Rada Electronic Industries Ltd (RADA) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Second Quarter 2021 Results Conference Call. (Operator Instructions) 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 RADA's Investor Relations team at GK Investor & Public Relations at 1 (646) 688-3559, or view it in the News section of the company's website, www.rada.com.

I would like to now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

Yes. Thank you, operator. I would like to welcome all of you to this conference call to discuss RADA's Second Quarter 2021 Results. I would like to thank RADA management for hosting this call. With us on the call today are Mr. Dov Sella, Chief Executive Officer; and Mr. Avi Israel, Chief Financial Officer. Dov will summarize the key highlights of the quarter, followed by Avi, who will provide a summary of the financials. We will then open the call for the question-and-answer session.

Before we start, I'd like to point out that the safe harbor published in today's press release also pertains to the content of this conference call.

And with that, I would now like to introduce RADA's CEO, Mr. Dov Sella. Dov, go ahead, please.

Thank you, Ehud. Good day to all call participants. Let's start with the results summary. We are very pleased with the results and are performing according to our plans. We show continued strong growth across the board. The Q2 numbers speak for themselves, to our opinion. We have revenues of $28 million in the quarter, up 61% year-over-year and 12% sequential quarter. We have gross margins which are at 40%, 4.35% or 435 basis points above the second quarter of last year.

Adjusted EBITDA is $6.3 million or 22% of our revenues versus EBITDA margin of 10% last year in the similar quarter. Overall, we are very pleased with the progress we make and the margin's growth over the past year, which were ahead of our expectations. These results support our guidance of over $120 million in revenues for the whole full year. This is a revenue growth of around 60% year-over-year, which is very significant in absolute terms and enhanced further, given the fact that our revenue basis -- revenue base is now already significant.

We have a strong balance sheet with over $96 million in net cash at the end of the quarter. Our current cash level is more than enough to support our inventory plans and our need for secure the supply chain, enable efficient manufacturing and enables us to continue to invest in our growth. Given the current global shortage of components and the ongoing need to mitigate against any COVID-19 pandemic impact on our supply chain, we have taken the decision to strategically increase inventory levels to ensure availability of components for our ongoing production plans. We are also using our cash to double our manufacturing capacity, both in Israel and the U.S. Furthermore, this cash level allows us to maintain our competitive edge through high R&D, and it also allows us to capitalize on acquisition opportunities when they present themselves.

Let's talk a bit about our markets. In terms of the summary of our markets, the positive trend in our markets, mainly around SHORAD, CUAS and base defense continued to develop. The U.S. is the leading market, and we also see increased interest in the global -- on a global basis. However, new opportunities in other geographies may take longer to materialize in the current COVID-19 constraints, which sometimes make it more difficult to mature new relationships into orders. Only last week, we saw a drone attack on shipping in the Gulf of Oman. This, along with continued detects by drones and rockets in Iraq and the Gulf region, and recently also in North India are further underlying the need for counter-UAS protection in today's world. And today, RADA can address the detection of these threats at the price and performance which is feasible for mass adoption. Hence, our pipeline continues to broaden.

Over the 3 years since the market really started to emerge, we have already issued the initial systems to quite a few new customers. In the coming years, we anticipate upside from follow-on orders to these initial orders we have satisfied so far and are in production for. In terms of programs in which we are currently a part of, Marine Corps -- U.S. Marine Corps GBAD program is the program of record. However, there are some reorg in the program that affects revenues this year. It's a bit slow down. We assume revenues will resume next year at the level of dozens of radars a year.

U.S. Army M-SHORAD program is a funded OTA. The U.S. Army awarded General Dynamics the expected framework of $1.2 billion contract, covering 4 brigades and 144 systems by mid-2023, each of which requires 4 radars of ours for full 360 hemispheric coverage. This year, we shall deliver dozens of systems to this program, which is our biggest this year, while revenues are expected to continue next year as well. Additional base defense and counter-UAS potential programs in the U.S. are incubating after satisfying significant urgent needs to the Air Force and SOCOM, Special Ops and others and undergoing continued testing. It should support our growth in 2022 and onwards. As an example, our radars are included in the recent Parsons award of Air Force Base Air Defense or ABAD, an IDIQ, which -- with a ceiling of close to $1 billion over 10 years, $953 million to be precise.

Our radars provide best-in-class performance for key ABAD missions, and we anticipate further fielding of radars as the program continues addressing a variety of intended requirements.

In terms of APS for fighting vehicles, our radars are embedded in Elbit's Iron Fit solution. The Israeli Eitan AFV development is ongoing and serial production will commence in the second half of 2022. The U.S. Army's Bradley IFV testing is ongoing and will continue into 2022, with serial production expected in '23 and onwards. The scope of the first brigade is over 600 radars, and we believe that the potential is higher than one brigade. And there are several additional APS programs in our pipeline, each requiring potentially hundreds of radars with deliveries to start in 2023 and onwards.

In summary, our results show as we are currently experiencing significant growth. We are performing according to our plans on the top line and somewhat ahead of expectations on improving our profit margins. We expect that the U.S. and global markets for our products mature over the coming years and anticipate further growth in the coming years. From a financial perspective, we reiterate our revenue guidance for over $120 million for this year, representing around 60% year-over-year growth with gross margin sustainable at current levels. And given the leverage in our business model now, there is potential for further improvement of our operating margin.

At this point, I'd like to hand over the discussion to Avi Israel, our CFO.

Avi?

Please hold the line. Avi is stepping into the room immediately. Avi, please?

Thank you, Dubi. You can find our results on the press release we issued earlier today. As Dubi mentioned, we are proud of our financial performance, and I would like to provide a short summary of the second quarter results.

Second quarter revenues were $28.3 million, up 61% year-over-year. Our gross margin in the quarter was 40% compared with 36% in Q2 of last year. Operating expenses were $6.8 million compared to $5.6 million in the second quarter of last year. I remind you that our current level of operating expenses support our current and expected operation in the short to midterm, so OpEx is expected to grow at a much lower pace than revenue.

Hence, the business now contains additional operating leverage with the potential to further improve our operating margins. Operating income was $4.5 million in the second quarter versus $634,000 in Q2 of last year. In the second quarter, we recorded a deferred tax asset of $6 million in view of our recent profitability. Adding the deferred tax asset, our net income was $10.4 million versus $707,000 in Q2 of last year. EBITDA for the second quarter was $6.3 million, which is 22% of revenues versus EBITDA of $1.7 million or 10% of revenue in Q2 of last year.

I would like to summarize and point out some highlights from our balance sheet as well. As of June 30, 2021, we had $96 million in net cash and 0 financial debt. At June 30, 2021, our shareholders' equity stood at $143.5 million, financing 77% of our balance sheet. Given the current global shortage of components and the ongoing need to mitigate against any COVID-19 pandemic impact on our supply chain, we took a decision to strategically increase inventory levels to ensure availability of components for our ongoing production plan. As of the end of the second quarter, the inventory level has increased to $31.6 million from $28.8 million as at the end of 2020. We plan for it to increase further in the coming quarters. In summary, as Dov mentioned and as the financial results demonstrate, we continue to be very pleased with our progress.

That ends my summary. We should now open the call for questions. Operator, please.

(Operator Instructions) The first question is from Sheila Kahyaoglu of Jefferies.

Maybe can you talk about the drivers of growth, what drove it? Given how broad-based it was, any particular areas of strength? Are you seeing any sort of areas of weakness as well, as we've seen that from some of the defense suppliers?

I'm sorry, could you repeat, please, Sheila, you were not exactly clear here.

Sorry about that. Can you hear me better now?

Yes.

Can you talk about where you saw areas of strength given your great growth in the quarter? And maybe any potential pockets of weakness, if at all, I know the growth was really good, just given we've heard some weak commentary from some of the suppliers?

Yes. Okay. The strength is coming from the U.S. market that was our first and foremost market, as we assume from the beginning. We are there in 2, 3 already established programs like the SHORAD, which is our biggest, the Marine Corp GBAD, now the ABAD. And there are potential for SOCOM program to add very soon. And also, we have the prospect of APS emerging, and we have quite a few additional prospects with -- incubating with some other planned integrators and solution providers around high-energy lasers and the counter-UAS solutions.

So the U.S. market is showing real strength. It is also surviving any question marks around declining of budgets and so on because we are in the priority channels in the -- and modernization priorities of the Army, and they are addressing current and now there is threats that are in the focus of all military forces.

We see the European market opening up, but it is very gradual and slow. So here, it is behind our expectations. The Middle East opened up for us because the need is very clear. However, the COVID slowed down things and the U.S. market compensated last year dramatically for that. We do believe that the trend will show up, probably towards the end of this year and into next year.

So we do believe that the market is continuing to grow. The APS market is waking up on us, and it will start next year towards the end of the year with deliveries to the Eitan fighting vehicles. So APS should add a few tens of million dollars in '23 and onwards to our revenues. So that's the general view of the market.

Maybe can you talk about how you're thinking about exercising your use of the market just given your cash has stepped up, I think, from $30 million at the end of the last year to $96 million today? Kind of what's the right buffer of working capital, how much you need and how you're thinking about capital deployment?

If we assume organic momentum, as we experienced until now, we have more than enough. We are increasing our inventory levels because of what's happening in the semiconductor market mainly, but it is not coming close to what we have now. And we do strategize our way forward to ensure growth beyond 2024 and onwards. I mean the next 2, 3 years are already dictated by the decisions that we took 2, 3 years ago, and we are launching 3 new radars this year. So we do believe that they will sustain and even enhance our both TAM and annual revenues. And we are preparing our strategies towards M&As as well. And it is a bit too early to discuss. But we have the level of cash which is adequate to start this activity as well.

The next question is from Brian Kinstlinger of Alliance Global Partners.

On recent calls, you discussed the goal to deeper penetrate Europe and you moving quicker than that U.S. time line. Can you talk about the progress you're making and will you need to add any local infrastructure there? And if so, can you share the expected time line?

As I mentioned earlier to Sheila's question, Europe is emerging, but not as fast as we thought. And the SHORAD and counter-UAV activity in Europe is relatively on a slower scale. We do see integrations. We do see incubations. We are part of them in quite a few areas. But I think the market will wake up significantly probably in 2023. Did I answer your questions because I didn't understand all the words you said.

No, that's it. I mean, the other question was, would you need to add local infrastructure, but I guess not as it's taking a little bit slower than you had previously anticipated.

Right. Yes.

Yes. And then last quarter -- and just now you talked about the 3 new Multi-Mission Hemispheric Radars. And last quarter, you talked about them being in prototype. Are they still on track to being shipped by the end of the year? Will these radars in any way cannibalize or replace sales of your other products or they're totally complementary?

We don't see any cannibalization, and we are on track.

Okay. Lastly, you addressed inventory a couple of times. But I was curious, if I'm not mistaken, you have about 5 to 6 months inventories, how I count inventory versus cost of goods, maybe I'm mistaken, but that's how I calculated it? Are you continuing to accelerate? Should we see -- if you're growing 60%, should we see that grow more than 60% over the next 2 quarters or so? Or how are you thinking about the remainder of the year?

It's -- Brian, it's more than 5, 6 months. It's a little bit more than that. And our view is to further increase the level of inventory At the end of the day, it's important to support our growth, and this is the strategy that was adopted by RADA's management a year ago when COVID started, proved itself to be the right strategy. We decreased our level of inventory towards the end of 2020. And now because of the circumstances in the semiconductors market, we have taken the same decision again, and we believe that it's the right one.

The next question is from Peter Arment of Baird.

Dubi, maybe you could just give us your updated thoughts given that you're being strategic about kind of building out your inventory, just given the supply chain stress in regarding being cash flow positive is still a goal when you're thinking about this year and going forward?

We already presented a positive cash flow from operating activities in the first quarter. And we believe that this is the right path. And assuming this level of profitability and EBITDA, there's no reason why not to be cash flow positive. Yes, we increased the level of inventory, but assuming that the second half of the year will be stronger in revenues than the first half, there's no reason to believe that operating cash flow from operations will be -- will not be positive.

Okay. And then just related to kind of your CapEx, I know you had planned to put additional anechoic chambers in place this year? And I think one was coming online in the U.S. and in Israel. Maybe you could just update us the status on where they stand?

Yes, the one in Israel is already up and running, and it is reflected in our fixed assets in the balance sheet. The one in the U.S. will come active towards the end of the year. We stick to our plans and no significant change from our original plan.

Okay. And just, Avi, just quickly just because of the tax benefit that you had in the quarter, just -- any thoughts about expectations in the second half of the year what we should be looking at from a model perspective?

No, it's not a question of the first -- the second part of the year. It's a question of we came to the point in which we are presenting 4 sequential quarters with significant operating profit, significant in our terms, obviously. As was presented in the financial statements of December 2020, I can update that as of the end of June, we have $60 million of NOLs in Israel. Calculating an average around about 10% tax rate in Israel because of all the benefits and so on and so forth, we've recorded deferred tax assets of $6 million to be executed over the next few years. It's not a question of the next few quarters.

The next question is from Austin Moeller of Canaccord.

Dubi and Avi, just my first question here. Do you see the impact of the troop drawdown in Afghanistan and the end to the combat mission in Iraq as affecting your demand at all for any of these radars for counterdrone applications? Or is it more, we just saw another drone attack on an oil tanker in the Gulf of Oman and probably even as the U.S. pulls out of Iraq and Afghanistan, they're going to continue to need equipment to defend their various air bases throughout the Middle East?

We believe that our -- when we step into programs like SHORAD and GBAD, it is not related to the deployment basically. It relates to the plans that the military forces have to equip their vehicles based on their force structure plans. So here, we don't see any changes. We are not exactly familiar with the very, very details of where our stationary solutions are deployed. But at this stage, we don't see any drop of momentum because we do believe that the demand is much higher than what we have delivered up till now. So that's the picture on our end.

Okay. And then just on the next batch of 59 SHORAD strikers that are expected to be ordered by the U.S. Army before the end of the year, is there any timing that you guys can provide on when you expect to receive that contract, maybe in the next couple of months or just sort of stay tuned on that?

The SHORAD program is on track and all expected orders are received.

Okay. And then just on the gross margin. So if I understood you correctly in your comments, you expect that you're going to be able to maintain gross margin at around 40%, or 38% to 40% going forward? Or is that just sort of a temporary results of your mix?

No, it is not temporary. We talked about it before, Austin, 40% was our goal. Actually, we have achieved it a little bit before our expectations, and 40% of gross margin is our expectation for the future -- for the coming future as well.

(Operator Instructions) There are no further questions at this time. Mr. Sella, would you like to make your concluding statement?

Yes. Thank you, operator. On behalf of the management, I would like to thank you all for continued interest in our business. We will present at the Jefferies Conference tomorrow and also in the Canaccord Conference next week, and we look forward to speak with some of you in these venues again. Otherwise, we look forward to speaking with you next time that we report our results. Stay well and healthy, and have a good day to you all.

Thank you. This concludes the RADA Electronic Industries Second Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.