Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Second Quarter 2020 Results Conference Call. All participants are 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 new 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, Yoni. Good day, everyone, and welcome to our second 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 today. The results of our second quarter reflects the resilience of Elbit Systems and the actions we are taking to address and mitigate the impact of the COVID-19 pandemic on our activities as we discussed in our earnings call for our first quarter results. Government directed safety measures, supply chain delays and travel restrictions continue to cause some disruptions to our business including the ability to attend in person except as inspections. Our subsidiaries around the world have helped support these inspections where possible. We continue to monitor the situation closely and are adhering to the instructions of the governments of the various countries in which we operate. The extent of the impact of the COVID-19 on the company's performance will depend on future developments including the duration and the spread of the pandemic, the measures adopted by governments to limit the spread of the pandemic, and the resulting actions that may be taken by our customers and our supply chain. Turning now to our results, 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 their reconciliation in today's press release. Overall, we are satisfied with our performance in a challenging environment. Revenues and backlog increased year-over-year and slightly in comparison to the previous quarter. The improvements in profitability and cash flow reflect the increased focus on operations including the cost-control measures that we implemented to mitigate the financial impact of the COVID-19 pandemic. Our backlog of $10.8 billion provides good…

Thank you, Yossi. I would like to start by thanking Elbit Systems employees around the world for their continued hard work in the - in challenging times. We continue to monitor the evaluation of the COVID-19 pandemic. Our priorities remain to protect the safety of our employees to maintain business continuity in our supply chain and leverage our ability to assist and protect our communities. The action we initiated to address COVID-19 and mitigating the impact are ongoing. Moving to the business and the quarterly results, the second quarter included a number of strategic milestones and important developments across different areas of our operation. Space is relatively small but strategically important part of our business with large potential. Space-related R&D also contribute to the development of additional capabilities and application including airborne weather system, advanced electro-optic sensors, and communications systems. In July, Israel launched into orbit the Ofek 16 electro-optical reconnaissance satellite with advanced camera on the satellite was developed and manufactured by Elbit Systems. Elbit is the world leader in developing high performing space cameras that are smaller and lighter than our competitors. We have sold our advanced space cameras to government and commercial customers around the world. At the end of 2019, Elbit’s first nanosatellite, NANOVA, was successfully launched into orbit, with a commercial communication payload. The nanosatellite built on our experience in developing and capturing and deploying space electro-optic payload and satellite communication. Maritime is an additional area where Elbit Systems has a broad portfolio of capabilities. In July, we received a $53 million contract from in Navy in Southeast Asia to equip the ship with an integrated intelligence suite capabilities that enables them to perform complex reconnaissance missions generating an operational picture for the earth's surface and underwater domain. Under this program, Elbit Systems will supply…

[Operator Instructions] The first question is from Sheila Kahyaoglu of Jefferies. Please go ahead.

This is actually [Ellen] on for Sheila. Thank you for this question. You raised the dividend back to $0.44 in the quarter after lowering that last quarter. So, how do you think about free cash flow in the second half? How comfortable are you with it and how much of the about $150 million generated in the quarter was from Israeli government payments versus core operation?

Hi, well actually, as you have seen, we have quite a lot of - we have experienced quite a lot of fluctuations in our cash flow during the past quarters, some of that related with the payment from the Ministry of Defense here in Israel. Fortunately, we were successful to get the payments in the second quarter and we're looking forward to generate cash flow in the second half of the year as well. Having said all of that, we all are aware about the pandemic around the world and about the fact that here in Israel, the budget for 2020 is not yet finalized, but we are optimistic that we'll be able to handle that.

Okay. Thank you that's helpful.

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

One question I had - I had a question on the revenue by regions. I just noticed the Asia Pacific revenue down kind of sharply this quarter which I thought was a little surprising because you've won a lot of, fairly sizable contracts in the Asia Pacific region? So, I was just wondering is this maybe a timing case where the new contracts haven't ramped up yet, but the old ones have ramped down or is there some impact of COVIID in particular in the Asia Pacific region? I guess I was wondering if you could clarify that?

Yes I would say the following: First of all, yes we did suffer, to some extent, not materially, from disruptions in this area - acceptance testing by customer of our equipment and so on, but this was not a material impact. Regarding the major contract that we got in the first quarter, it does take some ramp up to prepare for production, and we will start delivering that part - towards the end of this year and during the next year and the following year. So, this is something that takes time until we see the transformation from new business to revenues. The third element is that one - actually one or two programs that we had. Last year, we had quite of them. We finished delivery during the first quarter. So, we did not have their impact during the second quarter of this year. I should in general, recommend to look at our multi-quarter performance and one quarter shouldn't be very characteristic about how we operate.

Okay that's very helpful. I appreciate that, Yossi. And then separately revenue-wise, on commercial avionics, obviously we've seen Boeing and Airbus take rates down going forward and COVID has impacted to a lesser degree, but so does your business in general aviation as well. I’m just wondering if you could quantify for us the decline you saw in the quarter from commercial avionics versus business and general avionics?

I would say the following I mean, the defense avionics did perform well and in line with the general trend of the business of the company. The commercial part is not a huge part of our business yet. We did, during this quarter some of the revenues that we performed compared with the previous quarter were lower in the commercial avionics deliveries. We did see in the beginning of the third quarter some upside coming back. But again, this is very fluid and I would not dare to do some expectations on this part. We are our commercial avionics is mainly focused on the business jet, so and not that much on the wide-body airplanes. So, we are affected, but not at the level that the general industry is affected.

Okay very helpful. Thank you. I'll ask one more and then I'll get back in queue. I'm not sure if there's others in queue. But I guess, I want to think about the timing of margins in the back half of the year. If we look at the second half of 2019, you had a decline in margin rate in the third quarter and then a sharp ramp up in the fourth quarter. I'm just wondering if you were expecting that similar kind of dynamic in the back half of 2020?

Well, as you know, we do not give guidance. However, I think that we do expect to have some recovery on the gross profit level for the second half. I think that the performance on the operating profit this quarter and in general for the first half was quite good. And we do not expect any significant change on that part.

The next question is from Dina Korshunov of Leader Capital Markets. Please go ahead.

My question is do you feel and generally, the risk in the defense market is rising in the last quarter or the last couple of months due to the pandemic, the economy risks?

It depends. It depends [indiscernible] as you probably know, there is no defense budget, there is no budget. So - there are some delays in new orders. However, in the U.S. as well as in the UK and in West Europe as well as in Australia, we see a growing demand and we'll see more contracts and this is mainly to support the local economy to create more jobs. And just to remind all of us, we have dozens of subsidiaries all over the globe. And it help us right now to communicate with our customers, but to also help the local governments to create more jobs and to support their local economies. In some areas, we see some cuts because of budget priorities, but it's relatively not in many places. And there is also growing tension, security tension in several places around the globe which generate more demand for our products. All together, we have a wide portfolio and with many technologies and many solutions. And we are spread in many countries with dozens of subsidiaries all together will create stability. And we have also a strong backlog almost US$11 billion which - help us to take the right measure and to adapt ourselves to the changes in the market.

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

Thank you for taking my question. The question is actually about the next backlog, next backlog cycle mix. I think we know from experience that post crisis the mix is more driven or sometimes often driven by upgrades and budgets shrink and the airborne systems upgrade and then maybe some land upgrade? Are you actually preparing for this trend do you think it's going to happen? And if you do, what kind of steps it needs - you need to be taking because that was less the focus of recent years.

As you know, our portfolio can support new platforms as well as upgrading existing platforms. We continue to provide the avionics for new fighters in the U.S. as well as in other countries. And we continue to upgrade the existing platforms all over the world. The same is true also for land application will continue to provide the new electronics and new systems to new ground platforms and we also are - we are also actively upgrading existing platforms in the market. So, we already outperform the full support and we are ready for any decision that our customers will take. I also want to mention that our portfolio can help customers to save costs. And I will give you two examples. First, the command control application and autonomous systems are doing more - are bringing more operational value with less people. And they are doing it much more efficiently. That's one example and another example is similar to online training system. Instead of using a real flight and real 10 hours in the field, we are providing simulators and building flight calls to replace active hours in the air and on the ground. And once again, it helps our customers to prepare themselves with less cost associated. So, we are - we have a wide portfolio. We can support most of the demand in the market. We’re following the demand and the request of our customers closely, and we are adapting ourselves to the changing requirements in the market.

I have not [indiscernible] are doing great, and I think there will even - doing even better as time goes on. The question actually is, if we will see some shrinkage of the budget which is for one, it’s almost inevitable at least in some of the countries, do you think the targets that you marked for IMI growth have to be - maybe reconsidered and have to be softened a bit or still you think that it will be the same 2020 - and 2022, beginning 2023, that was a general position?

On the contrary, Ella, we see growing demand for our land portfolio. Just to remind all of us, we combined capabilities for IMI with Elbit capabilities. And by combining these capabilities together, we are able to provide guided munitions to our customers for different air forces, as well as for land forces and for navies around the globe. There is a growing demand for that, and we have really state-of-the-art solutions and I see a lot of potential there, and that's one area. And talking about upgrading the existing platform that's an area where IMI portfolio is very relevant at the protection system as well as armor and additional stuff are very relevant for upgrade programs as well. We see a growing demand for our IMI - for the IMI activity just to show you, I don't just remember but when we acquired IMI in less than 3 years ago, if I'm not mistaken, about 15% in the international market, something like that. Today, they are doing more than 40% of earlier brought, and we are working also on efficiency. So, we're bringing more business to IMI. We combine capabilities between Elbit and the IMI, and we do more exports and we are improving profitability in IMI and we are very happy with this acquisition.

Okay. That's great to hear. And one more question.

I'm talking about Active System, just Active Protection System. Just to remind all of us, we won the active protection competition here in Israel for the 8 x 8 armored vehicle over the IDF. We will provide the Active Protection System for this platform. We were chosen by the U.S. Army to provide the Active Protection System for the [indiscernible] in Australia and also in the Netherlands, and there is a lot of synergy between Elbit fire control capabilities, battle management capabilities, site capabilities, and IMI Active Protection capabilities as well. It supports new platforms as well as upgrade activities as well.

That's great to hear. Another question I think that refers to both of you. You raised quite a lot of cash in this quarter and is it just being a prudent and conservative facing the COVID and this time or do you have a some kind of acquisition targets or just the work to be prepared to something cures because there might be - you may be find something more interesting for acquisitions in the next year, couple of years?

Cash is a very important target for us, reducing working capital, increasing cash balance, and improving our cash position. This is very important during all times specifically during the times that now we are living in the COVID-19 environment. We want to make sure that we have enough cash, enough liquidity to run our business, and that is what we do. We had several quarters in the past that were quite low in our cash performance. I think we did catch up very nicely this quarter and we continue to emphasize, put a lot of emphasis on that cash performance of the organization. In general, I would also answer the second part. As you probably know, our strategy for many years does include acquisitions. We did quite a lot of them. And of course, most essentially, all of them we did with cash. So, say, if we have some specific target for the next months, I would say no. But we definitely, that is part of our all-time strategy to acquire and grow the business through M&A.

So, basically, you are being prudent but also ready if anything interesting comes across, to sum up?

That’s right.

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

Yes, thank you. Just one sort of two-part follow-up on cash flow. Advances - it looked like there were advances that were really strong this quarter and for the whole first half. That was great to see. I don't know if that was related to a couple of programs in particular, maybe the Asia Pacific that we talked about earlier, but I was wondering if you could give us any color on the strong advances. And then, the second part is just it looks like receivables continue to build, any expectation for the second half of the year on receivables declining? Thanks.

Okay. Regarding the cash, I think during previous calls, we did explain that we moved from a situation that we saw increased working capital in the company and we did change some of our policies to improve the cash generation. This change in policy has resulted in working with our customers for improved payment terms - improved for us, payment terms which include advances, down payments and for the various contracts that we are awarded. I think that we do see now the actual result of this strategy and which did come through to significant growth in the advances of the new contracts that we have received. So - and going forward, we continue to put emphasis on this element on the cash element and hopefully, that will continue for the future as well. It, of course, depends on the business environment and the capabilities of the customers and their budgets to provide us with these advances. I think this quarter was a very good one from that aspect. The receivables have grown and that is related with the progress in the various programs and the various contracts that we have. I'd like to remind you that some of these receivables are what we call unbilled receivables because according to the new accounting rules, we recognize revenues on the cost input method. And therefore, as we progress on the program, we recognize the revenues. And they will be transformed of course in cash in due time according to the payment milestones of the various contracts with our customers.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his concluding 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 this 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 again for the continued hard work particularly in discouraging 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 second quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.