RADA Electronic Industries Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries fourth 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 Radha'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.radha.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?

Yeah, thank you, Operator. I would like to welcome all of you to this conference call to discuss Radha's fourth quarter and full year 2021 results. I would like to thank RADA management for hosting this call. With us on the call today are Mr. Dov Stella, 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 questions 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 contents of this conference call. And with that, I would now like to introduce Radha's CEO, Mr. Dov Sela. Dovi, go ahead, please.

Thank you, Eud. Good day to all our participants. We had a call with our investor just a few weeks ago where we talked about our unique go-to-market strategy We cover the status of our markets and discussed our 2022 guidance. In today's call, we will provide a summary of our fourth quarter and full year of 2021. The results of that remind you of our forecasts ahead and reiterate our guidance for 2022. So let's start with the financial highlights. We demonstrate year-over-year revenue growth in excess of 50% in recent years. In some years, well over 100 even. Such growth rates are typically expected for successful early-stage technology companies, and it is unusual, to say the least, for established and profitable public companies like us, and even more so in the defense industry. We reported the revenue of $117 million, up 54% year over year. And we remind you that only two years ago, in 2019, our revenue was 44 million, a bit more than a third of what we have reported today. We are exceptionally proud of these results, and even more so given the ongoing corona pandemic and associated work and travel restrictions, the supply chain constraints and part shortages, and specifically in the US, the delay in the US budget for this year and the continuous resolution condition which is still in effect. Our EBITDA for the year was 27.3 million versus 9.7 million last year. It is almost three times year-over-year growth. While revenue grew 54%, EBITDA growth of 182% demonstrates the operating leverage in our business model. Because of the investments made in the past few years in our business, especially in the US, our business operating expense footprint is right-sized for today's revenue level, and our operating expenses now grow at a much slower rate than revenue. Furthermore, we have the manufacturing capacity for revenues at significantly higher levels than what we are currently delivering, which gives us ample room to grow. And beyond that, we have also built an ability to add new capacity quickly and at reasonable costs as needed in the future. In terms of our balance sheet, we ended the quarter with $79 million net cash and with absolutely no debt. Throughout the year, we have leveraged our strong cash level to increase our working capital mostly our inventory for semiconductors to avoid any supply chain issues. We are also planning to use our cash for potential M&A. We are looking to expand our addressable markets beyond the current estimation of the organic term of $6 billion over the next decade and hope to be able to bring you some news on this front in the future. Let's discuss our 2022 guidance. In our analyst score a few weeks ago, we issued our guidance for 2022 of $140 million, representing growth of around 20% year-over-year. This is comprised of a number of factors. $9 million are associated to Avionics revenues, which is a similar level to the revenues we achieved from this business over the past few years. In the non-US shore rod slash point defense market, we forecast over $40 million freighter revenues during 2022. It includes also counter UAS, naturally. In the United States, the stabilization of the shore rod and point defense market for us enables us to forecast our revenues based on the relevant line items in the U.S. defense budgets. About 90% of our guidance are incorporated in the defense budget line items. This gives us good visibility, and we feel comfortable with our U.S. forecast of $90 million for 2022. To that, I want to add that we often receive very short timelines and urgent need book and ship delivery requirements, with the whole process taking sometimes very few weeks. This means we are also operating without the luxury of planned backlog for these types of orders and is one of the reasons we maintain a high level of inventory so we can meet this demand. These type of customers of this new and growing market appreciate the top level and short-term supply that they receive from us that they cannot typically find somewhere else. and is a key factor in us winning new businesses with new customers. We note that these short-term turnaround revenues that are not part of our forecast represent further upside to our U.S. revenue expectations for this year. Let's take a look at our markets and the forecast for the coming years. Longer term, it is our goal to achieve $250 million in annual revenue within three to four years, which implies an acceleration of our revenue growth in 2023 and beyond. A significant driver will be the APS market, which is half of our potential market and very much in the incubation stage as of now. We have currently a backlog to deliver radars to the Iron Fist ATS at the level of about 30 million, and we expect to double or even triple it by the end of this year, which means increased revenues in 2023 and beyond. In the U.S., the qualification testing of the Iron Fist on the Bradley AFP will take place during 2022. It's already ongoing. In terms of future potential, we also believe that the solution we are part of, namely the Iron Fist, is a real candidate for striker vehicles as well. And other programs such as OMFV and APS or VPS advanced configurations such as MAPS are also posing for growth potential in future years. Regarding the shore rod slash point defense market in the USA, Our rapid growth since 2017 is mainly due to the U.S. COAS and short market segment. And to date, we have delivered around $160 million of tactical radars to this market segment in the U.S., over half of that in 2022. This reflects a new and emerging market through urgent acquisition processes, typically June joint urgent operational need statements, with relatively limited multi-year visibility. We now see our market shifting into a phase of stable growth, with multi-year planning and visibility reflected in line items in the U.S. defense budgets, as I mentioned earlier. But urgency is still very much around, as we see via our recent drone and cruise missile attacks in the Near East and other geographies. SHORAD and point defense programs such as the USMC GBAD, US Army M-SHORAD, US Air Force ABAD, SOCOM-SIP and others have become line items in the budget and reflect multi-year acquisition plans. Such transitions from G1s to programs of record or OTAs typically take a year or more. The fact that we are engaged in multiple programs has ensured a sustained growth you have seen from us in recent years, which we expect to continue in the future. While CR, continuous resolution, is still around, G1s compensated for some of the purchasing delays in the U.S. The recent award of the SOCOM SIP multi-year program to Android a company which is our customer, worth over $1 billion to them, is an encouraging signal that such delays will soon be over. Regarding the short slash point defense markets in the rest of the world, this market is currently around 25% of our total revenues, and we believe that it will rise to the U.S. levels within a very few years. The Near East often suffers from terrorist drones and cruise missile attacks, has been an active market for our radar since 2019, and continues to hold significant growth potential for RADA. The European-slash-NATO countries are typically following the doctrine and solution of the U.S. military, and the need for shore RAD and point defense is becoming recognized there. Currently, the market is in its incubation phase. We are engaged with quite a few prominent European weapon system providers, and our radars are integrated and continuously being tested as part of those solutions. We estimate that the market will uptick in the near future. The Indian market is also waking up around the need to mitigate the small UAS threats, mainly. and also short-range air defense in view of the recent drone attacks. We expect significant initial sales of counter-drone solutions in this market in this year, 2022, and strong growth from the region beyond that. In view of the size of this market and the regulatory environment, we announced a few months ago our plans to set up an Indian JV with a local partner and establish local production capabilities. Let's summarize. As our 2021 results show, RADA continues to experience very strong growth, also on the top line and significantly amplified on the bottom line due to our operating leverage, which we are enjoying now. As the discussion of our guidance and the coming projects indicate, we expect this growth trend to continue for the foreseeable future. And finally, I want to thank all of Radha's employees for their tremendous efforts and success in bringing these exceptional results in 2021. I'd like now to hand over the discussion to Avi Israel, our CFO. Avi, please.

Thank you, Juby. Hi, everybody. You can find our results on the press release we issued earlier today. As Dube mentioned, we are very proud of our financial performance, and I will provide a short summary of the fourth quarter results and the year as a whole. Fourth quarter revenues were $31.8 million, up 36% year over year. Full year 2021 revenues were $117.2 million, up 54% year over year. Our gross margin in the quarter was 41% compared to 39% in Q4 of last year. For the year, gross margin was 41% versus 37% in 2020. Operating expenses in the quarter were $7 million compared to $6.2 million in the Q4 of last year. Operating expenses for the year were $27.2 million compared to $22.9 million in 2020. I remind you that our current level of operation expenses support our current and expected operations in the short and mid-term. So OPEX is expected to grow at a much slower pace than revenues. Operating income was $6 million in the quarter versus $2.8 million in Q4 of last year. For the year, operating income was $20.4 million compared to $5.5 million of last year. Adjusted EBITDA for the quarter was $8 million, which is 25% of revenues, up 103% versus $3.9 million over 17% of revenues in Q4 of last year. For 2021, adjusted EBITDA was $27.3 million, which was 23% of revenues, up 182%, compared to $9.7 million, which was 13% of revenues in 2020. I would also like to summarize and point out some highlights from our balance sheet. As of December 31st, 2021, we had $78.8 million in cash and absolutely zero financial debt. Our shareholders' equity stood at $156 million, financing 77% of our balance sheet and up from $72 million as of year-end 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.

Hi.

Thank you. Just digging into the outlook a little bit more, I mean, for 2020 too, It seems like both U.S. Shorad and Point and non-U.S. are both maybe an incremental 10 million of sales in 2022 with the non-U.S., you know, a faster growth rate. Can you maybe just give us an update on what you're seeing in that market around award timing and maybe just thinking about 2022, what are the major program drivers this year?

Yeah, the Shorad in the U.S. continues, but, you know, the big four are probably bigger than the Shorad because, you know, at least half of the program we have already delivered in 2021 at this phase of the program. The bigger ones can be SOCOM-SIP and ABAD. We do have high expectations and also GBAD of the Marine Corps. So all these, what we call internally the big four for us in the U.S., will probably contribute over 60% of our revenues in 2022. That's in the US. In the other places in the world, you know, mainly the Middle East, India, as I've indicated, these are the major geographies, and also the... you know, the integration and testing efforts in Europe, which are starting to accumulate, bits and pieces become, you know, some significant numbers at the end. So that's the general overview of the short-run market.

And then just to follow up on the $250 million revenue target out three to four years, I mean, How do you think about the visibility towards that revenue number, either through contracts in hand or at least programs that you're already specced into versus including maybe competitive pursuits that aren't decided yet?

Yeah. We do believe that the U.S. market is stabilizing on us. At the level of, you know, between $100 to $120 million, that's the market potential, basically. And we see it happening. We also forecast $90 million this year. So let's assume it stabilizes to over $100 million. And we do believe that the rest of the world market of short and point defense will climb to that level. So you have $200 million within very few years. Add to that active protection, which starts to affect our top line in 2023 and onwards at the level of a few tenths of millions of dollars, and it will increase maybe later. Then you get the $250 million within three to four years.

Thank you. And then just last one for me. You provided sales guidance for 22 and talked about ongoing trends of sales, you know, rising far faster than operating margins. I mean, it seems like you're ahead or you are ahead of your EBITDA margin target. I mean, is there a way to frame kind of the opportunity in 2022 just from an EBITDA margin perspective, just thinking about what's implied on operating expense growth?

I think they... This is Harvey, Greg. We have four analysts that released their numbers for 2022. I would say that, generally speaking, it looks like they are pretty in line with our expectations. We do not release guidance as far as EBITDA is concerned, but take into consideration the guidance for the revenues and assuming that we are expecting to maintain our gross profit at the level of 40-41%. That's the area. Stabilizing our OPEX, as I mentioned earlier, and you can calculate the numbers technically, but the numbers of the analysts, the market consensus are pretty accurate.

Thank you. Thank you, Greg.

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

Yeah, good afternoon, B.D. Arment. Maybe just kind of circling back on the 22 outlook, how do you check kind of the importance of revenues? I know this past year about 55% of your revenues came in the second half of the year. You know, just when you think about the continuing evolution and having some you know, flight delays and kind of lower activity. How should we think about kind of modeling the cadence of revenues or how you're thinking about it?

Yeah, well, here, you know, the condition of the U.S. budget and the CR affects our first half. So we do expect that we will have growth maybe even quarterly. towards the end of the year. It will not be linear, but you know, actually, that was our situation for the last few years. So maybe it's going to be similar. I think that the start will be kind of similar to the end of last year, the last two quarters, but it will accelerate from then.

Okay, that's helpful. And then, Bibi, you guys have talked a lot about your ability to kind of stay ahead of the supply chain shortages. Maybe you could just give us an update there, how you're thinking about that.

You know, even before COVID, we realized very early on that this is a new market, and if we don't produce to stock, we are going to, you know, not to capitalize on the potential, and actually it became one of our competitive advantages. And when COVID appeared, we kind of were immune. Then we decided to even further enhance our inventories to over a year of supply, potentially, based on our production plans. And again, it is based on our pipeline and not on the backlog, because as you understand, a lot of it is book and ship. And that's where we are today. It's not... It's a tough environment today. You see allocations all over. You see prices that are changing. We were immune until now, and I do hope that what we did will keep us as such along 2022. In some cases, we have to pay more, and we have to reflect it to our customers, but it's really it's not overwhelming, it's really in the low number.

Okay, and just watching for me, on APS, I think the last time you disclosed, I think the backlog was around $30 million, or at least in the plans that revenue starts in 2023. Is there any sort of milestone we should be watching for as we think about 2022 in terms of adding to that backlog?

You know, we regularly, probably every quarter, we announce the new business that we received along the quarter, and we try to depict what went to which market segment. So, yeah, I mean, follow the backlog accumulation or the new business accumulation around APS, and you will have the picture because, you know, with APS, as opposed to the urgency of the shoreline and point defense markets, this business by nature is a long-term mission and you can plan ahead. Here we are establishing backlog. So every order that we receive is not for immediate delivery. It's spread over two or three years, something like that. So I think if you follow our new business announcements, you will have a very good picture. And we can always elaborate more on that whenever needed. Appreciate it. Congrats on the results. Thanks.

Thank you. Thank you, Peter.

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

Hi, guys. Thanks for taking my questions. You've laid out the potential for Shorad long-term, even APS to some degree. Of course, there's a finite market. So as you think about M&A, are you thinking about complementary products to Radar that can expand your market opportunity? Maybe talk about your M&A priorities, please, and how advanced are any discussions you're having right now?

Yeah. Well, we are examining several opportunities as they come already, but we are strategizing formally, kind of formally within our company way forward. Look, the categories are... in general terms, and it is a bit too early to disclose details, the categories are technology, geography, you know, complementary products that make sense to us. We don't want to lose our profile of a growing company, technology growth company. We don't want to inflate our top line just for the sake of having bigger numbers. So we are carefully examining our footprint in our strategic markets like we did in the US. We plan to do in India and maybe also in Europe. We'll see. And maybe not directly, but also in the Middle East. We are continuously examining the technology market of radar around us and what's happening and the We don't have to invent the wheel every time, you know. Maybe we can enjoy efforts of others and join forces. These are the roughly categories, the general categories that we are, in these days and weeks, we are translating into action plan.

Great. And then my second question is, clearly your inventory increased significantly from the end of September. Can you talk about what this inventory level covers? Is it all of 2022? Is it a little bit more? Is it a little bit less based on your demand and expectations? Thanks so much.

Yeah, well, our strategic decision was to have at least one full year of semiconductors based on our estimations, and we continue to maintain that.

Great, thank you.

Thank you, Brian. Thank you, Brian. The next question is from Austin Moller of Canaccord. Please go ahead.

Good morning, Duby and Avi.

Good morning, Justin.

My first question here, based on the 30 million that you forecast for action protection systems in 2023, Are you confident that when Biden's fiscal year 23 budget comes out probably in April, that there will be a funding account to upgrade the Bradleys with the Iron Fist?

No, we are not confident. We don't have certainties, unfortunately, because it depends on successful testing. But we are optimistic that once the testing soon enough will prove successful, The budgets will come.

Okay, that's helpful. My second question, is the Army expected to decide on purchasing additional SHORAD vehicles based on the testing that's currently going on beyond the existing 144, the first four battalions that you're already under contract for sometime this year?

Yeah, you know, the initial shorad plan of the army talked about 10 to 12, maybe 10, but then the talks increased it maybe to 12 battalions altogether. That's the force structure that is probably needed by the army. However, it's not going to be purely kinetic like what was done until now. And the directed energy will kick in. Directed energy will be completed in 2023, based on what we know. Again, to be put on strikers and there is an initial effort done by the rapid capabilities branch of the army that put a few lasers on four strikers, actually four lasers on four strikers as prototype, but it's going to be completed. We believe that our sensors, on-board sensors, will stay intact. That's our plan. But, you know, we are working with the potential vendors of the lasers. We are working directly with the Army to ensure that we stay there. And it will be completed, as I said, in 2023. And maybe some more battalions, kinetic battalions, in the configuration that we have now, will be also added.

Okay, great. Thank you. That's very helpful.

Sure. The next question is from Nahum Moshitz. Please go ahead.

Yeah, how are you doing, Mr. Stella? I have a question. You talked in the past about acquisitions. Did you mean that you want to acquire other companies or other companies to acquire you?

I can talk about what I want to do and not what others want to do to me. So obviously when we are talking about M&A, we are talking about ours. Okay.

And when do you think it's going to happen? Hopefully this year even. Great. Thank you very much. Good luck. 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 poll 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 your continuous interest in our business. We will be presenting at the current conference tomorrow, and if you want to speak to us, please either approach the conference organizers, but you always can approach our investor relations directly, and we will find the time to meet. We look forward to speaking with you in the next quarter. And thank you very much and have a good day.

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