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Edited Transcript of RADA earnings conference call or presentation 10-Mar-20 2:00pm GMT

Q4 2019 Rada Electronic Industries Ltd Earnings Call

NETANYA Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Rada Electronic Industries Ltd earnings conference call or presentation Tuesday, March 10, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avi Israel

RADA Electronic Industries Ltd. - CFO

* Dov Sella

RADA Electronic Industries Ltd. - CEO

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Conference Call Participants

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* Brian David Kinstlinger

Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst

* Kenneth George Herbert

Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst

* Michael Brcic

National Securities Corporation - SVP of Investments

* Scott Huntington;Bodell Overcash Anderson & Co;Adviser

* Ehud Helft;GK Investor Relations;Co-founder

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Fourth Quarter and Full Year 2019 Results Conference Call. (Operator Instructions) 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 now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

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Ehud Helft;GK Investor Relations;Co-founder, [2]

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Thank you, operator. I would like to welcome all of you to this conference call and thank RADA's management for hosting this call.

Earlier today, RADA released its results for the fourth quarter and full year 2019. By now, you should have all received a copy of the press release, which is also available on RADA website at www.rada.com.

With us on the line 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 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's CEO, Mr. Dov Sella. Dovi, go ahead, please.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [3]

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Thank you, Ehud. Good day to our call participants, and welcome to our fourth quarter and full year 2019 results conference call. Let's start with the results summary and guidance.

Obviously, we are very pleased with our Q4 results, especially with the strong growth in the revenues, which surpassed $14 million, the highest ever in RADA's history and up over 71% when compared to the fourth quarter of '18. For the year, our revenues were over $44 million, $44.3 million to be exact, up 58% over last year, the highest ever in our history and ahead of our full year target which started at $40 million and then updated to $43 million.

Furthermore, even while we significantly increased our OpEx in 2019 due to the high investments in our U.S. presence and the development of our next-generation radars, the very strong revenue growth and stable gross margin throughout the year enabled our EBITDA to become positive in the second half of the year. In early January, we issued our guidance for 2020. We expect our revenues to exceed $65 million, representing over 47% growth in 2020. Furthermore, we expect that RADA will continue to grow on a sequential basis through -- quarterly sequential basis throughout 2020 on the top line, which implies we will surpass the breakeven point and grow profitability during the year. This type of growth is the fruit of the seeds we planted in the past few years as we aggressively invested in new radars technology. It also shows that our markets, both in the U.S. and globally, have now awoken and are aware of the offering, especially counter-drone and point defense, while active protection is still in the waking up stage. Bottom line, we are on track and what we have been looking forward for many years has finally arrived.

Let's talk a bit about the general picture. The interest and need for the solutions in which our radars are a key part is global. And considering the addressable market size, we believe this is just the beginning of a sustained growth period. The second half of 2019 has indeed been the start of the transition from the initial stage to the growth stage. Market behavior in the U.S., but not only in the U.S., other places, including Israel and elsewhere in the world, is beginning to see these new capabilities which our radars are enabling as critical for defense needs. We therefore see programs moving from the fulfillment of urgent needs to multi-year acquisition programs, which should enable us to start building backlog along 2020.

About our sales progress. As many of you know, in the United States, we are currently targeting a number of programs. Let's start talking about the Bradley Active Protection program. We are at the heart of IMI -- Elbit/IMI Iron Fist Active Protection System, which is in process of being installed on the U.S. Army's Bradley Infantry Fighting Vehicle. And I would like to touch briefly on this program, which has been in the news lately. There are 3 phases to this program: the first one, characterization, was completed in 2018; the second phase, qualification, is ongoing, planned to be completed within a year; and the third phase is production for the first brigade. The original plan was to start equipping the first brigade by the end of 2020 in parallel to qualification. The project has been pushed back by 2 years and is now planned to be performed in sequence. We do hope that successful qualification has the potential to bring the schedule forward, but currently, we cannot -- we don't see formally something around there.

I want to highlight that even while this project has been delayed, it was planned to first impact our revenues in 2021. At this stage, we see some other programs that are being brought forward in the U.S. and elsewhere that will compensate for any of these delayed revenue.

We estimate that market [status] for APS systems is at about $3 billion in the coming decade, split evenly between U.S. and the rest of the world, and we feel very well positioned right now. Despite the Bradley delay, we stand by and feel even more confident with regard to our 2020 expectations than we were a few months ago.

Another program is the short-range solutions -- short-range air defense solutions for the Marine Corps in the U.S. Army. We estimate that the short-range air defense market will be a $2 billion market over the coming decade, also split evenly between the U.S. and the rest of the world. We are currently serving the U.S. Army IM-SHORAD program, providing the protection for 4 battalions, air defense battalions. We are also providing systems to the Marine Corps ground-based air defense program. In addition to the APS in SHORAD to the maneuver force, base in point defense has been becoming recently a clear need, mainly since the hostile attacks in the Near East by Iran and its allies. Beyond what has been delivered to date, we see significant upside from follow-on orders to the initial orders that we have delivered in the last 2 years. Our pipeline continues to broaden with significant prospects. Potential orders are especially strong in the U.S., while other international markets are increasingly growing.

Let's -- before concluding, let's talk a bit about the coronavirus and its effects on our business. As of now, it had no impact on our sales and deliveries since we do not use Chinese parts or materials, on one hand, and the maintain inventory levels to support immediate needs, on the other hand. However, if current travel restrictions continue for an extended period, it will likely have an impact on our business development efforts that may have an effect maybe later this year and into 2021. We also assume that the situation in China may affect availability and price of global supply chain as demand for non-Chinese parts and materials may rise and post allocation of supplies that we consume. All in all, we do wish well to all those impacted by this virus and hope, as all of us are, that the global situation will stabilize soon.

In summary, these are exciting times for us, finally reaching the stage we have been planning for, for quite a while now. We have mature solutions with a strong performance of our price advantage versus competition. In view of the opportunities ahead, RADA is positioned for significant growth after investing in our production infrastructure, both in U.S. and Israel, leading radar technology which keeps evolving, addresses the demanding needs of this growing market for the coming years. And overall, we are very pleased with our performance in 2019 and look forward to continue growth in 2020 and the years to come.

I'd like now to hand over the discussion to Avi Israel, our CFO. Avi, please go ahead.

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Avi Israel, RADA Electronic Industries Ltd. - CFO [4]

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Thank you, Dovi. Good morning to our U.S. friends. Good afternoon to our Israeli ones. You can find our results on the press release we issued earlier today, and I will provide a short summary of the fourth quarter and the full year results.

Fourth quarter revenues were $14.4 million, up 71% year-over-year. For the year, revenues were $44.3 million, up 58% year-over-year. Our gross margin in the quarter and the full year was at a stable 36% of revenues, the same as reported in the Q4 of last year as well as in 2018. This is the level we currently expect and are happy with.

As you know, we continued to make significant investment in 2019, especially in R&D and marketing as well as our infrastructure in the U.S., so our operating expenses grew. We expect operating expenses to stabilize at around current fourth quarter levels throughout 2020.

Operating loss was $209,000 compared to $102,000 in the Q4 of last year. Operating loss narrowed from $494,000 in the prior quarter. For the year, we reported an operating loss of $2.1 million versus an operating income of $62,000 in 2018.

Net loss attributable to shareholders for the quarter was $295,000. This is compared with the loss of $86,000 in Q4 last year and $686,000 last quarter. For the full year, net loss attributable to RADA's shareholders was $2 million versus $163,000 last year. We reported a positive EBITDA for the quarter, $587,000, versus $401,000 in Q4 of last year and $105,000 last quarter. Full year EBITDA was $407,000 versus $1.8 million last year.

I would also like to summarize and point out some highlights on our balance sheet. As of December 31, 2019, we had $13.8 million in cash and no financial debt at all. On January 10, 2020, we significantly strengthened our balance sheet by raising approximately $23.5 million from investors in the U.S., this is after expenses, and the secondary offering in the United States industry. At year-end, our shareholders' equity stood at $41.4 million financing 64% of our balance sheet.

In summary, as Dov mentioned, and as the financial results demonstrate, we are very pleased with our progress and on track. That ends my summary.

We should now open the call for questions. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Ken Herbert from Canaccord.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [2]

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Avi, I just wanted to ask you, first. For the 2020 outlook, you've indicated that you expect quarter-to-quarter, some sequential improvement both in revenues and in profitability. As we think about the revenue line, can you maybe provide a little more granularity on maybe sort of specific first quarter or first half, or maybe a little more parameters around how exactly that acceleration will take place over the year?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [3]

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As you can see, our fourth quarter, Ken, is -- we reported $14.4 million in revenues. And based on the current pipeline and maturity and backlog and so on, we can point out where the revenues would come from, especially in the first half. Nevertheless, we are working in this kind of environment for the last 2 to 3 years, so we developed our internal mechanism to identify the right potential and matureness of the pipeline. So yes, we keep -- considering the fact that we are mid-March already, we know what the revenue numbers will be in Q1. We have enough pipeline and backlog for -- to support continuous growth in Q2. And we have the necessary pipeline to support continuous growth in Q3 and 4. So we believe that the $65 million that was reported is -- quarter by quarter, will show growth and will achieve the $65 million that we reported.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [4]

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Okay. That's helpful, Avi. I guess maybe one other way to think about it is last -- in '19, first half revenues were roughly 42%, 43% of the full year. Is that sort of mix or that -- the cadence there may be the right way to think about it?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [5]

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I believe so. I believe that you are correct. You are not highly mistaken.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [6]

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Yes. Okay, great. And if I could, you -- obviously, a little bit of sounds like push to the right on Bradley and Active Protection. Can you just maybe go through a little more detail, Dovi, on sort of the next milestones on that program and where you maybe see risk over the next year to 2 as you move in from the qualification phase ideally to production in the future? But what are the next key milestones on the Bradley APS system we should be thinking about?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [7]

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The qualification is a process that starts very soon. I mean we are working on that together with IMI continuously, but there are gateways in front of the customer, tests and demonstrations. It starts here in Israel soon in a few weeks, then it goes to the United States. This is why this process takes, let's say, a year. And at the end, or even interim conclusion, I don't think we will see any specific milestone until it is declared as a success, hopefully, and that's what we are here for. And the biggest milestone is to get enough funding by the U.S. Army to upgrade the Bradley to version 4 that will enable the installation of the -- our system to Bradley. So probably within a year, you will see favored notifications coming from IMI mainly.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [8]

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Okay. Okay, that's helpful. And just finally, as we look at the new facility here in Maryland in the United States that's ramping up, can you just provide any more detail on how that's going? It sounds like, obviously, everything is going well, and you just sort of produced and tested the first articles there. But certainly, you've got a lot of investment you've put in and ramp up there. What kind of cadence should we expect out of that facility this year? And just any more commentary on how that's ramping up.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [9]

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Currently, we plan to deliver over 200 radars to the U.S. market from our Germantown facility, and if we are lucky, even more. The ceremony of the first radar launching was done 2 weeks ago with the presence of the Maryland -- a Maryland Congressman, Mr. Trone. Everything is on track. I mean we thought at the beginning that we will be able to complete everything by end of last year, but we took into account that it may be -- may slip to the first quarter, and we are here. And very soon, hopefully, this -- not hopefully, but the plan is that by the end of this month, we will start delivering radars to customers from our Germantown facility.

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Operator [10]

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The next question is from Brian Kinstlinger from Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [11]

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Great. Can you hear me?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [12]

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Yes.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [13]

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Great. I think the problem with the Bradley, from what I read, was not enough power to support the Iron Fist. Do you have other programs where you see this as a potential issue? I guess you've had a couple of wins, and I'm wondering if that power of those vehicles has been evaluated given the lessons learned.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [14]

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To our best knowledge, yes, mainly since these are new vehicles that are upgraded before the decision to select the Active Protection, and they took the requirements of Active Protection and modern requirements into account, you have to remember that the Bradley is a veteran vehicle that sooner than later, the U.S. Army wants to replace it, and they call it [OMF-free]. So I think the situation of the Bradley is unique.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [15]

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Okay. And you mentioned funding for the Bradley as maybe the one risk, and I haven't really read up on that. Is there contention on whether that would be funded for this fiscal year or not? Or is it, in all likelihood, expected to happen?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [16]

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Formally, it will not happen this year.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [17]

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I see. That's why it's 2 years now, not 1?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [18]

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Yes.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [19]

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Got it. Okay. In your original guidance, I'm curious, although it's unchanged, was there some benefit in the second half of the year for this? And can you quantify that?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [20]

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No, no.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [21]

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Okay. On the other hand, we have -- we do have a few other APS contracts that you announced for Iron Fist. So I'm wondering, would there be a contribution that you can quantify at all that's expected in your 2020 guidance from APS programs? And then should we expect a significant ramp in 2021?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [22]

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I don't expect it to be significant in 2020. It is still in the low quantities of 5-year tender for prototypes, mainly in testing. And since we are -- we have been selected and potentially going to be further more selected to -- in production of new vehicles or upgrade, then these programs are prolonged, then they'll spread over a few years. So significant revenues will start only in 2022 really.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [23]

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Got it, okay. And then I'm wondering for maybe the fourth quarter, we talked about different geographies. Can you break down roughly, I don't need the exact percentages, of where revenue is by geography compared to maybe a year ago?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [24]

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It is very similar in geography compared to the year ago. U.S. is about -- around 50%. Maybe it will increase this year a bit. Israel is a big chunk, mainly to export full integrators, but still. And the rest of the world is gradually increasing. It's about 30%.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [25]

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30% is not so small.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [26]

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Yes.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [27]

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And then to the first question that was asked, and is my final question, based on what you know, as the quarter is almost done, is the first quarter expected to be stronger than the fourth quarter in terms of revenue? Is it more even? Or is there seasonality that makes the first quarter step back from the fourth quarter?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [28]

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What we can say is that the fourth quarter of '19, which we just announced, is the base line to the sequential growth that we expect quarterly along 2020.

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Operator [29]

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The next question is from Scott Huntington of Bodell Overcash Anderson & Co.

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Scott Huntington;Bodell Overcash Anderson & Co;Adviser, [30]

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I have a couple of questions here for you this morning. First, congrats on Germantown. And I'm just wondering regarding Germantown, as you ramp up, are your breakevens going to be similar to volume in Israel? And when do you anticipate the volumes being sufficient to allow you to be breakeven?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [31]

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Breakeven company-wise or...

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Scott Huntington;Bodell Overcash Anderson & Co;Adviser, [32]

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No, no. No, the U.S. installation.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [33]

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The U.S. installation should become profitable this year.

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Scott Huntington;Bodell Overcash Anderson & Co;Adviser, [34]

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Beautiful. And in past releases, and I'm probably guilty for not trying to frame the window a little better, but you had mentioned 4 new products that anticipated being released the first of the year -- after the first of the year. And of course, as I sit in my chair, I like I think it's January 1. But that was never stated by you, folks. I'm just wondering how the new products are moving along and when we can anticipate a release of such.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [35]

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One was already released. It was a radar for APS along 2019, 3 more will be released end of 2020 and not later by mid-2021.

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Operator [36]

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The next question is from Michael Brcic of National Securities.

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Michael Brcic, National Securities Corporation - SVP of Investments [37]

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Two real quick questions. One is, with what's been going on in China, et cetera, I assume it doesn't affect your supply chain at all?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [38]

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Your assumption is correct.

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Michael Brcic, National Securities Corporation - SVP of Investments [39]

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Okay. It's good to have it on paper. Secondly, now that the Germantown facility is going to be up and running, is that going to take away from capacity in Israel right now? And how will that affect overall margins?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [40]

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First of all, the growth is not only in the United States. It's about 50%. So we do believe that the load in Israel will not be reduced because of the U.S. ramp up and it will stabilize in even quantities. What was the second question?

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Michael Brcic, National Securities Corporation - SVP of Investments [41]

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No, that was it, just the overall margins. So you aren't sort of...

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Dov Sella, RADA Electronic Industries Ltd. - CEO [42]

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(inaudible) at the corporate level, and we do not expect this to change.

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Operator [43]

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(Operator Instructions) There are no further questions at this time. Mr. Sella, would you like to make your concluding statement?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [44]

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Thank you.

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Operator [45]

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Excuse me. There is an additional question. Would you like to take another question?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [46]

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Sure.

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Operator [47]

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Okay. There's a further question by Scott Huntington of Bodell Overcash Anderson & Co.

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Scott Huntington;Bodell Overcash Anderson & Co;Adviser, [48]

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Yes. I'm sorry for jumping back on. I just got thinking a little bit about the 3 releases scheduled for later in 2020. And I wonder if that has been scheduled all along, or if there's been a snafu or delay, or is everything rolling along according to game plan?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [49]

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Everything is as planned.

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Operator [50]

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Mr. Sella, would you like to make your concluding statement?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [51]

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Yes. On behalf of the management, I would like to thank you for your interest in our business. We look forward to speaking to you and updating you next quarter. And have a good day. Thank you. Bye-bye.

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Operator [52]

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Thank you. This concludes the RADA Electronic Industries Fourth Quarter and Full Year 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.