

Ellen Page: Just looking at Europe, it’s like post 2022 obviously, there’s a lot of higher defense spending. But how much of the 11% backlog growth can be attributed to Europe? And is there any way to think about the mix of long cycle versus short cycle demand from the region?

Yossi Gaspar: Hi, Ellen, this is Yossi. I’m not sure I got question properly. Could you repeat it, please?

Ellen Page: Sure. So just looking at European demand, how much of the 11% backlog growth was from Europe? And can we can you talk about the mix of long cycle versus short cycle orders in Europe?

Yossi Gaspar: Well, I would say a significant part of our backlog growth did come from Europe; however, Asia Pacific and the U.S. were also very nice growth of the backlog. We will provide the exact breakdown. But you are right that Europe is a significant contributor to that. From the point of view of the spread of the backlog, we do indicate we do indicate how much of our backlog is going to be transformed in revenues in the 2023 and 2024 — 2023 and 2024 period. And then the rest of it during 2025 and on, usually it’s stands of about 60%, roughly, of our backlog, and this percentage did not change a lot over the years, it’s quite stable.

Ellen Page: Okay, helpful. And just unmanned systems, it’s been pretty lumpy through 2022. What drove the weakness in the quarter? And how do we think about that business into 2023?

Butzi Machlis: It’s Butzi. I just want to remind us that a short a short number will be deducted from the revenue from the second quarter of 2022. We see a growing demand for that solution in Europe as well as in other places. So I’m quite optimistic that the growth related to land systems will continue in the new future.

Ellen Page: Thank you. I’ll hop back in the queue.

Butzi Machlis: Thanks, Ellen.

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

Pete Skibitski: Good afternoon, everyone.

Butzi Machlis: Good afternoon.

Pete Skibitski: Guys, maybe to start out, 2022 is a pretty, pretty good growth year, weighted to the first half. Is something similar for 2023 reasonable for investors to expect something I don’t know in that 4% to 6% type of a range?

Yossi Gaspar: Well, Pete, this is Yossi. You know that we do not provide guidance. However, if you look at our backlog numbers that have grown significantly, much more than our revenue numbers, then from that, it is just natural that during 2023 we’re going to be able to realize some of that growth in revenues as well.

Pete Skibitski: Right. Okay, fair, fair enough. Thank you for that. And then maybe you’ll see on the 62 million employee Sharyland comp in 2022. Do you guys have the number for what that was in 2021 so we could just, you know, judge the magnitude of the increase and maybe, factor in our expectation for 2023.

Kobi Kagan: Hi, good morning. This is Kobi, actually the $62 million is the difference between the numbers that we saw on 2021 and 2022. So this is actually a onetime expense, which is higher in that all totality from the numbers in 2021. And in addition, we had some, we had some mostly for engineers, some retention, retention linked price programs that cost us additional one times $10 million. So it’s — $72 million of additional expenses, that we are not expecting to have similar expenses during 2023.

Pete Skibitski: Right. Okay. So I imagine there are people out there thinking that 2022 is probably a trough margin year for Elbit. And that given, hopefully, the likelihood that employee linked comp will decline in 2023. And I don’t know if there are other mix issues or if net pricing has improved, but is it reasonable for us to expect margins to improve in 2023 by some amount? I don’t know if you want to put any kind of a range around it or not put red color, but I guess I’ll stop there.

Yossi Gaspar: Again, Pete, we do not give you exact numbers, but definitely the numbers that Kobi mentioned earlier will not repeat themselves in 2023.

Pete Skibitski: Okay, okay. And then any — just on net pricing, just in terms of base labor rates, are €“ are you guys able to cover the inflation from base labor rates in your pricing in 2023? Or are you expecting improvements or deterioration of that situation? Can you add some color in there?

Kobi Kagan: Well you know Pete that about, I would say 75% of our labor force is in Israel. The compensation of these people is done in local currency, of course, the shekel. During 2022, we had currency exchange rate between the shekel and the U.S. dollar off roughly about 3.3 shekels to the dollar. In general, on an average, this number is going to improve in 2023. It is still to be calculated, but we expect an improvement in the in this cost, labor in dollar currency.

Pete Skibitski: Okay, okay. I appreciate it. Okay, yes, I’ll stop there. Thanks so much, guys.

Kobi Kagan: Thank you. Thank you, Pete.

Operator: The next question is from Atinc Ozkan of WOOD & Company. Please go ahead.

Atinc Ozkan: Thank you. Perfect pronunciation of my name. This is Atinc Ozkan from WOOD & Company. Sorry if my questions are repetitive. I was not able to join earlier part of the conference. But two questions for you, please. The first one is regarding your recent strategic MOU in Japan. You signed it with twice localized space companies. And we know that Japan is rearming, they will be spending roughly I guess $300 billion over the next five years. Why do you see the specific opportunities for your products in Japan? Should we assume that you will start with the needs of Japanese air defense force given that they are an operator of F-15 and F-35? That’s the first question. And second one is could you please provide some updates regarding person to completion of your on-going investment programs whether it’s the one ERP, the on-going production line in South Carolina and the state of the art plant in Southern Israel for IMI? Thank you.

Butzi Machlis: With regard to it’s Butzi, hello. With regard to the first question. We all see the on-going investment in Japan in defense. We find that our portfolio is very relevant to the growing needs is going to grind in this market. We see there is a lot of interest for our portfolio and I’m talking about training solutions, I’m talking about the earnings. I’m talking about these and others. For that we have teamed with several companies in the country. And as you noticed, we are we presented in the last exhibition, two weeks back, and it’s not the first time we are in this market. And we certainly see a growing opportunity in these areas as well as in others in the Japanese market. It’s a new market for us. We, we feel very welcome in this market.

And we have very good relationships with the local industry. And the customer, the customer, the Minister of Defense is well aware of our technologies and capabilities. And with regard with regards to our new facilities, our new facility in the south in Ramat Beka will start being operational in June 2024. And we expect it to be fully operational in 2025. Our production facility in South Carolina will enter into production DCU 2023. And I think we talked about in another article kind of the one ERP system, we are invested a lot. In our One ERP Solution, the system that we are deploying right now will replace 11 different Elbit Systems that we’ll use in the in the company, and the final implementation stage will take place in DCU when we are going to implement the system in the old IMI in the IMI comp operation.

And this will be the final limitation phase, the rest of the company is already on the system. And we start seeing many benefits coming from coming from this new ERP solution.

Atinc Ozkan: Crystal clear.

Butzi Machlis: Thank you, Atine.

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

Pete Skibitski: Yes, thanks, guys. Butzi you talked about increasing defense budgets around the world and how you’re spending, increased business development money to take advantage of those markets. And I think you are implying that R&D was kind of a part of that overall. And 2022 I think you spent the most on R&D in probably a decade and I know FX has an impact, etcetera. But kind of going forward, should we expect that R&D spend will remain elevated so that you can kind of take advantage of these of these very active markets over the next few years or have we reached a plateau there just was wondering if you had any color to add.

Butzi Machlis: We have as you know, we our strategy is to be leader, leader in the different markets. And for that we have to invest R&D. And we’re investing in several areas just to give you examples, high power lasers. We have the unique position in this market. We have a unique technology and we are providing the laser so visually, lenses, today’s really high power lens solution and we are a front from Israeli high power level, high power level. This is just one area where we invest and another some other areas guided munition. After the acquisition of IMI, we took a strategic decision to combine our guidance capabilities with the munition portfolio for IMI and today we have a new very advanced line of business which is very successful in Israel as well as abroad.

Another area where we’re investing quite a lot is autonomy. We see autonomy in AI and big data in these areas. We believe we are world leader and we would like to continue this investment. And this year, we have invested about 7.9% in R&D and percentage wise I don’t think we will increase the number in the future. And so that’s more or less the earlier where we will continue to invest in the future.

Pete Skibitski: Okay, thanks so much.

Butzi Machlis: Thanks Pete.

Operator: 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 1888-782-4291. In Israel please call 03-925-5900 and internationally please call 972-3925-5900. A replay of this call will also be available at the company’s website www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement.

Butzi Machlis: I would like to thank all of our employees for their continued hard work and contribution 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 good bye.

Operator: Thank you. This concludes the Elbit Systems Ltd fourth quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.