Elbit Systems Ltd (ESLT) 2022 Q4 法說會逐字稿

(presentation)

Hello, and welcome. It's off script, but until last night at 9 p.m., we didn't know if we would be able to hold this event. So it's wonderful to be here. And I'm so delighted to see all the people who are here and those on video. This is our investors conference, which we host in the Tel Aviv Stock Exchange. It is broadcast live. It is streamed with simultaneous interpreting into English.

(Operator Instructions)

We'll start with an overview of our CFO, Dr. Yaacov Kagan. At the end of the overview, the President, Butzi Machlis will go over the business achievements of the company over this past year and the operational transformation that Elbit is going through. Afterwards, we will answer questions by institutional investors and analysts. Analysts and institutional investors who watch the streaming and wish to ask a question in Hebrew or in English are welcome to send an e-mail to [elbitsystems@gkir.com] and soon you will see the email address on the screen during the broadcast and during the Q&A session. The materials that will be shown will be available on the Internet website of Elbit for Investors and there is a safe harbor that appears on the company as of this morning with financial overview that will include data that are not -- that are non-GAAP -- non-GAAP data and alignments with existing accounting data exist in the financial statements of the company.

For detailed information I'd like to refer your attention to the company's financial statements that were published in April 7, 2022 as part of the 20-F financial statement. If there is any [indiscrepancy] between what the company states in the report, if there is some kind of a discrepancy between the words of the management in Hebrew and then interpreting into English, then the legally binding part is what the management says in Hebrew.

And now let's move on to Kobi.

Good morning, everyone, and thank you, Rami. I'm going to present the financial results for 2022. My name is Kobi Kagan, I'm the group CFO. Just this morning, we published our financial results, and we would like to present the highlights. So we can see that 2022 was a peak year, both in backlog and in sales. We can see $15.1 billion in backlog and peak revenues of $5.5 billion. In 2022, we reached a profitability at the rate of 6.5% in non-GAAP, $367 million and an operating cash flow of $240 million.

I would like to emphasize several points regarding the 2022 financial results. So we see that in sales, we went up from $5,279 million to billion in 2021, and we crossed the $5.5 billion line. It's a peak revenue sales and in -- and this was a peak quarter in Q4, a total of 4.4 growth in sales during this year. Regarding backlog, we crossed the $15 billion. We're talking about an 11% growth in comparison to 2021. And here, we can see the results of the multi-annual strategy of the group with respect local presence in foreign countries and a highly diverse portfolio of products, and with respect to our ability to provide systemic solutions for our customers.

We see a drop in profitability, 2% drop from 8.5% in non-GAAP in 2021 to 6.5% on average in 2022. This drop is, first and foremost, a result of the payment. It has to do with share performance of $72 million. It's a one-off payment, both in GAAP and in non-GAAP. And as well during this year, we experienced some major challenges with supply chains, and we can see a moderation of these challenges as we look ahead. Butzi, the President of the company in his overview will explain in detail how the company is dealing with that, difficulties in supply chains are required that we increase our inventory and therefore, this was a difficulty with respect to the prices we saw for components in order to obtain the components, in order to safeguard our supply to our customers, and this impacted and harmed the profitability in 2022. And we see a drop in the pressures we have on the company's profitability as we move forward.

Regarding profit per share. We can see a drop of approximately $2. Of course, this is an outcome of the harm caused to operational profitability. But also because of an increase in financing costs, we raised bonds, a very successful round of raising bonds in high interest, and that guarantees a very stable platform of financing for the company and a very strong balance of the company that guarantees relatively low financing cost. Now with respect to operational cash -- operating cash flow, we see $240 million in 2022. It is a drop in comparison to 2021. But it's important to bear in mind that in 2022, we did have that one-off expense because of the profits and over -- the large number of -- large sum of hundreds of millions of dollars.

I'm not going to talk too much about Q4, but let me once again emphasize, we crossed the $1.5 billion in sales, $1.5 billion in sales. It's peak level of sales, the highest level ever, also an improvement in profitability in Q4 in comparison to previous quarters. And regarding -- we've seen excellent cash flow level in the specific quarter and of course, an increase in backlog.

The areas of operations, we can see mainly an increase in C4ISR. This is a growth mainly with respect to drones and precise ammunitions, and we also see stability in the other areas of operation. We would also like to mention that our geographic deployment enables us to benefit from peak demand for our products.

And looking at areas of operation, we can see the significant increase in Europe, an increase of approximately $400 million in sales to Europe. And of course, that's an outcome of the conflict between Russia and Ukraine. It's also an outcome of a great demand for drone solutions, precise ammunitions and Command and Control and of course, also ground solutions, land solutions. Europe is now arming itself with various ground solutions.

Now for many years, the company issued some of its operating profit to our shareholders and dividends. We're proud of that. We've been doing that for many years. We've distributed over $700 million over this 10-year period. And in 2022, it was $0.50 per share per quarter. All in all, a distribution of $2 in total. Thank you very much. Now I'm honored to invite Butzi, the President of the company, to give his overview.

Thank you very much, Kobi. Can everybody hear me? I'm so delighted to be here, and I'd like to thank all of you for coming. What I'm going to try to do -- try to tell you over the next few minutes, I'm going to try and tell you about the transformation and strategic change this company is undergoing. Elbit is at a very good period. We have a peak demand for our products with a significant increase in our backlog as well as an increase in sales but -- and we're going to see the details later. The company's backlog of sales between 2018 to date has doubled itself. We had approximately $7.5 billion backlog. And currently, it's over $15 billion. Our sales were approximately $3.5 billion and they've grown by $2 billion, and we're now talking about $5.5 billion in sales.

That means that a gap has opened up, a $5 billion gap between the increase in the company's backlog of orders and the company's sales. And this gap, this difference emphasizes and explains the potential and the change this company is undergoing, this gap. And that's -- before we talk about the future because looking forward, there is a great potential in our backlog. And we understood 2 years ago that the company is not in some kind of a linear growth trend, but we're actually in transformation. And this transformation means that we have to change our entire way of conduct in all parameters, whether it's operating parameters, whether it's R&D, HR, in order to bring the company over a period of several years to become a $6 billion or $7 billion sales company with a profitability of over 10%.

And this is what I'm going to try and explain today. This is what I'm going to show you, why the business environment supports this on the one hand and also why the trend -- I'm going to explain the transformation that the company is undergoing short-term in order to make it possible to reach these achievements in the short and midterm -- in the long and midterm. And of course, it comes with the cost of transformation. It means a very big investment and increase in capital investment, in the P&L investment, and ultimately, it's a short-term investment that will enable the long-term strategic change of the company. This is what I'm going to show you over the next few minutes.

Let's start and briefly talk about Israel. Let me tell you that in Israel, Israel has a defense budget, and this allows for a multi-annual planning stability. This is something that we didn't experience and I'm not going to go over all our areas of activities in Israel, but it exists in all of the military branches and our further collaboration with the security establishment makes it possible for us to deliver the best portfolio in the world. And thanks to this, we can be technological -- maintain our technological and operational leadership, which is what Elbit is famous for. So I'm not over all the systems and all the products, but rather I'd like to show you a short video, which emphasizes our achievements over this past year.

(presentation)

So as you saw in the video, you saw the 750, the new Command and Control system of the IDS. You've seen the follow-up -- the project for the Air Force which has been expanded over this past year. You also saw the Elbit active defense, which is now entering the [Eton] and [ELAL]. In the IDF you saw electronic -- maritime electronic warfare that are now entering the scene and you seen the -- you've seen the drones, the new drones of Elbit, which are part of the drones that the U.S. uses. It's a long-standing partnership between Elbit and the defense establishment, the security establishment, which has a -- which is expanding significantly. We've also received a very strong position with a powerful laser, which is a major source of investment in the company in order to give Israel strategic solutions in the land, we're part of this program.

This laser of Elbit, the component of the laser is integrated with a component from [Rafael] and Elbit is leading this laser -- the aerial multi-force laser that is going to give Israel a different kind of capabilities in defense. The U.S. there's a significant increase in the defense budget. You can see the increase in the R&D budgets and in procurement budgets, and these are the budgets relevant for us. And this increase in budget is because -- first of all, because of the threat in Asia Pacific, the issue with China and most of the investments there are in marine and aerial and the Sparton procurement -- the acquisition of Sparton in the U.S., and the purpose was to deliver strategic -- maritime strategic solutions. And all this continues in the excellent aerial positions that Elbit has, both directly or through the various American relevant OEMs, whether it's Lockheed Martin or [Boeing].

In addition to our investment in the sea and in air and the main purpose of that is Asia Pacific. There is also a differentiation in the land activity and also completing the inventory. And the main purpose of that is to help out in Europe with respect to the war in Ukraine. And that's an outcome of the European front versus Russia. We have approximately 4,000 employees in Europe. Many of them are engineers. We are deepening our local presence in the American market. In the U.S., we are selling about 1 point -- our sales in the U.S. are about -- our revenues in the U.S. are approximately $1.5 billion. We are situated in 13 states in the U.S., and we're part of the American ecosystem. We do not export from Israel to the U.S.

Our activity in the U.S. is local through our local company in the U.S., and we are part of the American establishment. And we are a trusted company in that market, which is the largest market in the world. And these are some of the positions we have in the American market. As I've said, we are on most of the airborne platforms in the U.S., whether it's F-35, F-15, F-18 or the future training airplane that's in development and we won that together with Boeing for the American Air Force. We provide munitions and homing devices to America Laser, GD Sonobuoy. We sell both to the Navy and also trains for -- cars for Command and Control to the American Army, et cetera. Some of them directly to American Army branches. And some of it is the activities we have with the American major OEMs, whether it's GD, Boeing.

And whenever an F-35 or an F-15 or F-16, F-18 or V22 and Apache is sold somewhere in the world automatically, Elbit Systems in America receives an order. It's tremendous power, tremendous power that serves us years into the future. And let me remind you that all this is not even part of our backlog. The backlog in the U.S., our annual backlogs. These are annual orders. It's not like what we see in other countries. These are multi-annual orders. And whatever is listed in our backlog of orders, these are only the annual orders that we receive. And I'm proud to say that in marine warfare or underwater warfare, we've heard that the American Navy is going to spend $5.1 billion IDEX. It's a multi-annual projects industries for 3 industries: Lockheed Martin, Ultra and us. And it doesn't even appear in our backlog, like I said. And this just comes to show you how much our activities within the U.S. in the underwater area is so basic.

Asia Pacific, what you can see here in this image. It's from the recent IDEX exhibit in the Emirates, and you can the booth we had, Elbit Systems Emirates with local employees that we have in that market. That's in the UAE. In addition to Asia Pacific, that continues to grow and procure as it faces the Chinese threat. A new market has opened up, the countries that are part of the Abraham Accords. And we didn't have access or it wasn't open to us this much in the past. It's extremely relevant to us. We've already received orders from these countries, and we're local there. And you can see it in this picture, these are employees. These are Elbit employees here in the picture. And these employees, these female employees explain about our portfolio.

Europe. An increase -- a significant increase in the defense budgets due to the war in Russia, the war between Russia and Ukraine. And this growth, this increase catches us at -- finds us at a very good point in time, a time in which we're significantly strong. We're local in Europe, in Sweden, in Germany, England, Italy, France. All these countries that you see in yellow, these are countries that Elbit has subsidiaries in. The lessons, both from COVID and also from the war between Russia and Ukraine is that countries wish to be more independent.

So on the one hand, they're increasing their defense budgets, but they also want to be more independent. Not only are we local, we are part of the ecosystem. We are part of the European ecosystem. And you can see names here. We are with SAAB. We've established a joint venture with KMW, Europulse and its purpose is to sell the rocket launchers in Europe, and there's great demand for that. We're also working with Rheinmetall. We are supplying along with Airbus. We deliver DIRCM systems in order to protect all the fuelers in Europe. We are partners with Airbus for providing an airborne systems to their helicopters. Every Airbus helicopter aircraft that flies, whether it's civil or military has Elbit avionics and we were chosen by BAE to provide the [HedBanz] systems.

These are active systems for several countries in Europe. We were chosen by General Dynamics to provide turrets to their land products of general dynamics in Romania. For example, once again, it's a differentiated market. We're local and we collaborate with all the relevant actors in the market. In order to be a local player, the 346 of Leonardo, which we also have in Israel. Some of its avionics systems come from Elbit, some of its training -- all of its training systems come from Elbit. And our presence in Europe is significant, and you've seen it in the results of Leonardo.

Elbit's portfolio is very relevant as we draw lessons from the war, whether these are systems that can handle suicide drones and UAVs, whether it's loitering munitions, whether it's drones and UAVs, with respect to intel and other subjects and also if we're talking about precision munitions on the air and definitely on the ground, whether it's rocket and -- we have advertised several of our wins for rockets in Europe and the funneling of that potential is huge. Like I said, we have a joint venture with [OW], which is a European joint venture that seeks to provide the fire platforms, ammunition platforms from Europe to Europe. And as for the electronic warfare, whether it's maritime, aerial, land, electronic warfare, that's also a major demand following the lessons of the war.

And our position in England in electronic warfare and maritime electronic warfare and we -- both land and maritime and we won so many projects in Europe and that's proved to our success, active systems. Everybody saw what an anti-tank missile or a stupid drone can do to ground forces. And we can absolutely protect from both ground and aerial threats. We can provide protection to such a force. And of course, command and control systems, which connect the sensor to the shooter and close the circle. And we have a portfolio that's mature, proven with local positions. It's a growing market. We've nailed it.

And now I'd like to show you a brief video showing our achievements worldwide over this past year.

2022 was another year of growth for Elbit Systems with governments around the world announcing plans to increase their defense budgets following the Russian invasion of Ukraine and lessons learned from the conflict. After years of investment in its global footprint and broad portfolio, Elbit Systems benefited from strong order intake that resulted in a record backlog.

(presentation)

Again, the market is growing, portfolio that is super relevant, local positions. And from here, we will talk about the transformation of the company. And this is a key slide that will talk about that transformation. This is what I tried to explain earlier. $7.5 billion in sales, the blue is going up. $7.5 billion sales accumulated, 15 -- to $5 billion. $7.5 billion growth from $3.5 billion, more or less sales to $5.5 billion. That's an increase of $2 billion. Look at the gaps, $5 billion gap, that's the difference. The numbers and the forecast 5 years along.

We will continue to grow. And I can see what's happening. And you can see the final, I can see the orders. We are in a period of peak, peak orders. So we understood 2 years ago in a clear process that this is going to happen. And we understood that we need to change something really significant in how we conduct ourselves in order to deal with the great demand and what's -- and the relevancy of our -- the strategy of our portfolio overall. And our goal, as I said, is to get within several years to $6.5 billion to $7 billion sale, with profitability of 10% more maybe. And we did strategic moves in order to support this transformation.

Short-term investments mean to bring about outcomes in the mid-range and long range. Now 4 pillars in our transformation strategy. The first, investment in infrastructure, in production. Second, investment in our people. And third, dealing with our supply chain. And fourth, the organizational infrastructure, which is on the OneERP. OneERP is a platform to create an organizational foundation for large-scale projects. Now notice here, the company didn't just grow at the scope of -- in its scope and its orders. It grew, meaning the composition of the orders has expanded. It's not only orders for products and systems at a rate of tens of millions of dollars or hundreds of millions of dollars at a single use. The company has been established in positions of hundreds of millions of dollars, many, and billions, in fact, billions of dollars. And this will continue to happen in the future. And so something fundamental about our conduct needed to change.

I'm going to show some of the investments, not all. The investments that we did, just as an example, in production, in manufacturing, in Ramat Hasharon for example, that was expanded, doubled in fact. In Yokneam, we have great demand for cannons, for -- we have a completely automatic line, a completely new automatic line in manufacturing, this line in the future, and in fact, already is taking on some of the old facility, which is moving from (inaudible) and will continue to take on from Ramat Hasharon later on and continue to expand. It didn't just double, it actually went and shifted to the most robotic manufacturing line that it could in Karmiel, another example.

As you saw for all of the American platforms, with the end of the backlog, we're very large in the United States and the world. In order to create this, you need a different infrastructure. Clean rooms, you need a different infrastructure of manufacturing possibilities and lines. We've increased. We've built new lines that will be able to create 3x more avionics for the U.S. from what we could in the past. So for example, the F-35. [Tel Hal] another example, increase of 60%. We now create radio devices. That's the key line for the world, radio devices. We've expanded the facilities by 60%, meaning they can now produce 10,000 more devices per year from this line of manufacturing in order to meet demand that we are experiencing.

The orders in Rehovot we have increased by 40% of clean rooms and facilities for laser in order to deal with the DIRCM for wafer and electro-optic devices. In all of the facilities, in fact, we have [prudent] robots, automatic lines and of course, the systems to manage -- automatic management systems and manage and oversee all this to increase our productivity overall. Everything has been modernized and increasing. We've also built 6 new locations, facilities in the U.S. In South Carolina, a new, in fact, facility for land forces and for communication in the U.S. This facility will now train -- will now open in the next few months. We also opened and built -- built and then opened a new facility in Bristol in the U.K. Now the purpose of which is to develop and to [deploy] electronic warfare, maritime warfare for the U.K. and other countries as well.

And to develop also another contract for the U.K. for all branches of military. We also have new radio facility in Germany that was also built for radio devices. We have contracts across Europe, in Sweden, in Switzerland, in the Netherlands, in Germany, and in Spain and Hungary. We built -- we're in the middle, in fact, of constructing 50,000 square meters for -- in Ramat Beka in Israel. This is ammunition production that will begin next year, in the second half of next year, we will reach full capacity in 2025. Robotic systems that are advanced, new that will allow us to meet all of the mounts for precision munitions. In Israel as well, another example.

We are in the beginning of next year, we have a new UAV facility in Modi’in. We've expanded the production facility that we had there in Romania also in electronic devices and also mechanical devices as well and solutions. Now this is all designed in order to increase our productivity, to allow us to significantly expand our sales and in correspondents, of course, with the orders that we've gotten and the backlog that we have, and we'll continue to see. Now we've invested in this about $200 million just generally overall, 2/3 of which are in our capital expenses, and we can see that capital expenses have gone up. It will go down as time -- it's already going down in '23, will continue to go down as the years go by, 1/3 of that sum, that's in the P&A. That's long term, meaning we're investing now and we'll give its dividends in the long term. We can see the numbers of 2022 and we'll see the benefits from '23, and as time goes by, more and more.

Now people. Now that's our biggest, biggest, biggest asset, the people, and our professionalism, our motivation, the professionalism and excellence. In Elbit we have people that no other company, no other company has. That is our key asset. We've continued to increase in the number of our people, 5% increase. In order to deal with the challenges of the market that we've seen in the last year, we happily gave people options that cost us $72 million in '19 -- in 2022. We don't expect to see this expense in 2023. We wanted people to be part of the success of the company, and their commitment will continue also in the long term. And we continue to increase in the number of people also in 2023 in Israel, and not only in Israel, also in the world.

And the environment has changed. A lot of people today are coming to us and are offering their services to us in Israel and abroad, and we will continue to invest in our people. But apart from that, I think we didn't just increase in the number of people, but we've also increased in the sales per person, meaning our productivity as a company has gone up. So in 2022, as Kobi said, it was a onetime investment of $72 million in order to maintain our management and professional talent, and I'm very glad that we did that.

Now supply chain, that was no doubt the big challenge of 2022. We've increased in inventory. We can see this -- this is beginning to stabilize, to moderate. We can see the supply chain and everything that relates to transportation is behind us, the problems. Metals, that's behind us. Electronics, there are still problems. It's stabilizing. I think that in the second half of '23 of this year, we -- most of it will be behind us, not all of the problems, but most of them. We can see that this is calming down. Now in order to deal with these very large challenges that we had in '22 and into -- in the supply chain, as I said, we developed alternatives. We increased inventory. And in some cases, we paid more money. Yes. That hurt our profits. In order to give people what they ordered, to meet our orders. And I believe this is now being -- this is trickling down and slowing down and most of it will be behind us by the end of this year.

Now before the OneERP, I think we want to do -- one more thing I want to say. We have increased our R&D investments. And we can see the result. We can see what we did in '22, and we increased it, and you can see the results. And why did we do this? R&D was increased and also marketing was increased. Why R&D? In order to take the portfolio that we had, take it one step further and take the opportunity that we had. For example, the high energy laser. We want to be the leader in high energy lasers, and we believe -- I believe we will be in fact. That's the future. And for that, we need to invest in R&D today to position ourselves. We've got the position in Israel. Now we need to move forward technologically speaking.

And to put into this investment into this -- and just as we did in DIRCM, we went on to be world leaders. Now we want to also be world leaders in high energy lasers, same thing in autonomous, same in precision munitions, same in other areas as well. The other issue is marketing. Because the potential is so great, you need to utilize it, you need to take advantages, you need to grasp it in both hands. And that means we need to invest in marketing to really take advantage of this excellent portfolio that we have to offer. OneERP. Now OneERP with God helping, we in the beginning of this year, we have the last facility is coming up. Everybody else is already on the platform.

This was an effort that took several years and investment of $200 million almost and here as well, a 1/3 of it to our P&A. That's for 2022. 2/3 in capital, meaning the purpose of this is to bring Elbit to a different management and organizational platform level. We replaced 11 ERP systems in Elbit. And we needed to if we want to manage ourselves like a large company, global company with a portfolio that is so varied. We need a key and uniform set of standards, procedures across the board. We want to buy and purchase uniformly. We want to manage our delivery. We want to do our payments. We want to do it all uniform and standard.

We can't have the historical platform that we used to use, no. This was a huge change, not only in terms of the investment in money but changing people, changing understanding in the beginning of -- the last to come up. We've already seen benefits from this new system. We see this in procurement. We look at it in our management of orders. We see it in other areas. It's becoming more efficient. We see the benefits. The entire company will be using this one uniform system and utilizing it throughout the year.

Now I'm going back to this initial message. We're going through a transformation. We want to get to $6.5 billion, $7 billion sales. We want to be over 10% operational profit. We'll get there. We are investing in short term to see long-term results. The company has an amazing portfolio, particularly relevant to our times in international positions that are excellent with local companies, which is exactly what the world is looking for today. The rates at the moment that hurt us in 2022 are now working to our benefit in 2023 and in the future. And I believe we will get to the goals that we want through realizing the strategy that I have laid out for you. This is an amazing company. Really, it is. It's a remarkable company. It's a privilege to manage it. And I think that we are in a very good period of time. So that's up -- that's me. That's the review for now.

Just one last thing, and I'm sure you'll ask me about it. So let me just say, you talk to me about procurements. I mean we have great balance, as Kobi said, great recruitment last year, less than 2%, right? Interest. We know to -- we know how to buy. We know how to create synergy within our companies. We are looking to buy also technological companies, things that we lack maybe technologically, but also in the market in Europe, in the U.S. and when we see the right opportunity, we'll do it.

We'll take that opportunity, no doubt. I want to mention one more thing. I showed you numbers from 5 years ago. You recall? The same number of shares. No, no change in the number of shares, right? No, no change in all of those years. A 5-year period, I showed you the slide. The company has doubled in sales. You saw what happened in the backlog. And at the end of the day, as a result of the fact that the company is growing and expanding, you can see where our future lies and where our future is headed. So that's it for me. Questions, if you have any questions. Thank you so much, Butzi.

Now before we begin the session of questions and answers, there are people that are also here online. And if you want to do any questions and ask any questions, then please send your questions in and we'll address them. They'll come to me, and I'll address them to the right people. There are people with mics, there are microphones across the room. So Butzi and Yossi and Kobi and are all open to questions, of course. We're going to put it up for you, the information and where to send your questions to.

You said -- do you want to see 10% profitability within 10 years. At the moment, you're 5% right, net profit. So what kind of profitability are you talking about in terms of operationally? What are you talking about operational?

The plan. I mean that's the goal, at least, and we'll get there. Nothing is incidental. This is a strategy. You can see an increase quarter-by-quarter in profits until we get to the goal that I stated, yes, yes. You already saw -- you've seen it in the last quarter, fourth -- quarter 4, you'll continue to see it in the future.

Another question.

It was really impressive and interesting to hear all of these developments. Some of them, of course, we didn't know about. I do have a couple of questions that come from what you said. CapEx -- the CapEx, you said that it will be on the decrease, meaning -- but there's another maybe -- let me look, there are several new sites, new locations. I mean is the peak behind us?

Yes, CapEx of the company in the past was $150 million. Over the years, let's say, in 2022, you can see [$250] million in investment in CapEx. CapEx generally is going to go down with -- to get to the same numbers that we were in the past, from 2023 and moving on into the future.

Now the same question of R&D and marketing that you talked about, that this is not the peak, it seems to me.

No, there we're still dealing with realizing full potential. There are amazing opportunities. We want to bring them home. We -- even now without COVID, I can get even more easily to markets than -- I mean it was very complicated in the past. So now I am really concentrating my efforts in order to bring the great opportunities that are before us, to make them into orders and realized orders and -- this is true of R&D. We have several strategic vectors of R&D that can really bring this company to, I mean, amazing places in the long term. We cannot miss them. We talked about the high energy lasers. Precision munitions. I mean, precision munitions is the end of a strategy that we continued -- that we did years ago of bringing in precision and bringing together the industries together. So that's exactly what's happening right now. We continue on this line. This vertical, continue to jump on opportunities.

Is this right? Maybe this is more for Kobi. Is it right to assume that R&D, I mean, you see an increase of 1% in the next 1.5 years. Is that like logical? Or...

I think at the moment, the company is growing. So from that very fact that we are growing. The percentage -- I mean if we allow that percentage, we can produce more R&D.

So you don't increase the -- you don't expect an increase. Just 2 more questions, 3 questions. Sorry. Now the backlog, the U.S. backlog that you talked about earlier, you mentioned that -- like just a rough estimate, okay? Apart from the backlog because you talked about the fact that the backlog in all areas, it's just for a year, the Navy as well. So just give me a rough estimate. What is the backlog that we don't see in terms of the American market?

Yossi is the one. Yossi, you're the one who is going to answer. Yossi, can you answer?

As we saw over the years, the -- what we call soft backlog is between 15% to 20% from the number of -- the hard number of backlog that you see here. In the U.S., it's greater. And in other countries, maybe a bit less in terms of percentages. So in terms of number, actually, in the United States is higher. Now we have to decide the F-35, for example. F-35, there will be thousands more of those for the next 40 years. I am not taking within this -- even soft backlog, what's happening beyond 10 years because who knows. But if you look at it on a safe level, conservative 20-plus percent in America.

Last, last question. It may be very specific. The sites that we're now evicting, that were -- Ramat Hasharon, [Antira] we're leaving in terms of timing. I mean, there's an amazing real estate potential here. I know that you're not a real estate company.

But yes, let me mention that in Ramat Hasharon, we are leaving the west side of the -- along Route 4, and it goes back to the states. It has nothing to do with us in terms of real estate. This is state lands, it's not ours. Now the eastern side of the campus of Route 4, most of that is ours and for many years to come.

I'm asking in terms of timing, when do you think that -- I mean, after we leave the sites and when will we be able to see profit?

Some of the areas have already been cleared. I mean -- sorry. The speakers mic got cut off.

I really didn't think about it. This is not our business. Okay. It's time to that other people ask questions. Thank you very much.

Liran from I.B.I. Two quick questions. As to the rates of exchange, you said that it hurt you in the last year. We saw the decrease in the shekel. We see a drop in the last month as well. How much of that have you managed to hedge? Do you have any interest in doing that? Or...

No, it's not -- okay, we did catch it in time. We rushed, of course, with our hedging policy to do it at good rates, better than we had in 2020, better than we had in previously years. How do I put this into the model?

Okay. Okay. One more question, please. When you said that you expected you asked the cycle that it will be this -- the political situation. How much do you accept questions? How much is it impacting us?

First of all, people do ask and some question people in the world talk about what's happening in Israel. Of course, no doubt. It doesn't yet impact us in terms of what we're doing now, I can say this directly. One of the things that are making it easier for us or to our benefit is that we are usually in most countries around the world. We work through local companies there. We're part of the ecosystem in every state. We, of course, don't hide the fact and we're, in fact, very proud of the fact that we're from Israel. They ask us questions. And does it impact us? No, at the moment, no.

So when with tenders, for example, is it something that comes up. Is it making it more difficult for you?

People ask us questions. I will not deny that. Of course, but at this point in time, I haven't seen an impact.

Elad Kraus from Meitav. I want to talk about the profit thing because the top line seems great. Backlog growing up, orders going up. I would expect the company though, that has -- I mean we have an advantage to size in terms of profitability, but the gap is actually quite large. Maybe it's because there's a lot competition for every tender and you have to lower the prices in order to get these tenders? Or is the dynamic as it was in the past?

No, I don't see the pressure price more than in the past. In fact, it is in some areas because of the opportunities and because people are running to get merchandise relatively quickly. Orders in fact are simplified in some areas. I certainly don't see a pressure price that is hurting us more than in the past. As I mentioned, in 2022, there were several events, that is single events for the most part that impacted our outcomes in 2022.

One is a large investment in workers, $72 million that I am very proud of. Second, investments to build strategic infrastructure, which is better for the company. We talked about our ERP. I already talked about the facilities, the new facilities that we're building. Some of this investment has also affected our PNL, and then also all of third, our supply chain issues, which also had a significant impact in 2022. These are the key issues that impacted '22, along with of course rates of exchange which were not to our benefit in that year.

And in all of these issues, it's not all over, we continue to invest in ERP. We continue to invest in facilities, although most of it is behind it. With most of these big investments, we are seeing the outcome. And it's not because of more aggressive pressure prices than we saw before.

Thank you. So with your permission, Butzi, we did receive some questions in English. I'll ask them in English, but you can answer in Hebrew. He's asking in English. Elbit Systems has recently signed an MOU with 2 Japanese aerospace companies. In which segment of your portfolio do you see the greatest business development opportunities in Japan?

Well, let me state the following. There are 2 countries that decided to dramatically increase their defense budgets in a multi-annual perspective, an increase that's beyond the -- what's the standard or regular. And these 2 countries are Japan and Germany. Both countries have decided to increase their budget by EUR 100 billion over a period of several years. In both these countries, we operate very intensively in order to seize this opportunity in the market and offer our portfolio. In Germany, we have a company. We are already making a lot of systems there, communication systems and aircraft defense systems.

In Japan, we have recently placed a great emphasis on the Japanese market, and we see there tremendous opportunities for us, both with respect to training systems. Also in EW, electronic warfare systems and drones systems and in other areas. And to that end, we've signed collaborations with the leading Japanese defense industries, as you've mentioned in your question, in order to indeed realize our potential. We participated in the recent exhibition in Japan. They are showing great interest in our products. And I'm also happy to tell you that there have been some success stories.

Second question.

Your participation in IDEX. What do you think the potential is for your business in the UAE and the other Abraham Accords countries?

Well, I think our entire -- almost our entire portfolio is relevant to the Abraham Accords countries, almost all of it. And I'm not going to go over the entire portfolio. But I think that almost the entire portfolio of Elbit is in demand. There's some of it directly through Elbit and others through OEMs because whenever we sell an airborne or aerial platform, it doesn't matter which aerial platform arrives, it comes with Elbit Systems. That was the case in the past as well. I think that almost the entire Elbit portfolio is relevant to the Abraham Accords countries in the sea, in the air and definitely on the ground.

And anybody from here -- from the audience would like to ask anything. So 2 additional questions we received. A question regarding the U.S. and the drop in sales in the U.S. in 2022 in comparison to 2021?

Well, in the American market, it's just a marginal drop, several dozens of millions of dollars, but there are 3 main reasons for that drop. The first reason is supply chain, something we all suffered from. Two additional reasons have to do with Elbit's civilian activities in the American market. One is in the medical field. And the second one is our activities in civil avionics, KMC when it comes to medical, our subsidiary had a lot of orders during COVID. This company provides a large box for diagnostics of body liquids and this increase stopped when the pandemic came to an end. And now this company is shrinking back to its original size. So that's one reason.

Another reason has to do with civilian avionics and Elbit actually has a significant portfolio in this field. Civilian avionics, this market stopped during COVID. Of course, you all know that. It's not a secret. No aircraft were ordered from any of the aircraft suppliers. And now, of course, this trend has reversed. In 2023, we're going to go the other way. We see a significant increase in demand for our civil avionics products, but specifically the civilian portfolio, both in civilian avionics and in the medical field were not as good in 2022. So we actually maintained our scope of sales in the U.S., and we didn't continue to grow in the American market because of these 2 reasons I just mentioned.

Now another question in the past you said that the main impact on the profitability of your investments, you will in Q3 and 4 in 2022. Is this still your assumption regarding the improvement in profitability?

Like I said, we will see a gradual in the company's profitability quarter after quarter. And in Q3 and 4 of this year, we definitely project an increase in profitability because some of the events related to the supply chain in electronics will be behind us. That's our assessment. That's our plan. And our goal is to be a $6.5 billion to $7 billion company in sales, with an operating profit of over 10%, and this is what we're building the company for. And that's the reason for all the investments we made in 2022 and the investments we'll make in the near future. Any other questions? Well, in that case. Okay, yes, Shah, if you could please wait for the mic.

Regarding profitability, when you say 10%, that's based on the current dollar exchange rate? And how much of an impact will that have?

In our estimates and the dollar is one of the parameters we have, and it doesn't -- it's not necessarily based on the existing dollar exchange rate in -- it is not based on this current peak moment in the dollar rate, exchange rate. We make certain assumptions, and these assumptions are not necessarily about this peak rate. So let's say, if we were, of course -- just, of course, to qualify myself, if the dollar will reach very difficult working points that will make it difficult for us. But our assumption is not an extreme to any side.

So it's the same as last year, you'll be able to meet your long-term goal?

We hope that we can.

Okay. Any further questions? So I'd like to thank you all, and let me remind you that you have all the materials on the website. And if we will be more than happy to answer any further questions if you have such. Thank you very much.