Q3 2021 Rada Electronic Industries Ltd Earnings Call

Yeah.

Peter.

Welcome to the conference center lean towards one operator.

Yeah.

Okay.

Hi.

Thank you.

Welcome to the company.

Hello, Kartik your name please.

Yes, it's David Brown.

David brand.

No David Brown likely cover.

Okay. Thank you David.

And your company please.

Yeah.

Era, that's a I E R. A.

Okay, I think silke, let's do now.

Thank you.

So our top line in 2023 and ensure continued growth.

Beyond that we expect disciplined breaking leverage which we have achieved to date to continue supporting our ability to further grow our profitability beyond the current levels.

So in summary.

Our results show, we are currently experiencing significant growth in our solid margins below our CEO a porphyry at a much higher rate.

While budget, an additional metals caused short term delays in the U S market, we are very experienced.

Getting these markets and our structure to quickly take advantage of a rising opportunities and serve the 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 seasonality.

Thank you Tobey the day to everybody you can find our results on the press release, we issued earlier today as Debbie 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 $32 million up 57% year over year.

Margin in the quarter was 41%.

238% in Q3 of last quarter.

Operating expenses of $7 million compared to $5 8 million.

In Q3 of last year, I'll remind you that our current level of operating.

Operating expenses for both our current and expected operation in the show to meet them. So opex.

<unk> to grow at a much slower pace than revenue.

Hence the business start contains additional operational leverage with the potential to further improve the 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%. This is an EBITDA of $3 1 million or 15% of revenue in Q3 of last year.

I would like to summarize and point out some highlights from our balance sheet as of September September 32021, we had $86 6 million in cash and <unk>.

<unk> financial debt.

Shareholders equity stood at $150 4 million financing, 77% of our balance sheet.

And up from $72 million.

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 increased inventory levels to ensure availability of components for our ongoing production.

If at the end of the third quarter, our inland inventory levels with increased to $38 1 million from $28 8 million.

Is it 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, let's now open the call for questions operator. Please.

Thank you ladies and gentlemen at this time, we will begin the question and answer session.

Question. Please press star one if you wish to cancel your request please press star two.

Using speaker equipment condiment kindly lift the handset before pressing the numbers.

<unk> will be Paul in the order. They are received please standby while we poll for your questions.

The first question is from Greg Konrad of Jefferies. Please go ahead.

Good morning, and good quarter.

Thank you.

Maybe you could start and you're thinking about the growth in the quarter I mean, maybe what were the top program primaries and then.

You mentioned a little bit around 2022.

Do you see a different credit program kind of driving the growth into next year, just thinking about the revenue cadence.

Yes.

The driver for this quarter are mainly the I am sure.

Of the U S Army.

I am sure.

This year will be about 25% of our total revenue with the company for this is a very.

Significant their program debt maturing to production in <unk>.

On the ground almost profiled already drawn of <unk> the usual stuff continues.

So thats the this quarter and also it is kind of spread out over the year and also in.

In the current quarter it will be similar.

However, some of them in in addition, with however in addition from the activities.

Categorized as urgent need until not so long ago like the Air Force base with defense a bug.

And the focus on their requirements are maturing into line items in the in the budget as we had identified so it should affect the.

And next year as well.

And then just on the margin.

You talked about kind of getting to 20% and you're kind of well above it this quarter.

A bit last quarter.

The drop through sequentially of course, 50% EBIT margin I mean have you reset the margin kind of.

The numbers you've talked before how are you thinking about that.

It takes on kind of the 25% plus margin in the quarter.

Yes.

Yeah.

As I mentioned it is a bit early compared to our initial plan.

Because we are efficient in the in the.

Also.

With structuring the our production lines investing in the test equipment getting the appropriate people and and in parallel to recruit the needed people to implement all of these are design and development plans and we are stabilizing our capex so altogether.

It's actually you know.

Kind of surfaces of the inherent margins that we have in our business and we are very happy with that.

There is a limit to this we're 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 the.

There is still room to grow above the above the current.

Operating in the <unk>.

EBITDA margins that we have the operating today.

In.

Even though the gross margin is fine.

One to grow by one or 2%, but you know we are reaching there we are reaching the point.

Thank you I'll leave it at scale.

Thank you.

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

Yes.

Yes.

Hmm.

I guess on consumer.

Consumer.

Can you talk a little bit.

The active protection.

Matson snacks maybe.

Alright.

We are in between.

And we want Inscape mid may mid teens in that path.

Okay.

Well Aps is as I said for many years before renting.

It is waking up.

We started with Aps back in 2006 events.

And we've been waiting for 15 years for these moments to come so we are under contract in Israel.

Elbit, Ireland fifth we are cooperating with Elbit since 2008, where we are.

Under contract and he's right as I mentioned that also in either these are firm contracts and their delivery dates are starting.

You'll know towards the end of next year, but mainly in 2023.

The majority of it and we have been selected together with IMI.

<unk>, a while ago two three years ago for the Bradley in the United States. There were delays, but we are in a good shape.

So our opinion, we the results our growth of the testing and there are signs just months ago are there you will say timeframe or the immediately the U S. Army mentioned that they are going to to make it happen hopefully a long day of 2022 in testing.

2023.

In order of order production order for 2023 or four months, but there are good signs so that's the general.

Kind of the market.

Some additional potentials.

In other places in the World and we do believe that also in the U S.

The quantities will be more than one broadly brigade once we pro form.

On the competitive landscape funeral down mainly to Brian's neuro, which are both Israeli ASIC software with the trophy and the Elbit IMI with the Ireland piece, we are in the Ireland piece, we are the incumbent radar in the iron Fist.

So for the near term we are well you know.

And.

On the other hand, you don't you do see long term.

Initiatives like.

Like in the U S. The main until a while ago was map modularity protection.

They change it probably two vps here we are.

We're working also directly with the.

With the army.

To prove out our ability or doing.

Patient walk directly vehicles, the modularity of the solution.

<unk> opened Stockholm to every central in the sector to come into the picture.

Believes that we are also hearing in good shape there.

This is a long term effort and something similar is happening.

UK they call it mix, but in essence, the same natural our approach there are very good demonstrations of <unk> were.

Published the biodiesel rather UK in September around the DSC, iPhone, France and Sweden.

Mission and we are proud 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.

Future, which is 2022 23 and probably also beyond.

Mike.

Sure.

Maybe.

You mentioned that you have there.

Correct.

It's not.

Hum.

We ended the year.

So there is something.

Thanks.

<unk>.

Okay. This situation of the market.

Our market.

Categorized as new and emerging actually show that vary from the very beginning that we need to work with high inventory levels and instead of just in case just in time two world just in case and 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 coffee coffee that happened we were kind of prepared for that because when the semiconductors became staff we had them for almost a year ahead and recently, we decided to increase our inventory.

Especially around semiconductors to more than a year ago. So I think here we are in a good shape. We don't have such would as of now any hiccups with our supply chain and sometimes we see our customers asking all of our products to be delivered earlier than the actual need in order to be sure.

But you know from us nothing really come as a surprise, so we gave them with confidence level globally.

Thank you.

<unk>.

Thanks Peter.

Next question and client.

The next question question is from Brian <unk> of Alliance Global Partners. Please go ahead.

Hey, guys. Thanks for taking my questions.

You gave us U S revenue.

Sorry, you gave us revenue companion show ads for the year about 25%, but 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 uncertainty in the near term and you guys lumpiness potentially that we talked about.

Does that suggest this trend we've had for so many quarters of sequential revenue growth.

Buyouts.

Last year, and maybe what sort of seasonality.

The 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 revenue this year it will be around 70%.

I am sure being the big the biggest chunk.

So yeah. The U S is the 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'll know when there are.

Lumpiness.

In the U S. We compensate.

From other places and that's what happened to us.

Other places they actually close down because of Covid the U S.

Blooming so you'll know it's a balance between the U S and the rest of the world.

In the long term medium term lets say look long term, we do believe that RFP mentioned filenet.

<unk> been in the last five years.

Even though we are showing there is something like I don't know, maybe 'twenty sequential quarter of growth.

Which is unique I cannot.

Guarantee that each and every quarter will be better than the previous one, but we do believe that our annual earnings.

A forecast as we have proven as I said Amit.

I don't think that this level of numbers. It is very important that each and every quarter would be higher than the previous month as long as you keep the decent level and meet the annual growth. So you know there is some and clarity around the U S opening up around the budget, mainly notwithstanding that one sorry.

But I think it will be soon enough.

Clear.

And then with your comments on obviously, we all know changing priorities of the new administration in the U S.

Not so much a U S project.

I wouldn't change the timeline of your Aps program and the new waxes it can be maybe delayed even further.

Maybe any update on how that's being impacted.

I don't I don't think it affects our Aps segment as it may.

<unk> changed the face of the of the Shaw the serum and change the pace with short term the United States I mentioned, but.

We are addressing urgent needs.

And their modernization priorities. So I don't I don't think that even in the midterm we will suffer.

But you know everybody withdrawal from Afghanistan in a hasty matter.

The military takes time also tool to analyze.

It is what are we going to do next and when what they know, but when and so on.

The Aps Euro since it is 2023 and the need is very clear.

Okay.

Around there.

The U S <unk> market does not affect the Aps at all.

Will it continue it is actually.

Showing the 45th and our expectations to start deliveries in 2023 is very fairly to my opinion.

Lastly, I think you made a comment that you have the components and our inventory.

Inventory to meet.

Our 2022 demand should we still expect given I'd take that lead times are much greater and that will continue to increase.

Inventory over the course of the next few quarters and that is the plan. Some degree you can.

Yes, we will do it as neither as you know and we are looking at 12 to 15 months ahead.

We haven't really wide pipeline.

Like what can happen in this timeframe, we do our production plans based on that.

The you know if you build it they will come and then we adjust our inventories accordingly.

They have been.

Thank you.

Yes.

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

Yeah.

Good morning, congratulations on the quarter.

So just to clarify.

This quarter it sounded like international sales were more heavily weighted relative to the delayed sales in Q3.

You called out.

Drawn down program pull out for you all but I was just wondering if.

Any other notable international programs in it since then.

Material ramp in Q4 for India or PBS.

Significantly longer just given the environment there.

Okay first of all maybe I wasn't clear on the onshore. This the biggest program that we have in the quarter that we're reporting.

And in the complementary programs other ground zone are the only drawn.

Other customers that we are in.

East Asia and so on.

Sure.

Okay.

So.

No.

It's not that the U S was up I think a bit confused it with the new business, but revenue wise.

The.

The U S is still the dominant the profits we felt.

Okay.

About the Indiana, Illinois, Indiana, as a potential and thank you all before.

India is a potential we ever an mou with the profit will go through the JV, we see the India market showing signs of opening up maybe around the counter UAV.

It's too early too early to discuss lumpy flow model, we will make the notice.

Okay, Great and just on the directed energy sure variance when when might you expect.

The government will reach a decision around that do you expect that that might be in 'twenty, two or 2020, but we'll hear more details about a down select there.

I think it will be 2023.

On the earliest.

Okay, great. Thank you.

Yes.

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

Hi, guys congratulations on the quarter.

Couple of quick questions.

And if not I'll.

Put out a release about 204 million.

Additionally to the contract would you be in September.

Does that have any bearing on what your backlog looks like et cetera.

We are in sight.

Part of it.

Gotcha. So so that just gives you a little bit more visibility on what's to come there yes, no we are deliver.

Alrighty.

Gotcha Okay.

After the fab Alright, and then I'm just wondering what as you roll on this.

Lots of our Spider.

Are you involved.

I guess, Chuck procurement going on.

Yeah, the Czech consumer is it something that the debt is equal breaking for a few years.

And we are not there.

But there is an opportunity for us we are working closely with.

On various.

And renewals.

And again, it's a bit too early to discuss.

Gotcha.

And then there was a huge.

Air Defense contract in Poland.

Hum local content et cetera is there some role.

Sure.

Type systems there.

Through our own opinion, yes, but.

After working with them six years, we sold a note like <unk> that they decided to do it in region indigenously.

Probably they have enough time to do that and we are just starting and we are active there for a few years now where we will see you know we are not.

Offended by any decision we continue working there I do believe that it is.

Not sure of the counter UAV solution of ours is relevant.

But yes, we can.

Yeah promo.

Awesome.

And then lastly.

Back on the.

The energy.

Are you actually working with that.

Okay.

Order system.

And are there things we need to do.

So we're targeting energy weapons.

From your current systems.

Even though the effort is the high power microwave to being sold on the Stryker, it's not a program yet.

We are the incumbent the radar in the central suite of the I am short of the insurers.

We don't see and we hear from the army a similar lines.

Your line, we don't see a need to replace the sensor suite because it can work with XI microwave is kind of walk with ion energy laser. It works is the kinetic solutions that they currently are employed.

I do believe that we will we have good chance to stay the incumbent tradeoff for the all the variants that.

The future will introduce.

That's great. Thanks, so much guys. Thank you.

Yeah.

Thank you if there any additional questions. Please press star one if you wish to cancel your request. Please press star two please standby, 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.

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 Robin will take export in mid November and the Needham growth conference in mid January.

So you know if your if you'd like to stick to our for these events.

Do we hope to speak with many of you as many of you as we can and you can also.

We are in direct contact with us through our IR team.

We look forward to speaking with you next.

Next quarter. Thank you.

Thank you. This concludes the Rada third quarter 2021 results conference call. Thank you for your participation you May go ahead and disconnect.

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