Elbit Systems - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' second quarter, 2023 results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the questions 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 at www.elbitsystems.com. I would now like to hand over the call to Mr. Rami Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead.

Rami Myerson (Director of Investor Relations)

Thank you, Nathan. Good day, everyone, and welcome to our second quarter 2023 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 in 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 ongoing business. You can find all the detailed GAAP financial data, as well as the Non-GAAP financial information and the reconciliation 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 turn the call over to a question and answer session. With that, I would like now to turn the call over to Kobi. Kobi, please.

Kobi Kagan (CFO)

Thank you, Rami. Hello, everyone, thank you for joining us today. The financial results of the second quarter of 2023 reflect sustained demand for our solutions. Increased production capacity and gradual easing of supply chain pressures that supported the revenue growth. The sequential increase in operating profitability provides an encouraging initial indication of the successful implementation of the operational improvement plan. We continue our efforts across the company to improve profitability and cash generation and realize our potential. Before I discuss some of the key figures and trends in our financial results, 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 our results in the second quarter of 2023 do not include a contribution from Ashot Ashkelon.

Second quarter revenues increased by 12% to $1.454 billion, compared to $1.303 billion in the second quarter of 2022, with growth across all business segments. In terms of quarterly revenue by segment, Aerospace revenue increased by 19% in the second quarter of 2023, compared to the second quarter of 2022, mainly due to training and simulation sales in Europe. C4I and Cyber revenues increased by 1% year-over-year. ISTAR and EW revenues increased by 21%, mainly due to European electronic warfare sales. Land revenues increased by 3%, mainly due, mainly due to armored vehicle upgrades and ammunition sales. Elbit Systems of America revenues increased by 7% in the second quarter due to growth in night vision sales.

Elbit Systems benefit from a diverse geographic revenue base that reduces revenue volatility and supports the long-term sustainability of our business. In the second quarter, Europe was our largest market, contributing 32% of group revenues. North America was 23%, Asia Pacific, 22%, and Israel contributed 17% of revenues. European revenues increased mainly due to growth in training and simulation sales. Asia Pacific revenues declined, mainly due to lower Precision-Guided Ammunition sales. The non-GAAP gross margin for the second quarter was 26.1%, compared to the second quarter of 2022, at 26.5%. GAAP gross margin in the second quarter was 25.6% of revenues, compared to 26.1% in the second quarter of 2022.

Second quarter in non-GAAP operating income was $112 million or 7.7% of revenues, compared with $103 million, or 7.9% of revenues last year. The sequential improvement in non-GAAP operating profitability is an encouraging indication of the tangible benefits of the operational transformation plan. GAAP operating income for the second quarter was $102 million or 7% of revenues, versus $115 million or 8.8% of revenues in the second quarter of 2022. GAAP operating income in the second quarter of 2022 included a capital gain related to the sale of our subsidiary, Ashot Ashkelon Industries, as well as the sale of a building in Israel.

The operating expenses breakdown in the second quarter was as follows: net R&D expenses were 6.4% of revenues, versus 7.4% in 2022. Marketing and selling expenses were 7% of revenues, versus 6.4% last year. The positive inflection in global defense budget growth has created multiple opportunities, the increase in marketing and sales spend will help to realize the potential this creates. G&A expenses were 5.2% of revenues, compared to 5.6% last year. Financial expenses were $32 million in the second quarter, compared to $9 million in 2022. Financial expenses in the second quarter were higher as a result of the significant increase in interest rates and higher debt.

Operating cash flow in the second quarter was $138 million outflow, compared to $169 million outflow in the same quarter last year. Operating cash flows in the first half of 2023 reflect an increase in inventories to support revenue growth and delays of payments from the Israeli Ministry of Defense. We do not believe there is a risk to receiving these outstanding payments, and we continue to work with our customers to expedite these payments. Our operational improvement plans should also support our efforts to improve cash generation in the medium term. We recorded a tax expense of $9 million in the second quarter, compared to $13 million in 2022. The effective tax rate in the second quarter was 13.6%, a similar level to the tax rate in 2022.

Our non-GAAP diluted EPS was $1.57 in the second quarter, compared with $1.73 in 2022. GAAP diluted EPS was $1.40 for the second quarter, compared with $1.82 in 2022. Our backlog of orders as of June 30th, 2023, was $16.1 billion, a $2 billion higher than the backlog at the end of the second quarter of 2022. Approximately 49% of the current backlog is scheduled to be performed during the remainder of 2023 and 2024, and the rest is scheduled for 2025 and beyond. The Board of Directors had declared a dividend of $0.50 per share. I will now turn the call over to Mr. Machlis, Elbit CEO. Please go ahead.

Butzi Machlis (President and CEO)

Thank you, Kobi. The second quarter results demonstrate the successful implementation of Elbit Systems' long-term strategy. Revenue growth accelerated in the quarter as we started to benefit from increased capacity, the easing of supply chain bottlenecks, and continued demand for our portfolio of solutions from customers around the world. The operational improvement plan that we discussed with you in the past is starting to deliver tangible results with the same, with.

Sequence.

-sequential increase in operating affordability. Financial expenses in the 1st half reflect the increase in interest rate and higher debt due to delayed payment from customers. In recent years, we have leveraged a strong balance sheet to overcome the challenges presented by COVID-19 and supply chain disruption to sustain deliveries to our customers. The increased interest rate environment has raised our cost of financing. As part of our operational improvement plan, we are working to improve cash generation and reduce financial leverage. This should contribute to a reduction in financial expenses over time. I would like to review how the financial results in the 2nd quarter reflect the successful implementation of Elbit Systems' long-term strategy. The growth in European revenue in recent quarters is a direct result of our multi-year investment in building a multi-domestic footprint across Europe.

Elbit Systems identified the long-term potential across European market as part of our strategic planning. Many European governments had significantly reduced the scale of their military forces following the end of the Cold War. This also resulted in reduced procurement from the domestic defense industrial base and the investment in defense-related research and development. At Elbit Systems, we identified the opportunity this provided to supply our advanced solutions to customers across Europe by building domestic subsidiaries with engineering, manufacturing, and support capabilities, transferring our cutting-edge IP and solutions, and adapting them to the requirements of the different European customers. We established domestic subsidiaries and partnerships with local companies across Europe, from Sweden to Greece and from U.K. to Romania. When we were ramping up our investment across Europe, other defense companies were shrinking their exposure and reducing investment.

The Russian invasion of Ukraine was a wake-up call for many European countries that have subsequently decided to ramp up their defense spending, recapitalizing their military forces and the domestic industrial base. Following years of investing, of investment in our multi-domestic presence across Europe and portfolio of leading and relevant solutions, Elbit Systems has started to benefit from the growth in European defense spending, as demonstrated by the growth in recent quarters, as well as the orders we announced for Watchkeeper X UAV from Romania and airborne EW system from Germany in recent months. In 2018, we acquired IMI from the Israeli government and integrated it into our land segment. IMI has two major product areas: active protection systems for armored vehicles and a broad portfolio of munition.

The strategic rationale for the acquisition was the potential we identified for significant value creation we could generate by combining our legacy seeker technology with IMI's munition portfolio to develop a range of air and ground-launched Precision-Guided Munitions. As part of the acquisition, we committed to building a brand new munition production, development, and testing facility in the south part of Israel. The Russian and Ukraine militaries are consuming thousands of rounds of munition every day of the current conflict, and militaries around the world have realized the critical importance of munition production capacity and stockpiles. We are benefiting from the strong demand for our portfolio of munition and launchers for customers around the world. In July, we announced a $60 million contract to supply artillery shells to the Israeli MOD.

These orders follow multiple orders for our PULS rocket launchers and precision rockets, artillery solutions, and tank munition. Demand for platform protection solutions has also increased. We have received exploration of interest from customers around the world in our Iron Fist active protection system. The strong demand for the land segment solutions validates the strategic rationale around the acquisition of IMI and our M&A processes. As part of our strategic processes, we regularly review our portfolio to identify capability or technology gap that we can fill through M&A. We have spent more than $1 billion in recent years on a series of acquisitions that we are delivering tangible returns, like IMI and IMB. We also review our existing portfolio to identify the business units that are no longer relevant to our strategy and could be more successful under different ownership.

When we identify these businesses, we explore opportunities to sell them. In 2022, we sold the Ashot Ashkelon Industries (Ashkelon) to FIMI Opportunity Funds and for Ferranti technology, power, and control business to the U.K., to the U.K., to TT Electronics. This is the preferred option, but if we are not able to find a buyer, we close the business as part of our strategy to optimize our business portfolio. Last week, following our AGM, David Federmann was appointed Chair of Elbit Systems Board of Directors, replacing Michael Mickey Federmann, who remained on the board as a director. Mickey was appointed as the chair of the board in July 2000, following the merger between Elop and Elbit Systems. In 2000, Elbit Systems reported annual revenues of $591 million and a backlog of $1.4 billion.

In 2022, Elbit reported annual revenues of $5.5 billion, a 900% increase, and a backlog of $50.1 billion, that increased to $6.1 billion at the end of the second quarter. Revenues and order backlog growth during Mickey's tenure as chair, outstripped global defense budget growth. Elbit Systems have become one of the leading defense companies in the world. In 2023, Elbit Systems was ranked 21st in Defense News Top 100 Global Defense Companies. On behalf of Elbit's employees, I would like to thank Mickey for his leadership. I would like to wish David Federmann success in his role as Chair of the Board of Directors. With that, I will be happy to take your questions. Operator?

Operator (participant)

Thank you, ladies and gentlemen. At this time, we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using a speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Sheila Kahyaoglu, from Jefferies. Please go ahead.

Sheila Kahyaoglu (Managing Director)

Good morning, guys, and thank you. Good quarter. I just wanted to ask a few questions, if that's okay. You talked about it in the prepared remarks a little bit, but obviously, Europe was really strong in the quarter, and Israel and North America, weaker... How should we think about the cadence of growth across geographies from here, and any color on the regional mix in the backlog?

Butzi Machlis (President and CEO)

Hello, Sheila. We, we see a big potential ahead of us. The funnel of, of, of opportunities we deal with is, is quite big. We, we see many opportunities in all domains, actually. We expect to see growth in Europe, and we also expect to see growth in Asia Pacific, as well as, as well as, in the U.S. Here in Israel, we are waiting for a 5-year planning of the Israeli MOD, which should take place around the end of this year. After it will take place, I believe that we'll be able to get more orders from the MOD.

Latin America is shrinking, and I do, I don't expect big orders from this, from this region and in the near quarter, or in the near future. This is, this is it more or less. After I bring my call, though, I'd like to say that there are more opportunities for us in the Middle East. We have a theory in, in the U.A.E., and we believe that There is quite a big potential for us in, in, in this market as well. Our diverse presence is a, is a stabilizing factor for future growth, and and I believe that the strategy, the strategy of Elbit, which includes two main pillars.

One is a very wide portfolio, and the other one is, being a global company with many subsidiaries all around the globe, is proving itself, and I expect to see additional growth in revenues as well as in profit.

Sheila Kahyaoglu (Managing Director)

Great, I might ask one or two more, if that's okay? When we think about the European market, obviously it's been really good. Again, is there a different strategy there? You mentioned, you know, how for all your coverages, in your prepared remarks in Europe, like, how you sell in Europe versus how you sell in North America and Asia.

Butzi Machlis (President and CEO)

She wants to take Europe. No, I, I don't expect. We, we continue to, to enhance our local presence in Europe. We have many subsidiaries. We have subsidiaries in, in the U.K. We just inaugurated 1 month ago, another facility for Elbit in the U.K. We are enhancing our, our position also in Germany. We inaugurated another facility in Germany, in Ulm. We have subsidiaries in Sweden, we have subsidiaries in Belgium, we have subsidiaries in Switzerland, we have subsidiaries in, in Austria, as well as, as well as in Romania. We are working hard with our customers to improve our local position in the continent. That's our strategy. With regards to the U.S., as you know, we acquired 2 companies in the U.S. recently.

We acquired Sparton, and we acquired Night Vision, and we are very happy with these acquisitions. Actually, we see a lot of interest for our portfolio in the U.S. market, and we expect additional growth for us in the U.S. as well.

Sheila Kahyaoglu (Managing Director)

Great, one more, if I don't, you don't mind, on the free cash flow, you know, continued usage. How much of that $300 million or so of usage in the first half will reverse in the second, and how much is tied to Israel, specifically on the working capital?

Kobi Kagan (CFO)

Hi, Sheila, this is Kobi. We expect that the second half will be a positive one. We see some delays in payments from the Ministry of Defense here in Israel, but we don't expect that those delay, delays will, will cross the year-end. We expect that on the second half, the Ministry of Defense will pay all the outstanding receivables that we are currently missing in our cash flow position.

Sheila Kahyaoglu (Managing Director)

Great. Thank you.

Butzi Machlis (President and CEO)

Thanks, Sheila.

Operator (participant)

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

Pete Skibitski (Director of Aerospace and Defense Equity Research)

Hello, good afternoon, everyone.

Butzi Machlis (President and CEO)

Hey, Pete.

Pete Skibitski (Director of Aerospace and Defense Equity Research)

Butzi, I, I did wanna follow up on Sheila's question with regard to Europe, because, you know, the revenue there has been incredible, right? Up, up 40% last year and roughly 50% year through the first half, so very impressive. Just, just for the perspective of playing the role of a devil's advocate, as, as they say, how much concern do you have about the willingness of European governments to continue to fund defense budget increases? Just in light of, you know, I think there are some inflationary pressures there. There's I, I think, some macroeconomic concerns there. Do you think the governments will, will follow through with budget increases the next few years, you know, in the current kind of macroeconomic backdrop they, they find themselves in?

Butzi Machlis (President and CEO)

Thank you, Pete. From what I understand, all European countries understand right now they need to spend 2% of GDP for defense. Not only them, some countries are even investing more than that. This is not for the short term, it's for the long term. Many countries also understand, as I described earlier, that they need to build local capabilities, and they want to reduce their dependency on external sources. This is exactly the Elbit strategy. I do not see a decline in defense spending in the near term or even in the medium term in Europe.

I also want to add to this, that inventories, there are actually huge, huge demand to increase inventories for for ammunition as well as for additional for additional mission products in Europe. Actually, many countries are left without critical mass of ammunition, of tanks, of artillery pieces, of UAVs, of communication equipment. It will take years to fill all this storage again with the required quantities. I don't see a shift or a change in the demand in in in the market. I also want to add that the backlog we have in Europe as well as in other places, is not just for the coming quarters. It's a long-term backlog, and I'm sure it will yield additional revenues in Europe.

We see a growing demand for guided ammunition, for UAVs, for EW system, for command and control and communication solutions, for anti-drone solutions, all over the continent as a result of the conflict with Ukraine. I don't expect it to change in the near future.

Pete Skibitski (Director of Aerospace and Defense Equity Research)

Okay. It's very helpful. I appreciate all the color on that. Let me ask one about Israel now, and, and not to go down a political path from thousands of miles away here, but can you briefly give us a, a sense of, you know, let's call it the, the recent social unrest that we've heard about? Do you expect that to have any impact upon the MOD's, you know, budget processes or contracting activities?

Butzi Machlis (President and CEO)

No. Without entering into politics, as you said, I don't expect... Israel, there is, there is a budget in the country, and, as a result of that, there is a process, which is taking place right now in Israel to build a five-year plan for the IDF. This plan should be concluded around the end of this year, and then we expect to get orders. I don't see any change in that.

Pete Skibitski (Director of Aerospace and Defense Equity Research)

Okay. Okay, I appreciate it. Last one for me. You know, so earlier this year, we, we sort of stopped talking about phantom stock options expense because the shares were, had, had, had retreated a bit. Of course, now the shares are up about 25% year to date. Should, should we do we have to start thinking again about stock option expense as a headwind, to margin at some point? Could, could you give us some color there?

Kobi Kagan (CFO)

Thank you, Pete, for the question. As you know, the phantom stock option plan is a specific plan. The terms of the option plan is scheduled that, all of the payments of this stock option plan will be concluded this year. We don't expect any, any other cost on the P&L from the stock options, not this year and not in coming years.

Pete Skibitski (Director of Aerospace and Defense Equity Research)

Okay. Okay, that's great. Thank you, guys.

Butzi Machlis (President and CEO)

Thank you.

Operator (participant)

I repeat, if there are any other additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we call for more questions. The next question is from Ella Fried of Bank Leumi. Please go ahead.

Ella Fried (Senior Equity Analyst)

Good afternoon. Well, it seems that you managed to tackle the supply chain challenges, but also at the cost of increasing the inventories. Correct me if I'm wrong. This increasing inventories is actually a follow-up question on the cash flow. How, how do you plan in this world when, when, when, when supply isn't so smooth as it used to be? How, how do you plan to face this challenge of inventories with your huge growth?

Butzi Machlis (President and CEO)

Hi, Ella.

Ella Fried (Senior Equity Analyst)

Hi.

Butzi Machlis (President and CEO)

Good afternoon. First, I must-- supply chain, as we predicted, supply chain, most of the obstacles we faced during COVID are over, are going down. Not all of them yet, but, but, it's much better than it was a year ago or even quarter ago. We don't have, it should have a positive effect on our inventories in the past. Because of the uncertainty we faced during COVID, we had to buy more inventories in order to ensure deliveries to our customer. Today, we are able to return back to the previous procedures. We don't have to maintain any more big stocks because of supply chain issues, and this is more or less coming back to normal.

The company is growing quite a lot, as you all see, and in order to meet, the, the demand, the, the demand, in order to meet the commitment we have, we need to acquire, more stocks, in order to be able to deliver the goods to the customer. That's actually what, what you see in the results. We continue to work hard to reduce the inventories. As I said, the fact that, supply chain is more, normal right now will help us to do so, and this is, an important, effort in the company which takes place these days.

Ella Fried (Senior Equity Analyst)

Well, it seems that the headwinds, the headwind of supply chain actually, was replaced, and the kind of, decreasing the impact of, cost of labor and, delay. The, the question is, do you think, it will follow us into 2024, and, how are you handling it as-?

Butzi Machlis (President and CEO)

No, regards to workforce, it's, it's, it's the contrary, Ella. To, to be quite the... As you know, the company has grown a lot, and we had the demand to, we still have a demand to recruit additional people. It was quite challenging during the COVID time. Right now, it's more easy for us to find good talent in the country. It's more easy to find good people, and it's also the, the salaries are more reasonable. This factor is also easing. I don't see major challenges for us now to recruiting good, good, good talent in the country with reasonable cost. It wasn't the case a year ago, right now it's much better.

Ella Fried (Senior Equity Analyst)

I think the next question is for Kobi. How should we look at the profitability in 2024 in comparison to this quarter? I mean, do, do, do we, do we expect a very substantial grow- I remember that you told us that we should expect a quarter after quarter increase and improvement, but when, when I'm looking at this quarter, with the impact of a financial expense, how should we be looking at 2024 in comparison to this quarter?

Kobi Kagan (CFO)

Ella, as, as you know, and thank you for the question. as you know, very well, we don't provide guidance.

Ella Fried (Senior Equity Analyst)

I know, but, I, I speak in more general terms.

Kobi Kagan (CFO)

we, we, as, as, as Butzi, as Butzi mentioned before, we are looking for sequential improvement in non-GAAP operational profitability. we, we promised that, and we think we, we kept our word, and, and there is, there is improvement, a gradual improvement in non-GAAP operational profitability, and the company is doing a lot of efforts to, to achieve this, this improvement. For your second half of the question, as to financial cost, we see, we see a dramatically increased neighborhood of interest rates, and we face higher interest rates.

Our, our rating, our rating is, is, is excellent, but as you know, the base interest rates, the SOFR, is now 5.5%, compared to almost zero, a year ago. With, with almost the same debt, we face higher in financial costs, and this is the new reality. As, and as we mentioned, we're looking at improvement, cash generation to reduce our, our financial debt.

Butzi Machlis (President and CEO)

we are committed, we are committed also, as mentioned earlier, to continue to improve our operational profit, our non-GAAP operational profit, as you saw in the last few quarters. It will continue in the future as well.

Ella Fried (Senior Equity Analyst)

Okay, thank you, and good luck. Maybe not very politically correct question, but can you tell us what actually happened with Denmark? Because there are so many publications about it, does it impact... First, and most important for Elbit, does it impact the order? The second question, is it relevant in any way to Elbit's position?

Butzi Machlis (President and CEO)

The answer is very clear and easy. It has nothing to do with Elbit. There was an urgent requirement. The Danish MOD came here and took a decision to acquire our stock, and we got an order. This order is valid. The criticism which is taking place in Denmark right now is not on Elbit, is on internal.

Ella Fried (Senior Equity Analyst)

About the process there.

Butzi Machlis (President and CEO)

About the internal process in Denmark. We, we delivered already, some, some equipment to them, and, this program is valid, is active, and, we believe that we'll get additional orders from them, I hope, in the, in the future. As you know, we won, we won, rocket launchers, not just in Denmark, also in the Netherlands, and, just recently, $300 million contract. I foresee big opportunities for us for guided ammunition in Europe.

Ella Fried (Senior Equity Analyst)

Thank you very much, and congrats on the improvement in the quarter.

Butzi Machlis (President and CEO)

Thank you.

Kobi Kagan (CFO)

Thank you, Ella.

Operator (participant)

The next question is from Elad Kraus of Meitav. Please go ahead.

Elad Kraus (Head of Research)

Thank you very much. First of all, good afternoon. Well, you've answered most of my questions. I do have still one. Do you see any change in the competition right now that regarding the margins of the company can affect the 2024, 2025 margins? Maybe to be higher or lower than today?

Kobi Kagan (CFO)

Of course, there is competition in the market, but, I believe that, the depth of the portfolio we have and, and the global positions we have are very unique. Customers are looking to get, mature equipment and to get it as soon as possible and to get it from local providers. We are unique with our offer. Of course, it gives us an advantage in the, in, in the market, but of course, there is still competition.

Elad Kraus (Head of Research)

So basically-

Kobi Kagan (CFO)

It depends, depends on which segment. In each segment, it's a different type of competition, but there aren't many companies who have such a portfolio and such market position like us.

Elad Kraus (Head of Research)

If this is the case, should we expect the same margins as, as we saw in the last couple of years?

Kobi Kagan (CFO)

I can tell you that, The gross profit profitability of our backlog is higher than the gross profit of the revenues that you see in our quarterly results. Because of that, I'm able to commit that our revenues in the future will be higher. Our profit in the, in the future will be higher.

Elad Kraus (Head of Research)

All right. Thank you very much.

Kobi Kagan (CFO)

You're welcome.

Operator (participant)

The next question is from Boaz Ben-Shitrit of Archimedes. Please, go ahead.

Boaz Ben-Shitrit (Senior Research Analyst)

Hi, good afternoon. I have three little references, that I wanted to ask. First of all, the delayment of payments from the Israeli Defense Forces. Are you getting any compensation for that? Because the varying costs. The other side of it is, if I'm looking forward, I see higher interest rates. What can we expect coming next year? Is it similar to this past six months or more even? On your future contracts, mainly the, the backlog, is it linked to interest rates or inflation? Because, the world changed in the past year, and your backlog is about two or maybe three years long. How will we see this in the coming quarters? Thanks.

Kobi Kagan (CFO)

Hi, Boaz. How are you?

Boaz Ben-Shitrit (Senior Research Analyst)

Good.

Kobi Kagan (CFO)

For your first question, we are negotiating with the Ministry of Defense, and I would not like to disclose those the details of the negotiation. As I mentioned before, we expect all the payments to be made till the end of the year. As to the second question, we see probably at the same level of this quarter financial expenses for next quarters, as the interest rate level to our analysis, have reached some peak, and we don't foresee additional increase in interest levels. We are expecting with cash generation to decrease the debt level.

We hope to see some, some decrease in financial expenses. As for price-adjusted contracts, we have some of our contracts, which are price-adjusted, and some of the contracts, which are fixed contracts. We are subject to competition, and of course, part of the competition is determining the competition rules, and part of our contracts are price-adjusted and part are not.

Boaz Ben-Shitrit (Senior Research Analyst)

Okay. Thank you very much.

Kobi Kagan (CFO)

Thanks, Boaz.

Operator (participant)

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

Pete Skibitski (Director of Aerospace and Defense Equity Research)

Yeah. I did have one follow-up, but I, I think it's largely been, been asked for Kobi. Kobi, if cash collections do improve in the second half, it sounds like you intend to pay down some of the short-term debt that you raised this quarter. Just, would, would you guys prioritize debt paydown over M&A if a, if a, if, you know, if an attractive deal comes your way, or, or are you more flexible in that sense for capital deployment?

Kobi Kagan (CFO)

We, we are known for very strict capital deployment, and we know how to, how to deploy our capital. We do that very, very diligently. As, as, as to specifics, we, we don't have any specifics on big M&A transactions. We are always looking for opportunities, and as we mentioned before, we look for M&A to increase our portfolio or to, to increase market share. There is always a search in the company, and as we proved in the past, we know, we know our way in M&A transactions. Of course, if we have a positive cash generations, we will, we will decrease our short-term debt. That, that's for sure, Pete.

Pete Skibitski (Director of Aerospace and Defense Equity Research)

Okay. Thank you very much.

Kobi Kagan (CFO)

Thanks, Pete.

Operator (participant)

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. Internationally, please call 972-3925-5900. A replay of the call will be also available on the company's website at www.Elbit Systems.com. Mr. Machlis, would you like to make your concluding statements?

Butzi Machlis (President and CEO)

I would like to thank all our employees for the 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 goodbye.

Operator (participant)

Thank you. This concludes the Elbit Systems second quarter 2023 results conference call. Thank you for your participation. You may now go ahead and disconnect.