RADA Electronic Industries Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries second 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 GK Investor and 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 Helf of GK Investor Relations. Mr. Helf, would you like to begin, please?

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 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 CEO, Mr. Dov Sela. Dov, go ahead, please.

Thank you, Ehud. Good day to our 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 growth 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 margins 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 hence further, given the fact that our 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 plants. 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 IR&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 a summary of our markets, the positive trend in our markets, mainly around SHORAD, CUIS, and Base Defense, continue to develop. The U.S. is the leading market, and we also see increased interest 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 attacks 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 three 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 following orders to these initial orders. We are satisfied so far and are in production form. In terms of programs in which we are currently a part of, a Marine Corps, U.S. Marine Corps, GBAT program is the program of record. However, there are some reorg in the program that affects revenues this year. It's a bit slowed down. We assume revenues will resume next year at the level of dozens of radars a year. U.S. Army M-SHORAD program is funded OTA. The U.S. Army awarded General Dynamics the framework of $1.2 billion contract covering four brigades and 144 systems by mid-2023, each of which requires four radars of ours. For 360 emissary 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 continual 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 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 Fist solution. The Israeli Aitan 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 2023 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 margins sustainable at current levels, and given the leverage in our business model now, there is potential for further improvement of our operating margins. At this point, I'd like to hand over the discussion to Avi Israel, our CFO.

Please hold a while. Avi is stepping into the room immediately. Avi, please.

Thank you, Zuby. You can find our results on the press release we issued earlier today. As Zuby mentioned, we are proud of our financial performance, and I will provide a short summary of the second quarter results. Second quarter revenues were at $28.3 million, up 61% year over year. Our growth 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 operating expenses support our current and expected operation in the short to mid-term, so OPEX is expected to grow at much lower pace than revenues. 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 revenues, 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 zero financial debt. At June 30th, 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 of 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.

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 Cagliau of Jefferies. Please go ahead.

Hi, good morning, team, and thank you for the time. 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? We've seen that from some of the defense suppliers.

I'm sorry, could you repeat, please, Sheila? You weren't exactly clear here.

Oh, 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.

Yeah, okay. The strength is coming from the U.S. market. That was our first and foremost market, as we assumed from the beginning. We are there in... in two or three already established programs, like the Visorad, which is our biggest, the Marine Corps GBAD, now the ABAD, and there are potentials for SOCOM program to add very soon. And also we have the prospect of APS emerging, and we have quite a few additional prospects there with incubating with some other prime 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 modernization priorities of the army, and they are addressing current and nowadays 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 ATAN fighting vehicles. So APS should, you know, add a few tens of million dollars in 2023 and onwards to our revenues. So that's the general view of the markets.

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 $95 million today? 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 two, three years are already dictated by the decisions that we took two, three years ago. and we are launching three new radars this year, so we do believe that they will sustain and even enhance both TAM and annual revenues. And we are, you know, 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.

Thank you so much.

Thank you, Sheila.

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

Hi, Greg. Thanks so much for taking my questions. On recent calls, you discussed the goal to deeper penetrate Europe and moving quicker than that U.S. timeline. Can you talk about the progress you're making? Will you need to add any local infrastructure there? And if so, can you share the expected timeline?

As I mentioned earlier to Sheila's question, Europe is emerging, but not as fast as we thought. And, you know, 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, will you need to add local infrastructure? But I guess not, given it's taking a little bit slower than you previously anticipated. Right. Yeah. Yeah. And then last quarter and just now you talked about the three 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 are they totally complimentary?

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

Okay. Lastly, you addressed inventory a couple of times. I was curious, if I'm not mistaken, you have about five to six months inventory is how I count inventory versus cost of goods. Maybe I'm mistaken, but that's how I calculated it. Are you continuing to excel? If you're growing 60%, should we see that grow more than 60% over the next two quarters or so? Or how are you thinking about the remainder of the year?

Brian, it's more than five, six 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 Radar Management a year ago when COVID started. It 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've taken the same decision again, and we believe that it's the right one. Okay. Thank you.

The next question is from Peter Armant of Byrd. Please go ahead.

Yes. Good afternoon, Duby and Avi. Duby, maybe you could just give us your updated thoughts, given that you're being strategic about, you know, kind of building out your inventory. you know, 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 for operating activities in the first quarter. And we believe that this is the right path. And assuming this level of profitability in EBITDA, there's no reason why not to be cash flow positive. Yes, we increase 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 not be positive.

Okay. And then just related to kind of your CapEx, I know you had planned to put additional NHL 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.

Yeah, 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 know where the significant change from our original plans.

Okay. And 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 second part of the year. It's a question of we came to the point in which we are presenting forced equational quarters with significant operating profits, significant in our terms, obviously. As was presented in the financial statement of December 2020, I can update that at 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 the deferred tax assets of $6 billion to be executed over the next few years. It's not a question of the next few quarters.

Appreciate all the call and nice results, guys. Thank you.

Thank you, Peter.

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

Hi, Judy and Avi. Just my first question here. Do you see the impact of the troop drawdown in Afghanistan and the end of the combat mission in Iraq as affecting your demand at all for any of these radars for counter drone applications, or is it more, you know, we just saw another drone attack on an oil tanker in the Gulf of Oman, and probably even if 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 when we step into programs like Shorad and Jibad, 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 four 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 shorehead 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?

Okay. that the SHORAT program is on track and all the 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 result 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 expectations for the future, for the coming future as well.

Okay, great. Thank you, guys.

Thank you, Austin.

Thanks, Austin.

Thank you. If there are any additional questions, please press star 1. If you wish to cancel your request, please press star two. Please stand by while we pull for more questions. 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 CannaCode 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 tour.

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.