Redwire Corporation

Greetings and welcome to the Redwire second quarter 2022 earnings conference call. My name is Kevin and I'll be your operator today. At this time, all participants are in listen-only mode. We will take questions at the end of this presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce for today's call, Nicole Taylor, Vice President, Financial Operations and Investor Relations. Ms. Taylor, you may begin your conference call.

Thank you, Kevin, and good morning, everyone. Welcome to Redwire's second quarter 2022 earnings call. I am Nicole Taylor, Vice President, Financial Operations and Investor Relations, and with me on the call are Pete Canedo, Chairman and Chief Executive Officer, Andrew Rush, President and Chief Operating Officer, Jonathan Bailiff, Chief Financial Officer and Director, and Chris Edmonds, Senior Vice President and Corporate Controller. We hope that you have seen our earnings release, which we issued this morning, and it is posted in the investor relations section of our website at redwirespace.com. Let me remind everyone that during the call, Redwire management may make forward-looking statements that reflect our beliefs, expectations, intentions, or predictions of the future. Our forward-looking statements are subject to risks and uncertainties that are described in more detail on slide two. Additionally, to the extent we discuss non-GAAP measures during the call, please see slide three, our earnings release, or the investor presentation on our website for the calculation of these measures and GAAP reconciliations. With that, I would like to turn the call over to Pete. Pete?

Thank you, Nicole. Starting with our agenda, you can see we will start with a quarterly update from myself, then I will turn it over to Andrew, who will give some operational highlights for the quarter, and then he will be followed by Jonathan Bailiff, our new CFO, who will be giving the financial highlights. After we end our presentation, we will open the floor for Q&A. I also, like every opportunity, going back to slide six, to point out Redwire hardware. So, as you can see, this beautiful picture of the International Space Station. On the right-hand side, you will see our rollout solar arrays that were deployed last summer, a remarkable technical achievement with our customer at NASA and our partners at Boeing, and we're very proud of that. Next slide. Starting with the market overview, So market demand remains strong despite the broader macroeconomic environment. And this is primarily due to geopolitical competition for dominance across all segments of the space industry. There is a space station that is currently being deployed by China. We continue to have geopolitical space race with Russia. And this is driving a lot of demand in the industry. And it can't be underscored enough that this is a decades-long trend. This is not just a trend that is going on this year and will go away overnight. This is a decades-long race for competition in space, and that is driving a lot of demand across our industry, across all of the different segments, and we're going to talk about that further on in the brief. On the commercial side, commercial space adoption is proven a little bit slower than expected, but the capability development outlook is still very strong. There are a lot of plans on the drawing board for extraordinary space capability. We are partnering with a number of commercial entities, and although it is proving to take a little bit longer for some adoption rates and for some of these organizations to get their capabilities out, which does have an impact on near-term revenue, The plans are still there, and the capability is still in high demand. So this will attract future growth. But in the meantime, our long-term government contracts across the civil and national security segments that are primarily with government entities give us the financial strength required to remain patient while we wait for commercial space to reach its full potential. And, of course, there are some interesting developments that occurred in the last quarter, most notably the Russians' threat to leave the ISS. That has increased the momentum behind commercial space stations, such as Orbital Reef, of which Redwire is partnered on with our partners Blue Origin and Sierra Space. Again, this is creating many new high-value opportunities for Redwire. Anecdotally, it just so happened that the Russians made this announcement that they retracted later during the International Space Station R&D Conference in Washington. And the buzz that it created on the floor was extraordinary. And it really just underscores the imperative for a commercial space station. And so we're going to see in the next decade the development of these commercial space stations, and that's a huge demand driver here. for some of Redwire's unique capabilities. Moving to slide eight. A couple of key takeaways that are going to be discussed in greater depth throughout the brief. One is that our demonstrated heritage on early stage programs is creating much larger opportunities. We are establishing numerous toeholds on very large programs, and this is because of the heritage that we've been able to demonstrate in the past. I started out the presentation by pointing out our rollout solar arrays on the International Space Station. That is one example of how that deployment and the proven heritage that we established with that capability has garnered increasing demand for other organizations who need the same capability. The result is that revenue momentum in the second quarter is up 14.2% compared to the year prior and is up 11.7% sequentially. This is a result of this virtuous cycle that is being created as a result of our performance, leading to more contracts in higher growth product lines. We have many high probability bids in the pipeline, some that are actually equal to or greater than our total revenue for 2021 in terms of total contract value. So that just underscores the tremendous amount of opportunity there. So we're executing a classic land and expand strategy. We have deep customer relationships. We have a long history of working with the marquee customers in the industry. We now have proven heritage on a number of really critical IP-protected product lines, and this is leading to more and larger opportunities for our products. As you can see, our pro forma adjusted EBITDA in Q2 2022 was negative 4.1 million compared to 2.1 million in Q2 2021 and compared to negative 4.7 million in the first quarter. So our EBITDA is improving, but we are making a significant number of investments and this is having an impact on EBITDA. Andrew and Jonathan will get into greater detail, but as an example, one contributing factor is an increase in our R&D spend. In order to support our revenue growth, we are making a number of investments in research and development. And as a result, our research and development has grown from roughly 3% of revenue in 2021 to almost 5% of revenue year-to-date. But as a result of these dynamics in the first and second quarter, we are revising our guidance for the remainder of the year, and we now expect revenue to be in the range of $165 million to $175 million for the year. This is compared to our previous estimate of $165 to $195 million, so we are guiding towards the lower part of the range. That does still reflect anywhere from 20% to 27% revenue growth for the year, which we believe is healthy. And we are estimating pro forma adjusted EBITDA to be in the range between negative 2 million and 3 million as we continue to make investments and we work towards achieving operating leverage associated with additional scale. The investments, however, are starting to demonstrate signs of paying off. Our investments in business development, innovation, and scale drove Q2 2022 book develop performance to 1.68. And Redwire expects to achieve positive adjusted EBITDA in the second half of 2022, driven by this increase in revenue, as well as a change in a contract mix with higher gross margins. Moving to slide nine. This slide gives you a high-level overview of some of the market trends by industry segment. We continue to see strong growth opportunities in the national security segment in particular to include 40% growth in the SpaceForce budget requested for 2023, which is growing faster than the DoD budget top line. So in national security, which is a growing area, space in particular is an even faster growing area. So that, of course, gives us additional confidence in the demand for our sector. This is driven somewhat by that geopolitical competition. And that geopolitical competition goes well beyond just the US market. It also is stimulating additional demand in Europe. And we have seen many European nations are also planning to invest heavily in space in the future. On the civil side, we see a trend towards increasing commercial dependency. I already mentioned that there is an imperative on the civil space side for a commercial space station, but there are also the successes of things such as commercial crew that are continuing to drive new public-private partnerships that is increasing demand for commercial services in the civil space segment. And of course, on the commercial side, although there is high volatility, we do see accelerated growth potential as many of the new commercial business models prove themselves out. Although it is the segment with the most volatility compared to the government segments of national security and civil space, it is probably the segment with the greatest and fastest growth potential over time. Moving to the next slide. and diving a little bit deeper into some ties specifically to Redwire. One of the very exciting dynamics that has been occurring over the last two quarters is that Redwire is providing critical components to some of the fastest growing programs in these national security markets to include working with the Space Development Agency on their tranche strategy. We have built a history on working on many classified programs, and we continue to make investments in security infrastructure to include investments in personnel, facilities, contracts, and our robust security processes and policies. The important thing to note here is this is a significant barrier to entry for competitors who are also trying to work with these customers. No organization can just come off the street and immediately start working in the classified domains of the national security sector of space. So by Redwire having the history and the capability and the supporting infrastructure, this gives us a competitive advantage. And we continue to invest in this area to expand our ability to execute against a very robust national security pipeline. In the national security sector, we are positioned to capture a number of high-end bespoke portions of the market to include in the power and radio frequency systems. And our digital engineering sensors and cameras, as well as large deployable structures, are all high-growth, high-demand areas in fast-moving swim lanes for the national security customers. So we feel... that our product line in particular is well positioned for what the national security sector is buying. And as an example of that, we talked about last quarter our recent success in procuring the LINK-16 antennas for the SDA architecture. The net result is large multi-year contract awards in 2022 that have high probabilities of follow-on work. For those of you who follow the DOD sector, you know that the key is to be baselined and established at the beginning of a program. And once you're established in the baseline, as the program grows and leads further into the production phases, this is a very strong result for multi-year reliable revenues. So the DoD will continue to spend in space, and our technologies are being based on many of these high-priority programs. Moving to the next slide. On the civil side, I've already mentioned that plans for commercial stations in Leo are accelerating due to competition from the Chinese and the uncertainty with the Russian partnership on the ISS. Redwire in particular, with our on-orbiting manufacturing and leading space biotechnology solutions, is positioned as one of the few companies with actually proven capability to outfit these future commercial LEO destinations. So as I mentioned, this is going to be a decade-long development cycle between now and 2030, where organizations are going to be investing in key Redwire capabilities to outfit these future commercial LEO destinations. But we can be patient. because as we are developing the next generation technologies, we continue to provide our heritage technologies on the ISS, which will continue on to 2030. This gives us visible revenue streams in the near term as we await many of the future revenue streams on the commercial side to gain steam. In addition, Civil side of the business, we're really excited about the Artemis I launch that is scheduled to occur on August 29th. Of course, Redwire provides the eyes of Orion. We provide the camera systems for the Orion capsule as part of the Artemis program, so we're very excited to see that launch successful, and we're very proud of our participation in that program. Additionally, NASA is preparing to award a second human landing system award and Redwire is positioned to play a major role on multiple teams as a key supplier. So there is now a race to the moon to establish a permanent presence and ultimately to Mars. And this is creating additional demand for our capabilities where Redwire is an industry leader in such IP critical driven technologies like 3D printing in space. Moving to slide 12. Of course, in commercial space, we're offering platform-agnostic technologies as a diversified portfolio, and this is allowing us to get a diversified toehold with a number of key commercial entities across the industry. This diversification hedges the volatility associated with the commercial space segment, and In a very interesting dynamic, Redwire is establishing itself as a key player in the supply chain of many of these key commercial space capability providers. And, in fact, we are turning our customers' struggles with supply chain into a positive opportunity for Redwire because they are looking to strengthen their supply base on a number of key technologies. As a matter of fact, a number of companies have reached out to us to co-invest in developing products that are critical to their future plans where they feel that the supplier base is weak, which will ultimately lead to additional highly sought-after subsystems and critical components that we will be adding to the Redwire portfolio based on proven customer demand. So we continue to, but in addition to being a key supplier, we continue to demonstrate new potential markets. We announced the first sale of our space-manufactured optical crystals. So in some cases, we are a critical supplier, and in other cases, we are actually market makers. And certainly in the area of space-based manufacturing and biotechnology, we're a market maker. And we were very excited on the commercial front with our announcement today of our space biotech partnership with our partners at Eli Lilly, a clear demonstration that the future potential for space biotech is being looked at by many stalwart companies in the pharmaceutical industry. So we've talked about the imperative for a commercial space station. like Orbital Reef, and that is gaining significant momentum. And we have a number of IP-driven products that are absolutely critical to the success of those platforms. Moving to slide 13. Covering down our strategic positioning. So where does this leave us? Well, we're increasing our near-term investment in order to achieve higher revenue and profitability as we seek to gain operating leverage. Jonathan's going to cover that a lot in his segment as well. We are focused on operational efficiencies and financial resiliency to endure uncertain economic conditions. Our heritage, deep customer relations, long government contracts, and our ability to work in the classified domains allows us to be patient as we see the commercial markets develop over time. We are gaining many toeholds and improving our penetration in large multi-year programs with high production potential. This should lead to more rapid scaling in later phases of those programs. And, of course, customer satisfaction and execution success is a key catalyst for follow-on opportunities. This is part of our land and expand strategy and is leading to significant momentum in our pipeline, which Andrew will talk about in greater detail. So at the end of the day, what's very exciting about Redwire is we have many modes. We have our existing flight heritage that just cannot be created overnight. We have deep customer relationships that are leading to co-investment to improve the supply chain. We have diversified products across all the different segments, but in particular in the commercial segment, this is giving us some resiliency opportunities against the volatility. We have long-term government contracts, which allows us to be patient. Unique facilities to include an exciting new facility that Andrew's going to talk about out in Goleta, where we're going to build the largest solar array ever to be deployed. Strong IP, particularly in the area of biotechnology and in-space manufacturing, and of course that classified security infrastructure. These all together provide us a unique sustainable competitive advantage as part of our positioning as the market grows. So as you can see, Redwire's products and services of offering our flight-proven, wide-reaching, strategically diversified products position us well for the future. To further expound on that, I'm now going to turn it over to Andrew, who will cover the operational highlights for the second quarter.