Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Third Quarter 2019 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. If you have not received it, please contact Elbit’s Investor Relations team at GK Investor and Public Relations at 1-646-688-3559 or view it in the News section of the Company’s website www.elbitsystems.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, please go ahead.

Thank you and good day to everybody. On behalf of all the investors, I would like to thank Elbit Systems’ management for hosting this call. Joining us on the call today are Mr. Butzi Machlis, Elbit's President and CEO; and Mr. Jose Gaspar, Elbit Systems' Chief Financial Officer. Jose will begin by providing a discussion of the financial results of the first quarter of 2019, followed by Butzi, who will talk about some of the significant events during the quarter and beyond. We will then turn over the call to the question-and-answer session. Before we begin, I would like to point out the Safe Harbor statement in the company’s press release issued earlier today also refers to the content of this conference call. With that, I would now like to turn the call over to Jose. Jose, please.

Thank you, Ehud. Hello everyone, and thank you for joining us today. As we do every quarter, we will provide you with our regular GAAP financial data as well as certain supplemental non-GAAP information. You can find all the detailed GAAP financial data as well as the non-GAAP information and their reconciliation in today’s press release. The results of the third quarter of 2019 showed a good revenue growth with particularly strong growth in the United States, a strategically important market for us. Elbit has now seen four consecutive quarters with revenues at over $1 billion per quarter and our backlog nearing $10 billion provides good visibility over the coming years. I should note that the balance sheet and the backlog of Harris Night Vision business has been consolidated as of September 30, 2019. I will now highlight and discuss some of the key figures and trends in our financial results. Our third quarter 2019 revenues were $1.1 billion compared with $895 million in the third quarter of 2018, up23% year-over-year. In terms of revenue breakdown across our areas of operations in the quarter, Land systems accounted for 27% of total sales and have increased significantly year-over-year, mainly due to our acquisition of IMI, completed in the fourth quarter of 2018. Airborne system sales at 36% of sales increased year-over-year due to Avionic sales and the sale of IMI products into the U.S. and Israel. In terms of geographic breakdown, we continue to be fairly well diversified between the various regions in which we operate. North America was the largest at 30% of our revenues, Asia Pacific at 23%, Israel at 22%. Europe at 18%. The strong growth in North America was primarily due to increased airborne sales, as I mentioned a few moments ago, and the growth in Israel was due to the acquisition of IMI. For the third quarter, non-GAAP gross margin was 26.3% compared to the third quarter of last year of 29.1%. The lower gross margin in the quarter reflects an unfavorable sales mix during the quarter and the lower gross margin of the IMI sales. Third quarter non-GAAP operating income was $80.7 million or 7.3% of revenues, compared with $85.7 million or 9.6% of revenues last year. Third quarter GAAP operating income was $101.7 million versus $79.1 million last year. In the quarter, we exercised the purchase option that we had on one of our buildings and sold it, generating a capital gain and income of $28 million, which reduced our operating expenses. The operating expenses breakdown in the quarter was as follows: Net R&D expense at 7.2% of revenues versus 7.8% last year, net R&D spend was $79.5 million in the quarter compared to $69.6 million last year. Marketing and selling expenses at 6.9% of revenues versus 7.8% last year. G&A expenses at 5.2% of revenue versus 4.2% last year with the relative increase primarily due to our recent acquisitions. Financial expenses for the third quarter of 2019 were $18.5 million compared with financial expenses of $8.1 million in the third quarter of last year. The higher level of financial expenses this quarter was due to the implementation of Accounting Standard ASC 842 relating to operating leases. In the quarter, this generated a non-cash accounting expense of $6.6 million mainly due to the strengthening of the shekel versus the U.S. dollar. We had other expense of $2.8 million. This was due to non-service cost component of pension plans following the adoption of Accounting Standard ASU 2017-07. For the third quarter, non-GAAP net income was $58.7 million or a net margin of 5.3% versus $67.3 million or a net margin of 7.5% in the third quarter of last year. On a GAAP basis, third quarter net income was $72.l million versus $64.1 million in the corresponding quarter last year. I know that during the second quarter, Elbit System raised $185 million through the sale of treasury shares to institutional investors in Israel. This increased our share count by about 3% to 44 million shares having a slight corresponding impact on our earnings per share relative to last year. Our non-GAAP diluted earnings per share were $1.32 compared with $1.57 in the third quarter of last year. GAAP diluted earnings per share were $1.63 compared with $1.50 in the third quarter of last year. Our backlog of orders as of September 30, 2019 was 9.8 billion, 1.7 billion higher than the backlog at the end of the third quarter of 2018, and 396 million higher than that of the end of 2018. This represents over 21% increase in backlog year-over-year. Approximately 46% of the current backlog is scheduled to be performed during the remainder of 2019 and 2020. And the remainder is scheduled for 2021 and beyond. The ratio is broadly similar to that of the third quarter of last year, where it was 45%. Operating cash flow for the quarter was $48.8 million outflow compared to its $19 million outflow in the same quarter last year. We have increased our focus on the cash generation and expect to see gradual improvement over the coming quarters. The Board of Directors declared a dividend of $0.44 per share for the third quarter of 2019. That ends my summary, and I should now turn over the call to Mr. Machlis, Elbit’s CEO. Butzi, please go ahead.

Thank you, Jose. Elbit Systems has evolved significantly in the past year, and it's of much greater scale than only a year ago. This is especially true in our key strategic region, the United States. Over the past year, we completed two large acquisitions. In September, we completed the acquisition of the Night Vision Business from L3Harris Technologies for $350 million. The Night Vision Business has strong market positions in the U.S. and adds advanced technologies to Elbit System portfolio, with significant potential for delivering -- for revenue synergies. This acquisition further enhanced our position in the U.S. a strategic market for Elbit. I would like to take this opportunity to welcome the Night Vision employees into the Elbit Systems Family. At the end of last year, we completed the acquisition of IMI Systems. The combination of Elbit and IMI’s capabilities together with Elbit Systems broad market presence enabled us to offer an enhanced product portfolio and realize the potential of IMI’s Technologies in Israel and more importantly in the International arena. The integration of IMI is progressing in line with our expectations, and we continue to explore further opportunities to extract revenue and cost synergies. Our gross margin in the third quarter was impacted by the sales mix and IMI. Land System’s management is working hard to raise IMI’s margins up to Elbit’s. All this is encouraging, but the improvement will be gradual. Elbit has decades of experience in successfully integrating acquisitions and exploiting synergies, often significantly ahead of plan. Taking a closer look at the performance of the Elbit System during the quarter, as Jose mentioned, our revenue grew by 23% year-over-year and mixture of organic growth and IMI. Our businesses continues to perform well, and we have won new businesses across all our main target regions. I would like to highlight some of our recent wins. In Europe, we were pleased to have been selected to provide the Swiss Armed Forces with an army-wide tactical Software Defined Radio solution, a key probability for the Swiss Armed Forces. This selection follows a rigorous evaluation procedure, which ultimately found our system providing a better price performance ratio over the competition. The contract award is subject to approval by the Swiss parliament. A few weeks ago, we announced a five-year $50 million contract to supply the Portuguese Air Force with a complete Electronic Warfare suite and Customer Logistics Support for the new KC-390 multi-mission aircraft. In the U.K. we were awarded a $38 million contract to supply Joint Fires Synthetic Training Systems to the British Army. The system will be supplied over two years, and the contract includes four years of maintenance, technical support and on-site training. In South East Asia, we announced $150 million contract for a multi-layered array of Unmanned Aircraft Systems or UAS. Under the contract, we will supply a networked multi-layered UAS solution, including more than a thousand THOR Multi-Rotor Vertical Takeoff and Landing mini-UAS, scores of Skylark LEX, Skylark 3 and Hermes 450 tactical UAS as well as Universal Ground Control Stations. In the U.S. we recently announced its 23 million win by our newly acquired Night Vision businesses for the supplier of systems and various spare components to the United States Marine Corps. The order is part of the $249 million five-year Squad Binocular Night Vision Goggle System IDIQ contract awarded several days before the finalization of the acquisition of the Night Vision businesses by our U.S. subsidiary. In September, we announced our selection by Boeing to supply cockpit displays, datalinks and embedded training capabilities for the U.S. Air Force T-X advanced pilot training aircrafts. We continue to see demand across the globe for our solutions from our legacy and recently acquired businesses highlighting the value provided by our broadband product suites. In summary, as Elbit moves into 2020, we are not only a leading high-tech defense electronic company; we are also a company of significant scale, a bigger player in the large US market with multiple growth opportunities ahead of us. And with that, I will be happy to take your questions.

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

Yes, hello, Butzi, and Jose and Rami [ph]. Good afternoon. My main question is on gross margin. I know you guys talked about mix, and I want to make sure I understand exactly what you mean by that. Was the mix related to you know within IMI, in other words IMI gross margin was down versus the first half of the year, or was it related to some other item?

It's a combination of both. IMI’s gross margin historically used to be in the teens, as you know, and we are working hard to improve that, and actually they were able to improve slightly in the last three quarters, and we see the gradual improvement for the future However, they start for a relatively low number, while we are in the high 20s, they are in the high teens. So that is one aspect. The other, the mix element is that given the rest of the business, from time to time we have a mix of products and mix of programs sold in the quarter, sometimes with higher profitability, sometimes with low profitability. And that's what we mean by a mix in the quarter. In general speaking, I would look at the longer term gross profit performance of the company. And the value of the specific quarter gross profit, I would say is a little bit limited.

Okay, okay. So you're expecting an improvement sequentially in the fourth quarter? Butzi.

Well, we're working hard to improve it. You -- we don't provide guidance as you know. Usually the first quarter is a strong quarter, definitely in the revenue line. We'll see how it goes.

Okay, and let me ask on the working capital. You know, you made some comments in your prepared remarks, how we think about the fourth quarter? Do you think working capital will be a tailwind for you and is there maybe a free cash flow to net income conversion ratio for the full year that you think you can have?

I expect to improve the situation in the fourth quarter. However, I do not expect total turnaround. We working hard to collect from our customers the money here in Israel, we have a little bit difficult situation with the Minister of Defense and in general, actually with the whole budgetary situation of the whole country, due to the political situation. However, we expect to collect that in the coming quarters in one way or another. Other customers were working hard to get the money in. The other elements of the working capital, we have a slightly higher than usual level of inventory. Part of that will be reduced, we expect during the fourth quarter but part of that will continue with us in view of the fact that we have to provide for the growth of the revenue line in the future quarters.

Okay. I understood. I guess I'll ask one last one. I appreciate all the color on active protection systems. It seems like you've had some breakthroughs recently. I think, you guys announced in August, you won the Israeli Eaton APS competition over Rafael. And I understand that the Eaton will go into production in 2021. And so I'm trying to maybe think about a revenue profile there like maybe a similar U.S. program could be. I'm guessing, maybe you have a limited number of development revenue you'll book before the Eaton gets introduced around 2021, but then thereafter, I mentioned maybe it ramps as the vehicle goes into production, is that the right way to think about it?

Yes, you're right, we almost completed the development of the system and we are waiting for -- we're waiting for an order from the Israeli Ministry of Defense. As you all know that Eaton is a very important platform here in Israel and I'm sure, it will go into production with big numbers and we are very proud by the fact that we have been selected by the Israeli MoD. We don't yet have an order. Therefore, we didn't talk about that, but we expect to have this order soon and it will go into production as you said probably in a year -- in about a year time from now. We see a lot of interest for the system in many other places. As you all know we are discussing the system also with the U.S. Forces for the Bradley A-3 in the U.S. and there is also a lot of interest in Europe as well as in Asia Pacific and we expect this product or system to be a growth engine for our land division as well as for the entire corporation. And we expect it to go into production, as I said in about a year from now for Israel as well as hopefully for other customers as well.

That's Great. I appreciate all the color, guys. Thank you.

Okay.

[Operator Instructions] The next question is from Ella Fried of Bank Leumi. Please go ahead.

Good afternoon. Thank you for taking my questions. And first, regarding the appreciation of shekel and the current hedge situation. As we know the third quarter was partially hedged. And if I remember correct, the fourth quarter, it was almost -- was no hedge at all. And how are you coping with the present rates and the shekel appreciation in general?

Well, we are experiencing a strong shekel. And actually, the third quarter did suffer to some extent from the strong shekel as well. We -- the fourth quarter would be affected as well. I'm not sure what will be the average rate on that fourth quarter shekel. However, we are now in the 348 per dollar, 346 per dollar range. We're working hard to reduce, as you know our cost basis and to be minimally affected by that. We did not hedge anything for the fourth [ph] quarter, we will have some impact. I don't think that will be something extremely drastic.

And another impact or not. The labor costs, the letting go of -- parts of IMI and all this procedure, will we see the impact of it on the results of the fourth quarter and how much of it did we see in the third quarter?

Well, actually the impact of that you'll see it first of all, in the cash flow. We did pay, whatever needed to be paid, according to the agreements that we had with the unions and the employees and the government when we bought IMI. So that is one impact. The other impact, we started seeing gradual initial reduction in the headcount and according to that reduction in the cost basis of the operation of IMI and therefore, we actually were able to bring them at a breakeven plus I would say the operating profit level. Some of the reasons of that are in that element that we just discussed right now. Looking into the future, we expect to get the benefit, the full benefit in the following year and by a reduction of cost -- cost basis. In parallel, we, of course, have gone through restructuring of the business and focusing in the business elements better according -- at IMI in line with what we do in the rest of the Company.

And for how long do you think is your estimate that this process. I mean, the bulk of this process will last two quarters, almost three quarters from now?

Yes, I think we'll be done with most of it somewhere during 2020.

Thank you very much for taking my questions.

Thank you.

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 1-888-326-9310. In Israel, please call 03-925-5921. And internationally, please call 972-3-925-5921. 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?

I would like to thank all of our employees for their continued hard work. 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.

Thank you. This concludes the Elbit System Ltd third quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.