RADA Electronic Industries Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the RADA third quarter 2021 results conference call. All participants are 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- 212-378-8040, 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. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Thank you, Operator. I would like to welcome all of you to this conference call to discuss RADA's third quarter 2021 results. I would like to thank Radice 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'll then open the call for the question and answer session. Before we start, I would like to point out that the safe harbor statement published in today's press release also pertains to the content of this conference call. And with that, I'd now like to introduce Radha's CEO, Mr. Dov Sela. Doobie, please begin.

Thank you, Kenny, and good day to all. Let's start with the results summary. We are very pleased with our record results for the quarter, which show not only strong growth across the board, but also the benefits from the significant operating leverage that is inherent to our business. Again, our Q3 numbers speak for themselves. Revenues are up 57% year-over-year. Our gross margins are 41%, up 330 basis points versus Q3 of last year. Operating margins are 20% versus 10% a year ago. And adjusted EBITDA is up 162% year-over-year. to a level of 8.2 million or 26% of our revenue versus 15% in Q3 of last year. As you can tell, you are very pleased with the results and especially with the progress made on the margin profile of the business, which were all ahead of our previous expectations. In terms of our balance sheet, we ended the quarter with over $86 million, we leveraged a strong cash level to increase our working capital, mostly our inventory of semiconductors to avoid any supply chain issues. So let's talk a bit about inventory and short-term delivery of our business. As I'm sure we all know and aware and probably have heard from many other companies, there is a global shortage of components. Earlier this year, We took a strategic decision to increase our inventory levels, which has grown to 38 million, to secure our supply chain and ensure we have the parts needed to meet our current and future customer demands. It also enables us manufacturing efficiency in which we build products and deliver to customers in a very short turnover. This is really a key significant competitive advantage of ours that is maintained for a few years now beyond our technical capabilities and product advantages. We often receive very short timelines and urgent need book and ship delivery requirements with the whole process taking only a few weeks. This means we are often operating without the luxury of a significant backlog on which to deliver, but At the same time, our offering are in demand across the board and our customers of this new and growing market appreciate the top level service that they receive from us, which they cannot get from somewhere else. This allows us to gain and keep customers for the long term and meet our revenue goals in the short term. As we move through the end of 2021 and into 2022, This ability of ours is even more important. Let's take a view of our markets. In the U.S., as has been widely reported, the new federal government has not been able to pass the budget and is operating under a continuing resolution. This means that last year's budget continues without the 5% increase that is expected with many new programs being delayed. Furthermore, the new government has different priorities, and all this is leading to a shift in the working point of the DoD and some lack of short-term certainties in defense spending, causing near-term delay across the board. While this phase of U.S. budget adjustment is making it more challenging, not just for us, but for the entire defense industrial base, We know our market well and the somewhat partial visibility along with all their lumpiness has long been a characteristic of this market of which we are very experienced with. We do not believe that there is a risk to the overall U.S. market demand for the defensive capabilities that our products provide since they are in the heart of modernization drives and are included in the proposed budget lines. The issue, as has been the case for a few years, is the timing of orders, which may be delayed at times. On the other hand, and in line with the expected behavior of a new market, some pipeline opportunities jump ahead of previous anticipations, especially following exogenic events such as drone attacks in various places in the world, like the Gulf, Iraq, Syria, India recently, to name a few, where we receive orders in a short notice with rapid delivery requests and our revenues are becoming increasingly globalized. In addition, we are seeing the various geographies in which we operate become more accustomed to operating under the COVID regime and areas that were very slow or even totally blocked for almost two years now, are opening up and momentum of demonstration and sales is regaining. We believe that this should speed up the process of gaining new customers, making business development easier than it has been during the last two years, where demos and meetings were how to perform. We therefore expect to enjoy increasingly global diversity of revenues in the coming years. Hence, it is important for us to maintain our agility on the pulse of the market, positioned to move quickly and critically, surpass our customer expectations and continue growing our top line. So let's talk about our guidance. With regard to our guidance, despite the challenges I've just discussed, we reiterate our expectation to surpass the $120 million revenue goal for 2021. As for 2022, we expect our organic growth to continue and we aim to provide you with guidance towards the end of this year or early next year once we complete the analysis of our continuously growing pipeline and improve its clarity. In addition, The APS segment of our market is throwing up through initial orders from Israel and the Netherlands and successful tests and allocations of funds in the U.S. budget. All will lead to generate revenues that will significantly affect our top line in 2023 and ensure continued growth. Beyond that, we expect the strong operating leverage which we have achieved to date to continue supporting our ability to further grow our profitability beyond the current level. So in summary, as our results show, we are currently experiencing significant growth, and our strong margins allow us to grow our profit at a much higher rate. While budget and additional matters cause short-term delays in the U.S. market, we are very experienced at navigating these markets, and our structure to quickly take advantage of arising opportunities and serve their orders when they come. At the same time, we are also seeing markets globally adjusting to the current working climate, providing us with additional opportunities for growth. From a financial perspective, we are reiterating our revenue guidance for over $120 million for this year, with organic growth continuing into 2022. and with the leverage allowing our profit to increase further. At this point, I'd like to hand over the discussion to Avi Israel, our CFO. Please, Avi.

Thank you, Duby. Good day to everybody. You can find our results on the press release we issued earlier today. As Duby mentioned, we are very proud of our financial performance, and I will provide a short summary of the third quarter results. Third quarter revenues were at $32.0 million, up 57% year over year. Our gross margin in the quarter was 41%, compared to 38% in Q3 of last quarter. Operating expenses were $7.0 million, compared to $5.8 million in Q3 of last year. I remind you that our current level of operating expenses supports our current and expected operation in the short to mid-term, so OPEX is expected to grow at a much lower pace than revenues. Hence, the business style contains additional operation leverage with the potential to further improve DAO operating margins. Operating income was $6.3 million in Q3 versus $2 million in Q3 of last year. Adjusted EBITDA for Q3 was $8.2 million, which is 26% of revenues, up 162% versus an EBITDA of $3.1 million, or 15% of revenues, in Q3 of last quarter. I would like to summarize and point out some highlights from our balance sheets. As of September 30, 2021, we had $86.6 million in cash and zero financial debt. Our shareholders' equities stood at $150.4 million, financing 77% of our balance sheet, and up from $72 million at the year end of 2020. 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 at the end of the third quarter, our inventory levels was increased to $38.1 million from $28.8 million as at the end of 2020. 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 polled in the order they are received. Please stand by while we poll for your questions. The first question is from Greg Conrad of Jefferies. Please go ahead.

Good morning and good quarter. Thank you.

Maybe just to start, I mean, thinking about the growth in the quarter, I mean, maybe what were the top program drivers? And then, you know, you mentioned a little bit around 2022. You know, did you see a different set of programs kind of driving the growth into next year, just thinking about the revenue cadence?

Yes. You know the drivers for this quarter are mainly the IM Shorad of the U.S. Army. The IM Shorad revenues this year will be about 25% of our total revenues of the company, so this is a very significant program that matured into production. In addition, the drone dome of Rafael, the redrone of Elisrael, the usual stuff continues. So that's this quarter and also it is kind of, you know, spread all over the year and also in the current quarter it will be similar. However, some, in addition, not however, in addition some activities that were categorized as urgent need until not so long ago, like the Air Force Base Defense, ABAD, and SOCOM requirements are maturing into line items in the budget as we identify it. So it should affect next year as well.

And then just on the margin, I mean, I think you talked about kind of getting to 20% and You're kind of well above it this quarter. You were above it last quarter. I mean, if we look at the drop through sequentially, it's close to 50% EBIT margins. I mean, have you reset the margin kind of above the numbers you've talked before? Just how are you thinking about the, you know, puts and takes on kind of the 25% plus margin in the quarter? Yeah.

yeah uh as as i mentioned it is a bit early compared to our initial plans because you know we were efficient in in also restructuring our production lines investing in in the test equipment getting the proper people and in and in parallel to recruit the needed people to implement our design design and development plans and we are stabilizing our capex. So altogether, it actually, you know, kind of surfaces up the inherent margins that we have in our business. And we are very happy with that. I mean, there is a limit to that. We are not a software company, as we said in the past. It's a software-defined hardware. But we are happy, and we do believe that there is still room to grow above the current... operating and the EBITDA margins that we have. The operating, you know, the gross margin is fine. Also, a room to grow by 1% or 2%, but, you know, we are reaching the point.

Thank you.

I'll leave it at that. Thank you.

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

Oh, yes. Good afternoon. I guess I'm going to ask a question on ACS. Can you talk a little bit about the active protection and kind of the adoption that you expect? I guess that's supposed to start in 2023. Are you seeing anything on the competitive landscape that may change that path?

Okay. Well, APS is, as I said, for many years, it was dormanting. It is waking up. You know, we started with APS back in 2006 even, and we've been waiting 15 years for these moments to come. So we are under contract in Israel. Through Elbit's Iron Fist, we are cooperating with Elbit since 2008. We are under contract in Israel, as I mentioned, and also in the Netherlands. These are firm contracts and the delivery dates are starting towards the end of next year, but mainly in 2023. a majority of it, and we have been selected together with IMI through GDOTS a while ago, two, three years ago, for the Bradley. In the United States, there were delays, but we are in good shape. To our opinion, the results are good of the testing, and there were signs just a month ago, the AUSA time frame, or the military, the U.S. Army mentioned that they are going to to make it happen hopefully along 2022 in testing and 2023 in production orders for 2023. It's not formal yet, but there are good signs. So that's the general trend of the market. There are some additional potentials in other places in the world. And we do believe that also in the US, the quantities will be more than one Bradley brigade once we perform. On the competitive landscape, you know, there are mainly two primes now, which are both Israelis. It's Rafael with the trophy and the Elbit IMI with the Iron Fist. We are in the Iron Fist. We are the incumbent trader in the Iron Fist. So for the near term, we are there, you know. And on the other hand, you do see long-term initiative like in the U.S., the name until a while ago was MAPS, modular active protection. They changed it probably to VPS. Here we are working also directly with the Army. to prove our viability. We are doing adaptation work directly because the modularity of the solution, you know, opens up the room to every sensor and the factor to come into the picture. I do believe that we are also here in a good shape, but this is a long-termish effort. And something similar is happening in the UK. They call it MIPS, but it's in essence the same modular approach. There were very good demonstrations as were published by Leonardo UK in September around the DSCI conference exhibition, and we were part of these demonstrations as well. So, you know, we are active in any place that is relevant for us, and currently we are happy with the near-term future, which is 2022, 2023, and probably also beyond.

Okay, and just regarding your comments on supply chain, you've been strategic with, you know, kind of building up a little bit of the inventory to make sure you have the correct components. Do you anticipate doing that through the end of the year and even next? Should we expect that inventory will continue to grow?

Thanks. Okay, this situation of the market, of our market, you know, we categorize it as new and emerging. actually showed us from the very beginning that we need to work with high inventory levels and instead of just in case, just in time, to work just in case. And this just in case actually is keeping us alive. I mean, the market is demanding things very fast and we are able to deliver. So when COVID happened, we were kind of prepared for that. because when the semiconductors became scarce, we had them for almost a year ahead. And recently we decided to increase our inventories, especially around semiconductors to more than a year away. So I think here we are in a good shape. We don't have touch wood as of now, any hiccups with our supply chain. And sometimes we see our customers asking our products to be delivered earlier than their actual need in order to be sure that, you know, for us, nothing will come as a surprise. So we give them this confidence level gladly.

Appreciate that. Thank you.

Thanks, Peter.

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

Hi, guys. Thanks for taking my questions. You gave us revenue from IM Shorad for the year, about 25%. Can you remind us the percentage of your total revenue in the U.S. versus the rest of the world? And then based on the uncertainties, in the near term and U.S. lumpiness potentially that you talked about. Does that suggest this trend that you've had for so many quarters of sequential revenue growth might not play out next year? Maybe we'll see the seasonality of U.S. defense spending.

You know, the U.S. is our most important and biggest market as of now. Last year, it was 60% of our revenues. This year, it will be around 70%. With the I am sure being the biggest chunk. So yeah, the U.S. is our current most important market. But as I mentioned, you know, we see the rest of the world opening up and we estimate the U.S. market to be potentially half of our addressable market. So, you know, when there are lumpiness in the US, we compensate from other places. And that's what happened to us. And when other places actually closed down because of COVID, the US was blooming. So, you know, it's a balance between the US and the rest of the world. In the long term, medium term, let's say, not long term, we do believe that our estimations are met. And as we proved them in the last five years, You know, we are showing something like, I don't know, maybe 20 sequential quarters of growth, which is unique. I cannot give a guarantee that each and every quarter will be better than the previous one, but we do believe that our annual forecast, as we have proven, as I said, are met. And I don't think that at this level of numbers it is very important that each and every quarter will be higher than the previous one, as long as you keep a decent level and meet the annual growth. So, you know, there is some unclarity around the U.S. opening up around the budget mainly, not opening up, I'm sorry. But I think it will be soon enough cleared.

And then with your comments on, obviously, we all know changing priorities of a new administration in the U.S., not so much the U.S. budget. How did this change the timeline of your APS program in the U.S.? Is it going to be maybe delayed even further? Just maybe any update on how that's being impacted?

I don't think it affects our APS segment at all. It may, you know, change the pace of the SHORAD, the CRAM, and change the pace with short-term delays, as I mentioned, but we are addressing urgent needs and the modernization priorities, so I don't think that even in the mid-term we will suffer. But, you know, everybody withdrew from Afghanistan in a hasty manner. And, you know, the military takes time also to analyze how we did it, what are we going to do next and when, what they know, but when and so on. But APS, you know, since it is 2023 and the need is very clear, what happened around the U.S. DOD market does not affect the APS at all. It continues, it is actually showing better promises and our expectations to start deliveries in 2023 is very valid to my opinion.

Lastly, I think you made a comment that you have the components and inventory to meet 2022 demand. Should we still expect, given I take it lead times, are much greater, that you'll continue to increase inventory over the course of the next few quarters, and that is the plan, to the degree you can?

Yes, we will do it as needed, you know. We are looking 12 to 15 months ahead. We have a very wide pipeline. We analyze what can happen in this time frame. We do our production plans based on that. You know, if you build it, they will come. And we adjust our inventories accordingly, yeah. It may happen.

Great. Thank you.

Thanks.

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

Morning, Duby Navi. Congratulations on the quarter. So just to clarify on this quarter, it sounded like international sales were more heavily weighted relative to the delayed U.S. sales in Q3. And I heard you call out the drone dome program for Raphael, but I was just wondering if there were any other notable international programs and if there's been material ramp in Q3 for India or if India is going to take significantly longer, just given the environment there?

Okay. First of all, maybe I was not clear. The IAM-SHARAD is the biggest program that we have in the quarter that we are reporting. And the complementary programs are the drone dome, the redrone, some other customers that we have in East Asia, and so on. So, you know, it's not that the U.S. was not. I think you're a bit confused with the new business, but revenue-wise, the U.S. is still, you know, the dominant part that we sell to. About India, you know, India has the potential. Thank you, Avi, for... Reminding me, India is a potential. We have an MOU with the partner there to set a JV. We see the Indian market showing signs of opening up mainly around the counter UAV, but it is too early to discuss. Once it's formal, we will make the notices.

Okay, great. And just on the directed energy shore ad variant, when might you expect that the government will reach a decision around that? Do you expect that that might be in 22 or 23 that we'll hear more details about a down select there?

I think it will be 2023 on the earliest.

Okay, great. Thank you.

Thanks. The next question is from Jeff Bernstein of Cowen. Please go ahead.

Hi, guys. Congratulations on the quarter. Just a couple of quick questions. I guess Leonardo put out a release about the $204 million addition to the contract with GD in September. Does that have any bearing on what your backlog looks like, et cetera?

No, we are inside. We are part of this.

Gotcha. So that just gives you a little bit more visibility on what's to come there, I guess.

No, we are delivering already.

Gotcha. Okay. All right. So after the fact. All right. And then I'm just wondering, what is your role on this Raphael Spider project? Are you involved there? And I guess there's a check procurement going on.

Yeah, the check procurement is something that is incubating for a few years, and we are not there. But SPDR is an opportunity for us. We are working closely with Rafael on various avenues. And again, it's a bit too early to discuss.

Got you. That's great. And then I see there's a huge air defense contract in Poland that's going to have local content, etc. Is there some role for SHORAD type systems there?

To our opinion, yes, but after working with them six years, we saw the note, like you, that they decided to do it indigenously. Probably they have enough time to do that. They are just starting, and we are active there for a few years now. We'll see. We are not offended by any decision. We continue working there. I do believe that, if not sure, the counter-UAV solution of ours is relevant. But, yeah, we accommodate. Gotcha.

And then lastly, back on the energy weapon system, are you actually working with that Akaris Leonidas system with GD, and are there things you need to do for targeting energy weapons that's different than your current systems?

Yeah. You know, the APRS effort is a high-power microwave to be installed on a Stryker. It's not a program yet. We are the incumbent radar in the sensor suit of the AM-Shorad. We don't see and we hear from the Army similar lines. We don't see a need to replace the sensor suits. Because it can work with ZEI microwave. It can work with ZEI energy laser. It works with the kinetic solutions that currently are employed. I do believe that we have good chance to stay the incumbent radar for all the variants that the future will introduce.

That's great. Thanks so much, guys.

Thank you.

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

Yes. I'd like on behalf of the management to thank you all for the continued interest in our business. We will be presenting at a number of conferences in the coming months, like the Bird Industrial next week, next Thursday, Leidenbrook Tech Expo in mid-November, and the Needham Growth Conference in mid-January. So, you know, if you'd like to speak to us through these events, please do. We hope to speak with as many of you as we can, and you can also be in direct contact with us through our IR team. We look forward to speaking with you next quarter. Thank you all.

Thank you. This concludes the RADA third quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.