Rada Electronic Industries Ltd (RADA) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries First 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 now like to 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 first quarter 2021 results. I would like to thank rather management for hosting this call. With us today on the call are Mr. Dov Sella, Chief Executive Officer; and Mr. Avi Sal, 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 Rather CEO, Mr. Dov Sella. Go ahead, please.

Thank you, Ehud. Good day to all our call participants. We believe that our financial results speak for themselves, and Avi will detail them later in his part. The highlights are the following. Our revenues were over $25 million. It's a growth of 67% year-over-year and up 8% compared to last quarter, and we expect our sequential quarterly revenues to grow along the year.

Gross margins improved to 40%, which is in line with our target model. Our adjusted EBITDA in this quarter is $4.8 million or 19% of our revenues and we feel comfortable with the current level of growth and operating margins and believe there is some room for improvement in the next quarters. We gave revenue guidance of over $120 million for the full year of 2021, which is more than 60% compared to last year. And we believe that this guidance is varied, and we continue to stand by this guidance.

We have a strong balance sheet with $96 million in net cash at the end of the quarter. This follows a very successful capital raise of $56 million, which we did in March, which also added a group of long-term focused and leading institutional investors from the U.S. and Israel to our shareholders' portfolio. It also tightened the connection between RADA and some of the Wall Street leading investment banks, which are focused on technology and defense companies, and we are now covered by 4 or 5 analysts.

Our current cash levels support our current inventory plans and our needs to secure the supply chain. It enables efficient manufacturing and enables us to continue to invest in our growth. While our U.S. production is operating with good efficiencies and satisfying our U.S. market needs. We are doubling our manufacturing capacity, both in Israel and the U.S. and increasing our inventories to accommodate the semiconductor global crisis, which we all hear about.

This cash level of ours also allows us to focus on maintaining our R&D edge, as I will describe a bit later and to capitalize on some opportunities as we identify them.

Let's discuss our markets. In general, the positive trends in our markets, mainly around SHORAD, counter-UAS, and base defense continue to develop both in the U.S. and more recently on a global basis. We recently see growing traction from European and Middle Eastern markets, which are now emerging for us, and our pipeline continues to broaden.

Beyond what we have already delivered to customers, we anticipate significant upside from follow-on orders to the initial orders we have satisfied so far and are in production. Specifically to U.S. and other programs. The USMC GBAD program is a program of record with steady annual deliveries of dozens of radars. The U.S. Army M-SHORAD program is a funded OTA. The U.S. Army awarded General Dynamics the expected framework of $1.2 billion of contract, covering 4 (inaudible) and 144 systems by mid-2023.

The initial production portion is 28 Stryker vehicles, each of which integrates 4 write-downs of ours. This portion will be delivered by midyear and we expect additional production order for 59 vehicles to be received this spring and delivered this year. Additional base defense and counter-UAS potential programs in the U.S.A. are incubating into OTAs or programs of record, after satisfying significant urgent needs to the U.S. Air Force and SOCOM through various integrators along 2020 and undergoing continuous testing. It should support our growth in 2022 and onwards.

In terms of APS programs for fighting vehicles, active protection systems for fighting vehicles. As you probably may know, we are part of the Elbit's Iron Fist solution currently. And the Israeli Eitan AFV development is ongoing. [Serial] production will commence in 2022, and the scope of this program is over 2,000 traders over a few years.

The U.S. arm is broadly IVF testing with spread over 2021 and 2022, and serial production expected to commence in 2023.

The scope of the first brigade is over 600 radars, while we believe that the potential is higher than 1 brigade. There are several additional APS programs in our pipeline are requiring potentially thousands of radars with deliveries to start in 2023 and onwards.

We are on the verge of launching a few new products this year. In addition to the [ICA] chart for the Eitan AFV, we shall start field-testing to new radars towards the end of this year. The first is the NMHR, the next MHR. It's an excellent evolution of the MHR family, advanced tactical radar with high accuracies, wide frequency band, advanced digital processing, multi-mission capabilities, and all the goodies that make our radar and here furthermore, uniquely adapted and adequate to the Tactical Radars for the Maneuver Force. All these unique features that make it ideal component for near-term protection solutions, such as Direct energy weapon systems and others.

The other radar is the extended MHR or XMHR, which enhances the ranges of our MHR family offering us to better address new threats, such as the cruise missiles, detection, and fire control, and capabilities such as point defense and [gap feeling].

All these radars should maintain our global leadership in the market of tactical radar for the Maneuver Force and increasing our total addressable market and ensuring growth in the coming years. In summary, we are performing according to our plans and expectations and experienced significant and sustainable growth.

Based on our visibility of 2021, we reiterate our revenue guidance at over $120 million for this year with continued sequential quarterly growth. And our profit margins are now at the level we aimed at and feel comfortable about. We expect our growth to continue for the foreseeable future.

And finally, while reporting our best ever quarterly results, it is clear that our upcoming quarters will continue to be better. I'd like at this point to hand the discussion over to Avi Israel, our CFO. Avi, please.

Thank you, Dov. Welcome to all of our participants. You can find our results on the press release we issued earlier today, and I will provide a short summary of the first quarter and the first quarter results.

First quarter revenues were at $25.2 million, up 67% year-over-year. Our gross margin in the first quarter was 40%, better than 36% in the first quarter of last year. Our operating expenses were $6.4 million compared to $5.3 million in this quarter of last year. Operating income was $3.6 million in the quarter versus $46,000 in the first quarter of last year.

Q1 net income was $3.8 million versus $170,000 in the first quarter of last year. We reported an adjusted EBITDA for the first quarter of $4.8 million, which is 19% of our revenues versus adjusted EBITDA of $0.9 million or 6% of our revenues in the first quarter of last year.

I would also like to summarize and point out some highlights from our balance sheet. As of the end of the first quarter, we had $96.2 million in net cash and 0 financial debt. At the same time, our shareholders' equity stood at $132.2 million, financing 67% of our balance sheet. 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.

There's been some commentary from your peers on push out of defense orders. Obviously, you're doubling manufacturing capacity and stocking up on inventory. So you're not seeing that perhaps. Can you just talk about are you noticing any programming delays, go over your top programs once more if that's possible?

Yes. We see -- when we contact our suppliers, component suppliers, we see prolonged delivery dates. And luckily enough, we are protected because our strategically handling the inventories long ago when the COVID started and a bit before that was to deliver to stock and avoid any missteps. So our inventories aren't presenting any hiccups in production, luckily enough, and we are continuing to do that even further.

Is it possible to go over-the-top programs for the quarter? What drove the growth? How do you expect that to trend throughout the year?

Well, we reported new business of $60 million in 2020 with significant new business in the fourth quarter. And we actually delivered. Our delivery cycle is less than 6 months, typically. Sometimes it's even a few weeks. Depends on the urgency and the program. So the first quarter represents all that new business that we got in the fourth quarter and it's basically according to our plan.

We are not starting the year with a full -- as opposed to other defense integrators. We are a product company. We are starting the year with not 100% naturally of backlog. So we have quite -- about 50% of book and ship. And we have that in this quarter as well.

In the first quarter, significant deliveries were also to the M-SHORAD. We have not completed it. We will complete it by midyear. For the 28 systems that have described in my discussion earlier. And other deliveries through other integrators in the U.S., mainly in the U.S., but not only also, as we mentioned, the Mideast, and Europe and through Europe and Israeli companies to the Mideast as well. So altogether, it's a mix of the U.S. programs, mainly the M-SHORAD and base defense and the other parts.

The next question is from Peter Arment of Baird.

Dov, in your presentation, it looks like you increased the total addressable market by about $1 billion from the last time. I think you had a presentation out there. And it seems like that was tied to the air defense and short-range surveillance radar market. So I know this is a TAM over a 10-year period, but what are you seeing there to kind of increase.

The new radars, especially the XMHR that widens our offering, it is actually doubling the ranges of the most powerful radar that we currently have, which is the ieMHR and we have deployed already hundreds of them, but we see the needs around base defense, around [FEROM], around force protection, demanding more ranges, like protecting against cruise missiles and low flying UAVs, as we have seen in the Saudi attack in 2019 and in other places in U.S. basis in Iraq and so on.

And actually, we believe that this -- addressing these needs, not only in the U.S., also in other places, as evidenced, is increasing the addressable market. So we have topped it up by $1 billion based on the offering that we are going to have very soon.

Are you still on track for adding additional anechoic chambers that you talked about previously for your capacity for this year?

Yes, absolutely. In Israel, it's already live and kicking. And in the U.S., the renovation of the land is towards end in a few months available as well.

And just lastly, your thoughts on potentially being cash flow positive this year, just given all the growth that you're showing. Does that still look like it's tracking? Obviously, you had great operating leverage this quarter.

Yes. As you could have seen, compared the cash balance at the end of the quarter with the one at the end of the year of 2020, take out the money that was raised in March, you definitely see a very powerful cash flow positive quarter. So hopefully, we'll continue with this track. Bear in mind that what Dov said that we plan considering the current situation of the components market. We plan to further increase our inventory to avoid any hiccups in the delivery. So yes, we definitely expect a positive cash flow year.

The next question is from Ken Herbert of Canaccord.

Just wanted to follow up. Did I hear correctly, you're still expecting the next SHORAD contract in the second quarter? Or how does timing look for the subsequent -- the 59 units you've talked about?

Yes. We expect them on the verge of the second and third quarter, and we do believe that we will deliver that this year.

And can you provide any more detail on the growth you're seeing in Europe or in other parts of Asia? I mean I know you've clearly got some work going up in the Netherlands and other areas, but can you provide any more details on any of the contracts or how many are these opportunities getting pulled to the left like you've seen in the United States?

We anticipated that, let's say, NATO, let's talk about Europe as a target end user market and through Europe to other places in a separate sentence. So for Europe, we anticipated that Europe itself, NATO countries, will adopt the U.S. concept of mobile SHORAD, counter UAS, [FEROM] and so on in a phase, and we start to see that.

As we experienced in the U.S., at the beginning, the Forces test what they have and the local solutions. We do believe that we have an edge. It's a process. At the end, cost performance, especially when you are talking about the big quantities for mobile forces mainly are making a difference.

So this is the process that we experienced in the U.S. until we started to see orders coming in. And we were demonstrating in the U.S. since 2014. And only in '17, we got the first significant order for the Marine Corp. for the GBAD.

In Europe, we started a year ago, we do believe it will be an accelerated process. So probably, we start seeing, let's say, initial orders we have already, but more significant order along 2022 and mainly in 2023. Through European companies and some other Israeli companies and elsewhere, we do sell to -- we don't sell directly. Our go-to-market is rather inside and we sell to the integrators. So we don't sell directly.

We are part of weapon system solutions. And we sell to the Middle Eastern needs through integrators. Most of them, Europeans, but not only. And this is happening that the COVID slowed it down a bit, but it is regaining momentum. As you have seen, about 60%, maybe a bit more of our -- 60% of our revenues last year. This year is similar, a bit higher were in the U.S., and the rest is Europe and the Middle East.

And still, we don't have yet any significant influence on the top line coming from active protection, including Netherlands, it will reflect our revenues only in 2023 and onwards. while the Israel program will be already showing revenues in 2022.

Can the European or Asian markets, can they be as large as the United States market eventually?

We believe that the U.S. market is at about 50% of the addressable market and the rest of the world is another 50%. We do believe that India is a big potential, maybe 15% out of that 50%. And India is waking up very slowly. We all know what's happening there around COVID, but we are doing some active BD in India as well. We see it as a potential market, but it is slow starter market. Yes, we do believe that the rest of the world market is like the U.S. market.

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

I think this question may have been answered but I didn't understand. Are there any issues with the supply chain that you could see impacting your gross margin or lead times? And can you remind us where you do source most of your supplies?

Well, our supply chain is made of mainly producers and providers of components that are from semiconductors, let's say, that are commercial off the shelf components. The sophisticated parts are coming from the U.S., I must say. Not always they are produced in the U.S., and I think the U.S. is encountering the challenge of establishing supply chains internally, but we will entertain that when it happens. But it comes from Europe, from the Far East. We don't have any components coming from China.

So that's about where we buy components from. Regarding the gross margin, no, we are avoiding that. At this point, we don't see any effect on the price. We avoided by the inventory level that we already have. And the fact that we are now ordering more material. And we take into account the longer lead times, we can tolerate that in both not affecting our bill of material and not affecting our delivery of goods. This is why we are doing these moves now, and we did it in the past and not later. So touch wood, we don't anticipate, as of now, any problems around that.

And then you made some comments on the APS programs and the pipeline. Has the company won any additional APS programs over the last 6 months or so? I know there's a bunch and they don't start for a while. I'm just curious, the business development side.

Yes. Well, we are part of the Elbit's Iron Fist so we don't win the programs on our own. And this is the most mature system that we are part of. We have some incubation programs in other places of the world, but it is too early to talk about. It will take quite a while until they mature, maybe in more than 3 years until they mature to products and deliveries.

So we are now part of Elbit's APS. And we have the Eitan in Israel. I think Netherlands was a program that was announced in the last 6 months, as you mentioned, the CV-90. These are the 2 awarded programs. And the pipeline is quite wide, Australia, in Europe, there are quite a few initiatives. And once Elbit announces that we piggyback on that and announce ourselves.

Last question I have. The demand for your radars has been robust. Do you see or foresee any challenges with the new U.S. administration given certainly accepted that it will be a less capable federal budget environment?

Yes. This question was asked for many times, and we are asking ourselves the same, but the answer that we give based on what we read and the evidence is that we are addressing new and emerging needs that are in demand and actually in a growing demand -- base defense, counter UAS. We also -- what happened in the war in Nagorno-Karabakh that more emphasizes mobile force protection and so on and so forth.

So we believe that even if there are pressures, budget pressure, they will be directed towards more legacy programs, mainly in the U.S., I mean, compared to the new needs that we are addressing.

The next question is from Austin Moeller of Canaccord.

Can you speak yet as to the quantities that will be manufactured yet under the Royal Netherlands Army CD-9 program for -- 9D program for Iron Fist? And I would assume that's -- is that revenue expected to be material more to 2022 or 2023?

The CV-90 is 90 vehicles as Elbit has noticed, and it will be in 2023 and onwards. 20 vehicles -- 90 vehicles, times 4, which is 360 radars with some [spirit] can be close to [400].

And can you comment yet on any of the opportunities surrounding CRAM with any of your customers yet? Or is that still too early to discuss?

Yes. I've mentioned that. I think the Air Force and [SOCOM's] needs are a combination of base protection. There is a program in incubation name ABAD, Air Base Air Defense, and also around SOCOM, there is a need to combine CRAM with earth surveillance and counter drones, and we are offering multi-mission radars that can do all these missions simultaneously. So we do believe there is good potential around these efforts as well.

And then you guys hit 40% gross margin in the quarter. Do you expect that to sort of be the run rate going forward here for the next several quarters? Or do you expect directionally to expand further beyond 40%? And what kind of delta should we assume on that?

40% was actually our target from long ago. And we have surfaced it now maybe a bit earlier than what we thought even. We would like to say at this level, maybe 1, 2 points more, but not beyond that. We want some margin for competition and maybe if we have inefficiency issues, which we don't anticipate, but I believe this is a fair margin, and we should look at our performance at this level.

(Operator Instructions) The next question is from [Isaac Vidomlanski].

In the last conference call, you announced an investment of $3 million in RADC and retained an option to increase the investment. My question is based on your experience with RADC so far, do you plan to invest more money in RADC? And can you give us more color about RADC?

It's too early to discuss this.

Say it again.

I'm saying that it is too early to discuss that.

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

Yes. On behalf of RADA's management, I would like to thank all of our investors and participants to this call for the interest in our business, and we look forward to speaking with you again soon. Stay well and healthy, and good day to all. Thank you.

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