Elbit Systems Ltd. (ESLT) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Second Quarter 2026 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand over the call to Daniella Finn, Elbit Systems, VP, Investor Relations. Daniella, please go ahead.

Thank you, operator. Hello, everyone, and welcome to our second quarter 2026 earnings call. On the call with me today are Butzi Machlis, President and CEO; Kobi Kagan, CFO; and myself, Daniella Finn. Before we begin, I would like to point out that the safe harbor statement in the company's press release issued earlier today also refers to the contents of this conference call. I would like to remind all listeners that the conference call today may contain forward-looking statements regarding the company and its subsidiaries business. Actual future results may differ materially from those forward-looking statements. As usual, we will provide you with both GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional transparency to better 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. Kobi will begin by discussing the financial results, followed by Butzi, who will elaborate on the main events during quarter and beyond. We will then turn the call over to a Q&A session. With that, I would like to now turn the call over to Kobi. Kobi, please go ahead.

Thank you, Daniella. Hello, everyone, and thank you for joining us today. We're pleased to report another strong quarter, delivering double-digit growth in revenues, backlog, operating profit and EPS. Our profitability margins, gross operating net continue to expand surpassing our internal targets. Building on the strong momentum we have established over the past several quarters, we continue to win important new business and expand our backlog to a record of $32 billion. Taking a closer look into the second quarter results. Second quarter revenues increased by 15.9% to $2,287 million compared to $1,973 million in the second quarter of 2025. We note the sequential revenue growth continues. For the second quarter of 2026, Europe contributed 25% of revenues; North America, 20%; Asia Pacific, 14%; and Israel contributed 37% of revenues following inventory replenishments on the back of the recent conflict with Iran that ended at the beginning of April. Europe and Asia continue to be meaningful growth engines. In terms of quarterly revenues by segment, C4I & Cyber revenues increased by 11% in the second quarter of 2026 as compared to the second quarter of 2025, mainly due to sales of radio systems and command and control systems sales in Europe. ISTAR and EW revenues increased by 22% and mainly due to increased sales of airborne and land High Power Laser, Electronic Warfare and Maritime systems in Asia-Pacific. Land revenues increased by 32% and mainly to ammunition and munition sales in Israel. Elbit Systems of America revenues increased by 17%, mainly due to onetime favorable project mix during the quarter, and the increase in sales of Night-Vision Systems, Maritime systems and Electronic systems. Aerospace revenues decreased by 8% in the second quarter of 2026, mainly to a one-time unfavorable project mix and lower sales of training and simulation systems in Europe, partially offset by the increase in UAV sales in Israel. GAAP gross margin in the second quarter of 2026 was 25.3% of revenues compared to 24% in the second quarter of 2025. Non-GAAP gross margin for the second quarter was 25.6% compared to the second quarter of 2025 at 24.4%. We are pleased with the continued expansion of gross margins. GAAP operating income in the second quarter was $218.8 million or 9.6% of revenues, as compared to $157.8 million or 8% of revenues in the second quarter of 2025, a 1.6% increase. Non-GAAP operating income was $237.5 million or 10.4% of revenues in the second quarter of 2026, as compared to $175.1 million or 8.9% of revenues in the second quarter of 2025, a 1.5% increase. With this margin expansion, we have surpassed our internal targets for operating margins. On March 31, 2026, the Knesset, the Israeli [indiscernible] enacted the law for the encouragement of research and development. This newly introduced R&D Law applies to qualifying R&D expenditures incurred at the beginning of the tax year starting January 1, 2026. This law is meant to encourage R&D efforts in Israel. We increased our R&D spend in the first half of the year by about $70 million, of which about half was funded by the new incentive law and the other half from company resources to support the future growth of the company, at the same time, maintaining the margin expansion. The operating expense breakdown for the second quarter of 2026 was as follows: net R&D expenses were $159.1 million or 7% of revenues, as compared to $129.7 million or 6.6% of revenues in 2025. We remain committed to investing in new -- next-generation technologies and advanced AI capabilities that expand our solutions portfolio to support our customers' evolving mission requirements and reinforce Elbit leadership position in key markets for years to come. Marketing and selling expenses were $103.2 million or 4.5% of revenues in the second quarter of 2026, as compared to $91.5 million or 4.6% of revenues in 2025. G&A expenses were $97.9 million or 4.3% of revenues in the second quarter of 2026, as compared to $93.9 million or 4.8% of revenues in the same period last year. Financial expenses were $22 million in the second quarter of 2026, as compared to $31.2 million in the second quarter of 2025. The decrease in financial expenses net in the second quarter of 2026 was mainly due to the reduction in the average debt during the quarter. Taxes on income were $32.7 million in the second quarter of 2026, as compared to $7.1 million in the second quarter of 2025. The higher tax expense in the second quarter of 2026 was mainly driven by the implementation of the OECD Pillar II global minimum tax rules. The effective tax rate in the second quarter of 2026 was 16.4%, compared to 5.6% in the second quarter of 2025. GAAP diluted EPS for the second quarter of 2026 was $3.61, up 34% as compared to $2.69 in the second quarter of 2025. Our non-GAAP diluted EPS was $4.14 in the second quarter of 2026, up 28% as compared to $3.23 in the second quarter of 2025. Our backlog of June 30, 2026 stood at $32 billion, with the increase during the quarter, predominantly by orders from international customers, mainly from Europe. Approximately 70% of the current backlog was generated from outside of Israel. Approximately 42% of the backlog at the end of June is scheduled to be performed during the remainder of 2026 and in 2027 and while the rest is scheduled to be performed during 2028 and beyond. New business and the quarterly backlog increase provides us with good visibility into future sales growth. Cash provided by operating expense activities in the quarter ended 30th June 2026 was $237 million as compared to $120 million in the quarter ended June 30, 2025. The cash flow in the second quarter of 2026 was affected by the increase in net income and a strong increase in contract liabilities. At the end of the second quarter of 2026, we delivered $150 million of free cash flow as compared to the $71 million free cash flow generated at the end of the second quarter of 2025. Cash conversion remained strong at 86% for the quarter, reflecting the quality of our earnings and disciplined working capital management. I will now turn the call over to Mr. Machlis, Elbit's President and CEO. Butzi, please go ahead.

Thank you, Kobi. Following another quarter of strong financial performance, as Kobi just outlined, we continue to convert market demand into growth, booking substantial new orders and increasing our backlog to a record of $32 billion. I'm very proud of the consistent execution and business momentum demonstrated across the organization. In the U.S., Elbit Systems of America has received multiple awards from the U.S. Custom and Border Protection, valued at approximately $270 million. This reflects the continued confidence in our ability to deliver advanced operationally proven solutions that enhance situation awareness and support critical national security missions. Additionally, in the U.S., we secured a $212 million order for continuous production of ENVG-B system for the U.S. Army. Notably, the Army has historically [indiscernible] split production for ENVG-B system among multiple vendors. However, Elbit Systems of America was selected as the sole [indiscernible] supplier under this award, reflecting the Army's confidence in our advanced Night-Vision capabilities. We also expanded our UAS footprint in the U.S. with Army selecting our [indiscernible] Group 2 unmanned areas. [indiscernible] provide tactical units with opt deployable autonomous capability for [indiscernible] and other mission critical operations. As I mentioned in the last call, during the quarter, we were awarded landmark of USD 1.4 billion contract for European customer for a comprehensive military utilization program, expanding multiple domain. The program includes advanced airborne, land communication, electronic offer and autonomous capabilities, further validating the strength and breadth of our portfolio. We also announced the formal award of approximately $750 million for [indiscernible] in Greece. This significant program further strengthen, [indiscernible] position as the leading [indiscernible] solution in Europe and reflects the growing international demand for advanced precision pilot capabilities. In Sweden, we successfully completed one of Europe's largest life demonstration of the digitalized land for network over a 2-week still exercise our solution seamlessly connected stores, vehicles and command post in a unified network, enabling real-time situation awareness and decision-making across all levels come. The demonstration highlighted the strength of our NATO interoperable, so and communication portfolio as its ability to support modern network battered operations. In Israel, Elbit was awarded a contract by the Israeli Ministry of Defense to develop and extend them to reach capability for the [indiscernible]. This program is expected to enhance the aircraft operational capabilities. During the quarter, we received approximately $200 million in contract from the Israeli Ministry of Defense for advanced airline [indiscernible], this all reflects the continued demand for precision strike capabilities and our role in supporting operational needs for the Israeli [indiscernible]. Elbit executed a $250 million contract to modernize the fleet of main battle tanks for international customers. The program includes upgrades to the [indiscernible] system to the communication system situation awareness and other mission vertical system, extending platform life and enhancing operational effectiveness. This award further reinforce our leadership in [indiscernible] and our ability to deliver integrated solutions that enhance platform effectiveness [indiscernible] and operational advantages. Since the beginning of the year, Elbit has made 3 bolt-on acquisitions. The recent one published in May of the acquisition of [indiscernible] Robotics, an Israeli developer of AI-powered autonomous ground solutions, strengthening Elbit autonomy capabilities. The acquisition extends our multi-domain autonomy portfolio and enhanced our ability to deliver advanced robotics solutions in manned and unmanned teaming solutions. And we reported last quarter's Elbit and KBS partners to establish Euros in Germany, a joint venture that will market the [indiscernible] to European customers. The venture combines Elbit battle-proven long technology with KBS strong European footprint and advanced control capabilities. We further expanded our partnership with [indiscernible] Defense through a new agreement to offer the [indiscernible] emulation system to the German Armed Forces, combining combat-proven preceding [indiscernible], advanced autonomy and flexible deployment across multiple platforms, [indiscernible] addresses growing demand for next-generation strike solutions, while supporting, sovereign defense capabilities and local industrial participation in Germany. Recently, we participated in 3 major European exhibitions, [indiscernible]. We showcased our latest operational improvement solution. Interest from customers, partners and investors alike as especially strong particularly around local defense capabilities, advanced [indiscernible] solutions, electronic [indiscernible] and next-generation air and land systems, expecting continued demand for advanced defense technology across multiple domains. Elbit Systems ranked first in the defense integrator category in the recent survey carried out by [indiscernible], ranking of Israeli defense industry. We are honored to be recognized as the leading defense integrator in Israel. This recognition reflects the strength of our ability to combine advanced technologies across multiple domains into comprehensive operationally proven solution for our customers. Behind every milestone we achieved and every innovation we deliver [indiscernible] especially team of employees who talent dedication and sense of purpose continue to shape Elbit's future. I am deeply grateful the commitment and contribution every day. Following an outstanding first half of the year, Elbit is operating from a position of strength supported by record demand and robust backlog, continued innovation and the dedication of our global team we remain focused on executing our growth strategy and creating long-term value for our customers, shareholders and other stakeholders. And with that, I will be happy to take your questions.

[Operator Instructions] The first question is from [indiscernible] of Jefferies.

Maybe if you could just talk about just to start off, how do you think about your revenue growth profile given the backlog growth up 6% and other sequentially? And just everything you're seeing in terms of the growth, but also the news cycle [indiscernible] ceasefire the U.S. and Iran, how do you think about both medium-term growth profile of the company as you see [indiscernible] in Europe and demand in the U.S.

We see a growing demand for our portfolio in Europe as well as in the U.S. And actually, as you see, our backlog has grown quite drastically during the last quarter, and it is mainly outside the Israel, mainly in Europe and in Israel. In both -- and what we are looking into our funnel, I see many more opportunities for the company in Europe as well as in the U.S., but also in Asia-Pacific and in our region. The funnel is very big, and I believe that you will continue to see growth backlog -- growth in our backlog in the coming quarters. We are making a lot of effort. And talking about opportunities, one of the big advantages we have, is that we have a very wide proportion, we do EW, we do [indiscernible], we do command and control, we do ammunition and many, many simulations, many, many more. And we have many -- and we are very impressed with this portfolio. On the other hand, we are and we are in a position to transfer the IP and the technology to our partners and to our subsidiaries in Europe, in U.S. and elsewhere. And by doing so, we are able to support the local economies. We are power of the local ecosystem in each country, and that's a very unique business model that we have. We are making right now a big effort to convert the huge backlog, which will continue to grow into revenues and profit. In order to do so, we have increased our capital investment to about $300 million. We are building new production facilities. We are investing in robotics, in AI, and we are improving our productivity and our ability to deliver the backlog and to convert the backlog into revenue growth and into profit and cash. And I believe that this momentum will yield in the near future. Our new production facility in the South part of Israel is operational already. We have inaugurated several facilities abroad as well. So I believe that we are in a very good position to meet the growing demand that we see in the market, backlog wise and revenue wise.

Sheila, this is Kobi. And to add on Butzi's answer in terms of numbers, we see 34% year-over-year growth in our backlog while revenue increased 16%. That speaks to our extended visibility to the future and our resilience of resilient growth in our revenue and cost of transformation of converging those revenues to earnings and cash, as Butzi mentioned.

The next question is from Omri Efroni of Oppenheimer.

Congrats on the results. I have one question and one follow-up. The first one, I was wondering what are you seeing from the Maritime domain that has a lot of investments from -- especially the U.S., but other nations as well. And I was wondering how do you see the sector developing worldwide and for Elbit specifically? And that's the first one. And the follow-up what is the High Power Laser specifically that is sold, not specifically about what is the demand that going to Asia-Pacific and from which region you think the demand is going to be the highest. The U.S., Israel or other part of the world.

Omri, with regards to the Maritime domain, that's for sure a growth engine for the company. We have several activities in the maritime domain, and we are growing our portfolio. First, we have EW and our Naval EW are very famous and very advanced. Just to remind all of us, we want the Naval EW, the future Naval EW in the U.K., and we are in the process of delivering systems to the U.K. Navy. And this is true not just for the U.K. It is also for many customers in Europe as well as in other continents. So you can see on Naval EW actually, I believe that the most advanced Naval EW available right now in the market. Talking about [indiscernible], we have in the U.S., portland who is Elbit Systems of America subsidiaries, they do the 1 -- they are 1 out of 2 suppliers of [indiscernible] to the U.S. Navy as well as to other international customers. This activity is growing for the company. There is a growing demand for [indiscernible] all over the world and especially in the U.S. We have unmanned, unmanned ships on the USD, which are operational already here in Israel as well as by other customers. which are being used to eliminate -- to allocate into limited mines and also to allocate submarines. And such a U.S. base can include also weapons, different type of [indiscernible], and we have short-range and long-range reside, which can be launched from unmanned or [indiscernible], which are already operational by several nations. We have [indiscernible] in Canada. They are very trends with the [indiscernible], selling [indiscernible] to many customers in Europe, in the Far East, in other places as well. And this company is growing fast. They have a unique and very effective solution for this market. We are also dealing with upgrading ships. We have Maritime radar, electrooptics, [indiscernible], communication and minimal. So altogether, we are growing our position in the Maritime domain. It's a growing segment for Elbit. It is growing rapidly, and it will continue to grow in the future. Talking about High Power Lasers, first, we are delivering already in High Power Laser sources for the Israeli program. We are meeting our schedule, and we expect additional orders to come for Israel. And we see together with Rafael, we see a one partner for that in the international market. We continue our development of [indiscernible] Solution. Just to remind all of us, Elbit was selected as the prime contractor for High Power Laser, [indiscernible] High Power Laser. And it was recently announced contract to develop High Power Laser for the Israeli Air Force helicopters as well as for our jet aircraft, different type of solutions. And we are very advanced with the development and the helicopter solution will be operational, relatively in a short period of time. In the middle of the development of the airborne High Power Laser for fighter aircraft. This solution was exposed in exhibitions, which took place in Europe last month in Germany, in [indiscernible], Germany, also in [ Farnborough in ] the U.K. and in Paris. And there is a huge input for that. I'm not aware openly solution like this, which is available in the market. So it's a huge interest for our High Power Laser technology and especially for airborne solution, it is coming from all different continents, not just for Europe. Also, our relationships are looking to integrate these solutions into the [indiscernible]. So I believe it's a growth engine for the company and there's a huge potential for us in this domain. And I [indiscernible] just part of it. We invest quite a lot in other technologies in the domain of energy weapons.

[Operator Instructions] The next question is from Sheila Kahyaoglu from Jefferies.