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Edited Transcript of RADA earnings conference call or presentation 19-Nov-19 2:00pm GMT

Q3 2019 Rada Electronic Industries Ltd Earnings Call

NETANYA Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Rada Electronic Industries Ltd earnings conference call or presentation Tuesday, November 19, 2019 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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* Austin Moeller

Canaccord Genuity Corp., Research Division - Analyst

* Brian David Kinstlinger

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

* Michael Brcic

National Securities Corporation - SVP of Investments

* Ehud Helft

CCG Investor Relations Inc. - Managing Partner - Israel

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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 Third Quarter 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 & 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?

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Ehud Helft, CCG Investor Relations Inc. - Managing Partner - Israel [2]

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

With us today on the call 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 a 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 hand over the call to RADA's CEO, Mr. Dov Sella. Dov, go ahead, please.

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

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Thank you, Ehud. And good day to our call participants, and welcome to our third quarter of '19 results conference call. I'll start with the results summary and guidance.

I have to mention that we are very pleased with our Q3 results, especially with the strong growth in revenues, which surpassed $11 million, and is the highest ever in our history. Q3 is up over 60% when compared to Q3 of 2018. Furthermore, we did not sacrifice gross margins to achieve this growth. Gross margin is maintained at around 36%, per our targets.

We are comfortable with the guidance of 2019. Expectations are for revenues to surpass $43 million this year, which implies continuous growth into quarter #4 with revenues over $13 million that we expect. It is translated to at least 15% sequential quarterly growth -- revenue growth quarter by quarter, and that represents year-over-year quarterly growth of over 54%. This type of growth is the fruits of our -- of the seeds that we have planted in the few past years as we aggressively invested in new radar technology. And it also shows that our markets have now awakened to our offerings, especially the counter-drone segment of this market. Bottom line is that we are on track and are very excited over what we are to face in the coming quarters.

Let's discuss the general picture a bit. The market for radars is here and now, with an increasing emphasis on counter-drone needs and the continued development of active protection segment, a moment we've been working towards for many years. The interest and need for the solutions in our -- 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. We are at an inflection point from the initial stage to the growth stage of the market.

Market behavior in the U.S. and also other places like Israel is changing from fulfillment of urgent needs to programs of record or long-term program, and it will help us to establish a backlog for a few years ahead. We expect it to happen along 2020. We see significant upside from follow-on orders to the initial orders sold to new customers, further validating our radar technology solutions. And our pipeline is continuously growing and broadened with significant prospects. Potential orders are especially strong in the U.S., while other international markets are increasingly growing. In summary, these are exciting times for the RADA team, and we have been planning for that for many years now.

RADA's future growth will be fueled by global sales of our radar technology to an attractive mix of growing markets. We have mature solutions with a performance-over-price advantage versus the competition. In view of the huge opportunity ahead of us, we are positioning RADA for significant growth by investing in production infrastructure, both in the U.S.A. and Israel, and by developing the next generation of our radar technology to address these demanding needs of these growing markets in the coming years. We expect our operating expenses to stabilize in the near term and along with anticipated growth, to reach profitability during 2020. And in overall, we are very pleased with our performance in Q3 and the whole of 2019. We are on track and positioning the company for accelerated growth in the future.

I'd like to hand over this discussion to Avi Israel, our CFO. Avi, please.

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

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Thank you, Dov. Hi, everybody. You can find our results on the press release we issued earlier today, and I will provide a short summary of the third quarter results.

Third quarter revenues were $11.3 million, up 60% year-over-year. Our gross margin was stable at 36% of revenues, same as reported in Q3 of last year as well as in the last few quarters. This is the level we are currently expecting and happy with. We continue to make significant investments, especially in R&D as well as our infrastructure in the United States, so our operating expenses grew. Our aim is to bring operating expenses towards the $20 million annual range, which we believe will be sufficient to support our current expected growth.

R&D expenses increased to $1.9 million, up from $0.8 million in the same quarter of last year. This was slightly higher than the R&D expenses of the previous quarter, which stood at $1.7 million.

Sales and marketing were $0.9 million compared to $0.7 million in Q3 of last quarter. This was marginally below that number in the last quarter. G&A expenses were $1.8 million compared to $1.1 million of last year, again a significant increase related to our newly established U.S. presence. The G&A was at a very similar level to that of the prior quarter.

Operating loss was $0.5 million compared to a loss of $0.1 million in Q3 of last year. The operating loss narrowed from $0.8 million in the prior quarter. Net loss attributed to shareholders for the quarter was $0.7 million, this is compared with a net loss of less than $0.1 million in Q3 of last year and $0.6 million last quarter.

I would like to summarize and point out a few highlights from our balance sheet as of September 30, 2019. We ended the quarter with $16.7 million in cash and no financial debt at all. Our inventory increased significantly to $17.3 million from $11.2 million at the end of 2018 in order to support expected product delivery in short cycles.

Our shareholders' equity stands at $14.1 million, financing 72% 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 Brian Kinstlinger of Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [2]

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I wanted to start with some big wins in APS. First, BAE was awarded a contract to integrate Iron Fist by the Dutch Army for the CV90. And I assume, obviously, as a supplier, to me, of radars this will benefit you. Can you talk about when this contract is expected to begin contributing to your revenue and maybe the magnitude of what this means to RADA?

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

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Yes. We are not on contract here. It was noticed that it was awarded, but we expect the contract to be received in the first half of 2020. We don't expect this program to affect our revenues next year.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [4]

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So it's a 2021 event?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [5]

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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 [6]

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Great. And then sticking with APS. Maybe update us on the plans for the U.S. Bradley. I saw the protest by DRS was unsuccessful, and they expect a contract, I think, in January 2020. So is this -- will this be a contributor to 2020 revenue? And maybe share maybe the impact of how you see this contract.

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

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During 2020, it will be mainly testing and validation, and the revenues are expected to start maybe by the very end of 2020 but mainly in 2021.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [8]

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Great. And then lastly, with the 3 contracts now, you've got Israel, you've contracted Dutch Army and the U.S. and you talked about your pipeline being pretty strong, I think, for APS, if I understood it. Can you maybe talk -- speak to your pipeline? Are there a handful of large contracts like these 3? Are there dozens that you're bidding on? Maybe just some kind of quantification on your pipeline would be helpful.

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

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Well, I cannot quantify the pipeline at this forum, but we can say that it's not only APS and there are additional APS programs in the pipeline beyond what you have mentioned and also with some prospects that we assume are relevant to the current ones also. But the pipeline is a few tens of relatively big opportunity.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [10]

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Okay. Now clearly, the demand for your tactical radars for drone defense and other SHORAD programs is solid with the growth we're seeing, and it sounds like you expect 2020 to have very strong growth as well. But I'm just wondering if this exceptional growth creates tough comparisons so that the growth rate might slow a little bit. Or do you think that you can sustain these abnormally strong growth rates, given you're still at a small revenue base?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [11]

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I think the latter part of your question is more relevant. We estimate the market -- the total addressable market is at least $5 billion. And I think everybody is just scratching the tip of this mountain. So we do believe the growth of the market will continue.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [12]

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Great. Last question I've got, and then I'll get back in the queue with some others. Maybe you can speak to the questions I get on the competitive landscape. Have you seen any other companies or heard of any other companies developing mini tactical radars? Or have anybody -- has anyone entered the market with a competing product?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [13]

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I have to remind us all that when we started developing radars, our biggest competitor from Israel, Elta, were already established in this market. So we are trying to shake the market towards our end and there are -- since day 1. And we do see some movement of smaller players in the U.S. mainly that are trying to be relevant. But we do believe that our performance-over-price lead is still maintained. And based on that, we do anticipate the growth as we depicted to continue.

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Operator [14]

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The next question is from Austin Moeller of Canaccord.

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Austin Moeller, Canaccord Genuity Corp., Research Division - Analyst [15]

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I just had a quick question about IM-SHORAD and what the time line of that looks like in terms of becoming a program of record, both on the Army side and the Marine Corps side.

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

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IM-SHORAD is the Army program. The Marine Corps is named GBAD. The Army program is not a typical program of record. It evolved as an urgent need to a very rapid program. And probably all of us -- some of us have seen that in the U.S. -- AUSA conference being depicted as from slide to prototype within less than a year. So I think everybody involved, including the U.S. Army, are very proud of this momentum. The program itself is a sizable program for us. It's close to 150 vehicles. And if it goes as planned, then it is now -- it was already published by the program executive officer that if it started testing, we do see revenue start towards end of 2020 or mainly, again, 2021. And again, the testing and validation typically takes quite a few months until everybody is settled.

This is the IM-SHORAD one. The Marine Corps, we have delivered close to 200 radars for them for their urgent needs of the GBAD program. And they are now trying to make it a program of record. We do anticipate that it will become a program of record with, I don't know, maybe a couple of hundreds of vehicles worth of program, again, during 2020. And also here, the revenues will be materializing in 2021.

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Austin Moeller, Canaccord Genuity Corp., Research Division - Analyst [17]

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Okay. So just to clarify, IM-SHORAD would be Army. So all of the radars for the 144 vehicles there are going to be purchased with urgent need emergency funding and not necessarily with the program of record?

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

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I'm not in the very details of the right nomenclature, but this transaction is another transaction agreement or arrangement in order to accelerate the program. So I don't know if it is classic urgent need or naturally not a classic program of record, but it's a very important program that the U.S. Army is running now.

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Austin Moeller, Canaccord Genuity Corp., Research Division - Analyst [19]

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Okay. Got it. And then I just had a question on the R&D as we're sort of going into 2020 here. Is that expected to stay around 16% to 17% of sales as we go into 2020? Or as aCHR and xMHR sort of get through the testing regime, is that expected to sort of come back to around 12% to 14%?

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

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Well, we are not looking at that from the percentage of the top line point of view. We are investing in R&D per our understanding of what the market needs in 18 to 24 months from now, and we have identified it about a year ago already. So we do believe that the R&D expenses will kind of stabilize relatively soon because we have equipped ourselves with the adequate manpower and capabilities to execute our plans.

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Austin Moeller, Canaccord Genuity Corp., Research Division - Analyst [21]

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Okay. So the run rate there is looking more like the -- I guess, if we're stabilizing sooner, in that $1.9 million to $2 million per quarter range?

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

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Something like that, yes.

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Austin Moeller, Canaccord Genuity Corp., Research Division - Analyst [23]

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Okay. Great. And then I was just wondering if you could expand any on the offering being developed by Syracuse Research. And would that primarily be a competitor to your offering on the LMADIS, for example?

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

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Judging from their publications and statements, I believe they are trying to bring a competitive product to the IM-SHORAD, to the LMADIS -- yes, to the SHORAD and the counter-drone segment.

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Operator [25]

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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 [26]

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Just a quick question on the cash usage. And where do you see the cash balance over the next 3 quarters? And how comfortable are you with your total cash level until you achieve profitability?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [27]

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We closed the quarter at around $17 million in cash and no debt at all. Looking into the preliminary numbers coming from the 2020 budget planning, it looks like we have enough cash to move forward and to support our growth CapEx expenditures and so on, so forth. So we don't foresee any problem with the cash, and we are looking for bank alternatives in case we're going to need them. So it doesn't look like an issue from our point of view.

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Operator [28]

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Your next question is from Brian Kinstlinger of Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [29]

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Yes, great. Just a little bit of follow-up on that last question. Inventory is building, demand is getting even stronger. Can you talk about your plans for inventory? Do you expect that to increase significantly, gradually increase? How are you thinking about inventory?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [30]

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We have an annual plan, and we translate it to either ahead of other production or based on order and the down payments and so on. It will be a mixture. Naturally, when you have long-term programs, you have down payment, you have a more relaxed market evolution. And we are on the verge of changing from urgent needs to more stable market with some forecasts, as we said. We did increase our inventory, but we do believe that this level of inventory is basically what we need in order to address our upcoming plans.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [31]

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So to be clear, you don't expect as demand is increasing this year, you'll have to increase inventory levels significantly through 2020?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [32]

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Not significantly. I believe the numbers can grow because we want to be on the safe side, and the market's behavior is sometimes a little hectic as far as the short cycle between PO and the opportunity that we don't want to miss. And as a result, we are producing to stock, our shelves are pretty empty. So we are building our many components inventory in order to support these short cycles. So it is not a reason for dramatic or extreme increase, as you mentioned.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [33]

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Great. And then in terms of CapEx, you talked about expanding infrastructure, I think, and capabilities in different regions. Is that going to be reflected in CapEx? Or is that going to be more reflected in operating expenses? And maybe if you can expand on what that is from a budgetary standpoint.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [34]

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As always, it's a combination of things. Our CapEx investment in the U.S. is there, but with the growth of the market, if we realize ahead of time that we need to increase production capability, we will increase CapEx. We are -- I think we are at a steady level of CapEx investment in the last 2 years. Last year, we actually increased it in the U.S., but looking at the Israeli CapEx level, we are at a steady state and the U.S. is -- the huge investment is behind us. So we do believe that we are more relaxed on that side as well.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [35]

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Right. Finally, for Avi, maybe you can share just some numbers with us for the third quarter. Can you just talk about what CapEx was and then depreciation, amortization and stock comp so we can calculate adjusted EBITDA for the quarter?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [36]

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We usually do not report these numbers. And definitely, I don't want to create a situation under which there is a differentiation between shareholders that are participating on this conference or not. So obviously, these numbers are, I believe, based on the -- even 2018 financial statement, you can guess and not be very far from the numbers.

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Operator [37]

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The next question is from [Nahum Moschitz].

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Unidentified Participant, [38]

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Congratulations for the great quarter and the excellent results. I wanted to know, is there a U.S. production facility ready? Or is that going to be ready like only in a couple of months, so when?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [39]

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We are doing the ribbon-cutting ceremony on the 2nd of December with the governors of Maryland. Infrastructure is almost all there, and we do plan to release our first assembled radar -- assembled and tested radars from that facility by the end of December. So that's the resolution.

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Unidentified Participant, [40]

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That's great. And if I understood right, in the past, you said that right now you have a capability of giving $100 million. Is it like annual rate? And now you want to double it to $200 million annual rate, is it right?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [41]

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Yes, growth of radar sales. Yes.

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Unidentified Participant, [42]

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And if I may ask you, Mr. Sella, when do you think you're going to fill this $200 million annual rate? And when do you think you can have to...

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Dov Sella, RADA Electronic Industries Ltd. - CEO [43]

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I think around the production size and when, we are experiencing significant growth. If the growth continues, and you can do the math yourself, we do believe that the $200 million production potential is adequate at this stage for any particular reason.

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Unidentified Participant, [44]

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And again, when do you think you're going to need to make another plant or another facility, like in a year, in 2 years, when?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [45]

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When we need to, we will do it.

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Operator [46]

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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 [47]

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Yes. Thank you, operator. On behalf of the management of RADA, I would like to thank you all for the interest in our business, and we look forward to speaking with you and updating you in the next quarter. Have a good day, everybody. Thank you.

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Operator [48]

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