Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems first quarter 2020 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. I would now like to hand over the call to Mr. Rami Myerson, Elbit Systems’ Investor Relations Director. Rami, please go ahead.

Thank you, Rainn. Good day everyone and welcome to our first quarter 2020 earnings call. On the call with me today are Butzi Machlis, our President and CEO, and Yossi Gaspar, our Chief Financial Officer. 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. 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. Yossi, please?

Thank you Rami. Hello everyone and thank you for joining us before today. Before reviewing our financial results, I would like to address the COVID-19 pandemic and the global economic environment. We are monitoring the situation closely and are adhering to the instructions of the governments of the various countries in which we operate. During the first quarter of 2020, our businesses were not materially impacted by the pandemic. Subsequently, some of our businesses have begun to experience certain disruptions due to government directed safety measures, travel restrictions, and supply chain delays. As of today, the financial impact of this disruption has not been material. As we reported on April 13, we have implemented a series of actions to protect the safety of our employees, maintain business continuity and our supply chain, and leverage our abilities to assist and protect our communities. All of these actions remain ongoing. We have also initiated a series of cost control measures to mitigate any financial impact on the company in parallel to the measures we are taking to maintain businesses continuity and deliveries to our customers. We believe that as of the end of the first quarter, Elbit Systems has a healthy balance sheet, adequate levels of cash, and access to credit facilities that provide liquidity when necessary. We have prioritized cash management and adequate cash reserves to run the business. During the quarter, we drew additional cash from our existing credit facilities to increase our financial flexibility. We utilized some of our financial resources to secure our supply chain and build buffer inventories to mitigate the potential impacts of COVID-19. The extent of the impact of COVID-19 on the company’s performance will depend on future developments, including the duration and spread of the pandemic, the measures adopted by governments to limit the…

Thank you Josi. I also would like to start by discussing our priorities and measures we are implementing to address the COVID-19 pandemic. Since the outbreak of the COVID-19 pandemic, our priorities have been to protect the safety of our employees, maintain business continuity in our supply chain, and leverage our ability to assist and protect our communities. I am particularly proud of the innovative spirit of our employees that have worked rapidly to adapt our technologies to help the medical teams fighting this pandemic. We developed a stellar command and control system for medical staff based on our market-leading command and control technologies. This system has already been rolled out in 16 Israeli hospitals. We have also developed a sensor system to remotely read physiological parameters to protect health workers and, following a request from the Israeli government, we are leveraging our manufacturing capabilities to produce ventilators. KMC, our medical technology subsidiary based in New Hampshire, designs and manufactures diagnostic equipment and medical devices for leading healthcare companies. KMC has seen increased demand growth due to COVID-19 and is actively supporting a number of our customers by accelerating some order times to support COVID-19 diagnostic testing, lung management applications, and ventilators. We are exploring a range of export opportunities for these and other products related to combating COVID-19. We have implemented a series of protective measures to protect our employees, including halving shifts and working from home where possible. As a critical industry, manufacturing at almost all our facilities around the world continues as planned as we work to deliver on our commitments to our customers. I’m pleased that most of our operations are starting to return to levels similar to those at the beginning of the year. We have allocated additional resources to secure our supply chain and…

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

Good afternoon guys. I apologise if there’s any background noise - I’m traveling. Maybe we can talk about cash flow first. You guys, I think, had high expectations to start off the year for cash flow. I think it was a little lighter than expected, but I imagine perhaps COVID was an impact, and it sounds like you helped out your suppliers a bit, so. Maybe you can talk a little bit more about what impacted cash flow the first quarter, and then how that potentially could unwind the balance of the year. Maybe we can start there.

Okay, hi Pete. This is Josi. Regarding cash flow, yes, we did two things, two major things in the first quarter. First of all, we did collect on some of the late cash from our missile defense here in Israel, however we didn’t get all of it. We are in the process now in the second quarter to further collect from them, so that is one thing we did. The other thing, we did use our cash to increase our inventories to have some buffer inventories to enable us, I would say, independence almost for our deliveries and not being dependent on late deliveries from our supply chain. The increase in the inventory, if you look at our balance sheet, was close to about $80 million, and that has also used up cash. The third item, if you again look at our inventory--at our balance sheet, you will see that we have paid out to our suppliers something close to about $100 million, increased our payments to suppliers in the first quarter to enable them to operate properly, to reduce risk, and again to help our supply chain because by the end of the day, they are partners in our business. All of that, of course, has created the situation that we reported, negative of slightly less than $10 million of operating cash flow. We expect during the year to continue to collect the cash from our customers and that will definitely improve our operating cash.

Okay, thank you for the color, Josi. I appreciate it. Maybe give some detail also on the cost savings measures that you’ve implemented across the company. It sounds like with COVID coming through, that you really focused on taking out costs, so maybe you can touch on that.

Okay, I will address and then maybe Butzi will add on, on this. We have analyzed our cost basis during the first quarter and have taken some measures. Some of our people, of course, were not very effective in the environment that there were no flights, and most of our business is international, so we had to reduce the level of activity during the first quarter. That is one aspect we did. We have used actually a temporary reduction in the salaries of management executives in the company. We have actually reduced significantly our overhead expenses wherever possible, and stopped any overhead things that--expenses that could be delayed to a period that will be after the COVID-19 time frame. We did also review some of our short term and long term and critical engineering activities so that the efforts are focused for doing in the midterm and in the short term what is absolutely necessary and delay whatever is not critical in the performance of the programs and the development activities. I would also mention that yesterday, when we had our board meeting, as management we were nicely surprised by the initiative of our directors to suggest a cut in their payment, temporary cut in their payment which is probably not material for the overall performance of the company, but it definitely sends a very positive sign to everybody supporting the company.

I just want to add that we are also working with our suppliers to reduce--to encourage savings and to reduce costs as well, and I’m happy to say that they are very supportive and helping us to reduce the supply chain costs as well.

Okay, thanks for all the color, guys. I appreciate it. Maybe one last one from me and I’ll get back in the queue. From a sales perspective, it looked like the organic revenue growth in the first quarter started off kind of low single digits, but you’ve had this tremendous backlog growth, so I’m wondering are you expecting organic sales growth to accelerate the balance of the year, or is it still kind of hard to tell globally because of the impact of COVID?

I think it’s a little bit too early to tell because of the COVID-19 situation. Presently we did--as I mentioned earlier, we do not see a material impact; however, we do sense a little bit of a slowdown in some areas. It very much depends on how early we will get out of this situation, and that will strongly impact, of course, how our revenue growth will show. Presently, I would say we cannot give you a better answer than that.

Okay, understood. Thanks so much, guys.

Thank you.

The next question is from Sheila Kahyaoglu of Jefferies. Please go ahead.

Hey, good morning everyone, and thank you for the time. First, I guess I want to know where Pete is traveling to in the U.S., because I can’t get out of the house today! I guess following up on Pete’s question, can you clarify for me the comment on the supplier payments? I think you mentioned $100 million. I might have missed the inventory amount in terms of was that all Q1, or is that your expectation for all of 2020? How do we think about receivables and the timing of the Israeli government payments?

About the payables, if you look at our balance sheet as to the payable number by the 2019 compared to the payables in the first quarter, we reduced the payables significantly. That is close to $100 million, $90 million or some number close to that, so that is one. We paid out to our suppliers so that they would be in a stronger position to perform their responsibilities, so that is the payables in our balance sheet. Regarding the inventories, they grew by about $80 million, and that is in order to enable us, as I mentioned earlier, to be able to supply our products in time to our customers and not being dependent on the critical suppliers’ chain, so this is the second item. The third item, the receivables, they did not change a lot if you look at our bottom line on the balance sheet, and we expect to receive those receivables during the year and collect that. Still, our Ministry of Defense is a little bit behind the time frame for paying their debt, but we’ve had intensive discussions with them and now that there is a stable government in place and hopefully there will be a reviewed budget very soon, so it looks like everything will be in line to solve this issue.

Okay, that’s super helpful. Then maybe just given the diversification of your backlog geographically, how do we think about what’s going on? I know there was some comments in the prepared remarks. What are you seeing from international governments in terms of defense budgets? Where are you seeing areas of most strength and perhaps some pockets of weakness?

We don’t see a major change right now from the original plan. We see--in t he U.S, we see additional investments in defense spending and we enjoy from that. We see it also in other areas and this is mainly to support the local industry, and we are lucky to have many subsidiaries all around the world and these subsidiaries are in a good position to get additional orders to create more jobs and to support the local economies. We see stability in Israel, in Asia, in the EU right now. It’s too early to judge what will happen in the future, and because of that we are conservative, as Yossi mentioned. We have a good, strong balance sheet and we are in a good liquidity situation, and I believe that in the next quarter or maybe the quarter after that, the picture will be a bit clearer and then we can understand where the direction is going. We are in a good position by having a large portfolio and a strong global presence, so we are able to deliver--to support different needs and also to help boosting local economies. I believe that is a big strength of the company and it will help us to overcome difficulties in other markets which might happen.

Sure, that’s super helpful. Then just on the C4ISR market, what are you seeing there? I think the business declined in Q1. Is that some sort of seasonality in that segment, and how do we expect it to sort of grow for the rest of the year?

On the contrary, we see a lot of potential for us in the C4 domain in many places, and just to remind all of us, we have been selected to provide a huge contract for communications in Switzerland, for tactical communications in Switzerland. We didn’t receive the contract yet. We hope to get it by the end of the year. We are also in a very good position in the Netherlands to get follow-on orders, and also in Australia and in other markets, so there is a lot of potential for us in the areas of C4. I really believe that we are in a leading position in this domain and there is a lot of interest and a lot of potential.

Okay, thank you very much.

Thanks Sheila.

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

Yes, thanks again guys. I wanted to see if we could get a little more color about your exposure, maybe just on a 2019 basis, your exposure to commercial aerospace and business aviation. I know particularly in business aviation, you do the electro-optics on some of the Gulfstream jets, I believe, so maybe you could size that business for us overall, commercial and business jets, and I imagine that might even have greater headwinds this year because of some of the slowdowns.

Hi Pete, this is Yossi. In the commercial field, the aviation field, we have actually two major branches of activities. One is related with the commercial avionics parts, which the acquisition that we did in the U.S., Universal Avionics, is part of that, and also what we had before is the operation for night vision and adverse weather landing that we had previously with Gulfstream that you mentioned, and some other businesses in Europe in that area. We have probably--in that branch, we have probably a couple of hundred million dollars of business and we did see a little bit of effect of a decline in that, but I wouldn’t call that material, several tens of millions of dollars per year on average. That is in the recent quarter, I mean, if I average over the whole year, so nothing material, I would say, there. The other branch that we have is the branch related with the composite materials that we manufacture parts for military aircraft and also for commercial aircrafts. Boeing is one of our customers, but there are some others as well. Here we have very long-term contracts, multi-year contracts, firm funded contracts, but presently they are not affected and we deliver on time as requested by our supplier. I would say we are probably third or fourth tier in that level, so any change in the requirements of a number of airplanes and so on, if that would stay with us for three or four years, then yes, we would be affected. However, the military side of that is very strong, and that is the commercial part is only about several tens of millions of dollars. So in total, we did not really see a strong negative impact on that.

Okay, great color. Thanks so much. Just one last one from me, a more minor question. On the Cyberbit transaction, can you remind us, I think you already were not booking Cyberbit revenue, right? You were only booking the EBIT, so nothing should meaningfully change post that transaction from a revenue perspective. Do I have that right?

You are right. All the commercial part was not consolidated in our statements at all, so the military, the defense cyber is consolidated in our statements, it’s part of our C4 division, and it is actually a very good business and growing.

And this element will continue to be with us.

Okay, okay. Thanks so much for the clarification. Thanks guys.

[Operator Instructions] 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 972-3-925-5900. 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?

I would like to thank all of our employees 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 Ltd. first quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.