RADA Electronic Industries Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries first quarter 2021 results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact RADA's investor relations team at gkinvestorandpublicrelations at 1- Call 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 Helf of GK Investor Relations. Mr. Helf, would you like to begin, please?

Yeah, 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 RADA management for hosting this call. With us today on the call are Mr. Dov Sela, 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 Sela.

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 gross 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 valid 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 four or five analysts. Our current cash levels support our current inventory plans and our needs to secure the supply chain. It enables us 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 US and more recently on global basis. We recently see a growing attraction 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 GBAT 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 four brigades and 144 systems by mid-2023. The initial production portion is 28 Stryker vehicles, each of which integrates four radars of ours. This portion will be delivered by mid-year. 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 USA are incubating into OTAs or programs of record after satisfying significant urgent needs to the US 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 Elbitz Iron Fist solution currently. And the Israeli ATAN AFV development is ongoing. Serial production will commence in 2022. And the scope of this program is over 2,000 radars over a few years. The U.S. Army's Bradley IFV testing will spread over 2021 and 2022. And serial production expected to commence in 2023. The scope of the 1st Brigade is over 600 radars. while we believe that the potential is higher than one brigade. There are several additional APS programs in our pipeline 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 ICHR for the Eitan AFV, we shall start field testing two new radars towards the end of this year. The first is the NMHR, the next MHR. It's an evolution of the MHR family. Advanced tactical radar with high accuracy, wide frequency band, advanced digital processing, multi-emission capabilities, and all the goodies that make our radar and the year furthermore uniquely adapted and adequate to the tactical radar for the maneuver force, all these unique features that make it an 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 of radars to better address new threats such as cruise missiles detection and fire control and capabilities such as point defense and gap filling. All these radars should maintain our global leadership in the market of tactical radars 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 experience 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, Juby. 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 GROWTH 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 at the end of the first quarter, we had $96.2 million in net cash and zero 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.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Sheila of Jefferies. Please go ahead.

Good morning, and thank you for the time. You know, 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, you know, are you noticing any program with delays? You know, go over your top programs once more if that's possible.

Yeah, we see when we contact our suppliers, component suppliers, we see prolonged delivery dates. And luckily enough, we are protected because our strategy handling the inventories long ago when the COVID started and a bit before that was to, you know, deliver to stock and avoid any mishaps. So our inventories are protected. preventing 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, you know, we reported a new business of $60 million in 2020 with significant new business in the fourth quarter. We actually delivered, you know, our delivery cycle is less than six months typically. Sometimes it's even a few weeks. Depends on the urgency and the program. So, you know, the first quarter represents all the debt new business that we got in the fourth quarter of 2020. And, you know, it's basically according to our plan. We are not starting the year with a full, as opposed to other defense integrators. You know, 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 had 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 mid-year for the 28 systems that I've 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 Middle East as well. So all together, you know, it's a mix of the U.S. programs, mainly the MSHORAD and the base defense and the other parts.

Okay, thank you. I'll jump back in the queue.

Thank you.

The next question is from Peter Arment of Baird. Please go ahead.

Yeah, good afternoon, Judy and Javi. Doobie, in your presentation, it looks like you increased the total addressable market by about a billion dollars from the last time I think you had a presentation out there. It seems like that was tied to the air defense and short-range surveillance radar market. I know this is a TAM over a 10-year period, but what are you seeing there to kind of increase both, I guess, in the U.S. and the rest of the world?

Yeah, I think that the introduction of the new radars, especially the XMHR that WIDENS are 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 CRAM, 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. bases in Iraq and so on. And actually we believe that 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. Yeah, that's helpful.

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

Yes, absolutely. In Israel, it's already alive and kicking, and in the U.S., the renovation of the land is towards the end, and the orders are already out there, so the anechoic chamber there will be within a few months available as well.

Okay, very good. And just lastly, your thoughts on the potentially being cash flow positive this year, you know, 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.

Yeah, as you could have seen, compared to 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 Doobie 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 yeah, we definitely expect a positive cash flow here.

Appreciate all the details. I'll jump back in queue. Thanks. Thanks.

The next question is from Ken Herbert of Canaccord. Please go ahead.

Hey, good afternoon, Doobie, and Avi. Very nice quarter.

Thank you. Hi, Ken.

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

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

Okay, that's great. 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 contracts 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 and user market and through Europe to other places in a separate sentence. So for Europe, we anticipated that Europe itself, NATO countries, will adapt effectively the U.S. concept of mobile shore rod, counter UAS, CRAM, and so on, in a phase, and we start to see that. You know, as we experience 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. You know, at the end, cost performance, especially when you're talking about 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 2017 we got the first significant order for the Marine Corps, for the GBAD. In Europe, we started a year ago. We do believe it will be an accelerated process, so probably we'll 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 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, the COVID slowed it down a bit, but it is regaining momentum. As you have seen, about 60, maybe a bit more, 60% of our revenues last year, this year will be 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 Israeli program will be already showing revenues in 2022.

That's great. Can the European or Asian markets 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 you know 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 a slow starter market. Yes, we do believe that the rest of the world market is like the U.S. market.

Great. Well, thank you very much. I'll pass it back there.

Thank you. Thank you.

The next question is from Brian Kinslinger of Alliance Global Partners. Please go ahead.

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

Well, we, you know, our supply chain is made of mainly producers and providers of components that are from semiconductors, let's say, that are, you know, 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... 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 Any effects on the price, we avoid it 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.

Great. And then you made some comments on the APS programs and the pipeline. Has the company won any additional APS programs over the last six 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.

Yeah, well, you know, we are part of the LBT 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 three years until they mature to products and deliveries. So we are now part of LBIPS APS, and we have the ATAN in Israel. I think Netherlands was the program that was announced in the last six months, as you mentioned, the CV90. These are the two awarded programs, and the pipeline is quite wide, you know, In Australia, in Europe, there are quite a few initiatives. And once LBIT 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 COVID? certainly accepted that it will be a less capable federal budget environment.

Yeah, 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 all saw what happened in the 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, you know, pressures, budget pressures, they will be directed towards more legacy programs, mainly in the U.S., I mean, compared to the new needs that we are addressing.

Great. Thank you.

Thank you, Brian.

The next question is from Austin Lohler of Canaccord. Please go ahead.

Hi, Juby. This is Austin. I just had a quick question on can you speak yet as to the quantities that will be manufactured yet under the Royal Netherlands Army CB9 program for 90 program for Iron Fist, and I would assume that's probably, is that revenue expected to be material more to 2022 or 2023?

The CV90 is 90, 90 vehicles, as Albert has noticed, and it will be in 2023 and onwards. 20 vehicles, 90 vehicles times four, which is... 360 radars with some spirit can be close to 400.

Okay, great. 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?

Yeah, 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 named ABAD, Air Base Air Defense, and also around SOCOM there is a need to combine CRAM with air 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.

Okay, awesome. 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 stay at this level, you know, maybe one, two points more, but not beyond that. You know, we want some margin for competition, and maybe if we have inefficiency issues, which we don't anticipate, but, you know, I believe this is a fair margin, and we should look at our performance at this level.

Okay, got it. Well, thank you for all the color. I appreciate it.

Thanks, Austin.

If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. The next question is from . Please go ahead.

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

It's too early to discuss that.

Say it again?

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

I see.

Okay.

Thank you.

Thank you.

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

Yes. On behalf of Radar'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.