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Edited Transcript of RADA earnings conference call or presentation 21-May-19 1:00pm GMT

Q1 2019 Rada Electronic Industries Ltd Earnings Call

NETANYA Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Rada Electronic Industries Ltd earnings conference call or presentation Tuesday, May 21, 2019 at 1:00:00pm 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

* Ehud Helft

CCG Investor Relations Inc. - Managing Partner - Israel

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Conference Call Participants

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* Jeffrey M. K. Bernstein

Cowen Inc. - VP

* Kevin Darryl Dede

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Michael Brcic

National Securities Corporation - SVP of Investments

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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 First 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 at 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, CCG Investor Relations Inc. - Managing Partner - Israel [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. With us on the call 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 pertain to the content of this conference call.

And with that, I would now like to introduce 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. Good morning to our U.S. participants and good evening to the Israeli ones, and welcome to our first quarter of '19 conference call.

Let's start with the summary of the results and some guidance. First, I want to mention that we are very pleased with the continued growth that we show. Our revenue growth this quarter is an outcome of our increased investments in IR&D and in our U.S. presence. While we grow in revenues, we maintain our solid gross margin level.

The bottom line is that everything is on track, and the results of this quarter actually validate for us the forecast of the whole year that we gave a while ago. The revenues in this quarter grew by 44% compared to the first quarter of '18. And when you compare '18 to '17, the growth was much more humble because '18 was pretty much similar to '17.

However, we anticipated early this year that this year will be showing significant growth. We have issued the guidance of $40 million in the top line, and we still believe that this is still only the beginning because we are still at the phase of the market that is not stable enough. However, this growth proves that our markets are beginning to mature, the sales of our tactical radars are beginning to broaden and ramp and our increased investments start to pay the dividends that we expect to get.

Regarding our performance growth. I would like to emphasize the following: we would like to picture our business as a technology start-up company with very new and exciting technology of software-defined radars. However, we still have our legacy, and this is an advantage for us because our legacy is stable and has very good cash flow and profitability. So in our investments, we are also on this leg.

And while in the past few years we developed our tactical radars with foresight of what was predicted at that time, today, we have mature solutions to the very immediate and urgent defense needs for effective protection, counter-drone, short-range air defense, counter rocket, artillery and mortars, and some other operational needs. Further, as opposed to an early-stage company, we already have initial sales of our growth products already being used by armed forces in several countries, mainly in the United States and Israel.

And because of the huge opportunity ahead of us, we are gearing RADA up for significant growth in 2019, and mainly in 2020 and onwards. We already started last year, and we're continuing to make very significant investments in R&D. We're developing quite a few new products in order to maintain our leadership and first mover advantage in this market. But we do believe that the growth will be in 2020 and onwards.

Therefore our current efforts are focused on top line growth, and this is where we should be measured in the coming few quarters. This, along with the gross margins that we demonstrate, should bring to significant profitability when the top line will become significant, and as I say, it's 2020 and onwards.

In terms of short-range expectations, as we said, we are confident that with our over 40% revenue growth in '19, the goal of $40 million and maybe a bit more will be met. And as the programs of record start to come online in the United States mainly and our markets will start their maturity phase, we are even more optimistic for the period beyond 2020.

About the market size and pipeline. As mentioned and reiterated in the last few years, our current main focus areas are on active protection and mobile short-range air defense while counter drone and counter-UAV is a subset of the short-range air defense. We estimate the market at about $5 billion as total addressable market, half of it in the United States and the other half in the Western countries because our offering is a high-end offering.

About 60% of this estimation of the market is around active protection and the rest is around mobile SHORAD, critical infrastructure and so on. We do estimate the relevant market in the United States at about 15,000 potential tactical vehicles that active protection may be relevant to them. And again, the other -- the rest of the world is doubling these numbers.

In terms of sales effort, in the active protection market, we are part of the Elbit/IMI Iron Fist APS for the U.S. Army Bradley Vehicle, a program which is moving ahead towards testing and then acquisition of systems for a brigade as a beginning point, as a starting point. We believe that it will begin end of this year or early next year.

The mobile short-range air defense or M-SHORAD customers are -- address Western European forces such as the U.S. Army and United States Marine Corps and also European NATO forces and some forces in the Asia Pacific. And again counter drones, counter-UAV is a subset of this market in our eyes. We have mentioned that we were selected through Leonardo DRS for the U.S. Army IM-SHORAD program, initial maneuverable short-range air defense program, having the potential of close to 150 Stryker vehicles equipped with the short-range air defense package, and each one should include 4 radars of ours.

Meanwhile, we have already fielded close to 200 radars in the U.S., mainly operated by the Marine Corps, but also by others. And again, we believe that this is only the beginning. The market behavior in the U.S. is changing from fulfillment of urgent needs to programs of record, and this will help us build the backlog as opposed to an erratic and unstable market that we experienced until now.

Our pipeline is strong. It broadened nicely in the past year with significant revenue potential. Potential orders are global, but especially strong in the U.S. given the market maturation and our strong presence there. And I want to mention that orders to new customers that we have previously supplied and announced earlier this year and last year as well as others we are now beginning to supply have the potential to lead to very significant follow-on orders compared to the initial stage. As we move through 2019, it is clear that this is the year we have been waiting for since we've -- we believe we are now at the inflection point of the market acceptance and growth.

About our cash position and investment in the future. We have a strong cash position at about $21.5 million at the end of the first quarter. It is enough capital to continue the investment in our U.S. production line. It provides us ample capital to further invest in R&D and maintain our lead as well as marketing dollars to pursue market opportunities and initiatives. It provides the increased working capital for building inventory to address the short turnover needs of the market that we have experienced until now and still do. And it also shows a strong and stable supplier in front of our traditional customers.

In summary, we are very pleased with our first quarter performance, which tells us that everything is on track. 2019 is expected to be a record year for us with over 40% of revenue growth year-over-year, while we believe that '19 is only the beginning. Our balance sheet is strong. It gives us the ability to make the right investments in order to capitalize on significant and immediate needs in our end markets.

We see initial orders from new customers continuously coming at us, all with high growth potential, and the pipeline is strong and promising. And again, we do believe that even though '19 is a very strong year for us and probably the record year ever for RADA, 2020 and onwards should be even better.

At this point, I'd like to hand over the discussion to Avi Israel, our CFO. Avi?

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

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

First quarter revenues were at $8.7 million, up 44% year-over-year. Our gross margin grew 45% compared to the first quarter of last year and was 36% of revenues, same as it was in the first quarter of last year. This is the level we currently expect and happy with.

As Dov explained earlier, we are making significant investment, especially into our infrastructure in the United States, so operating expenses grew and will continue to remain at high levels to support our growth in the future and as expected. R&D increased to $1.4 million in the first quarter, up from $0.6 million in the same quarter of last year. Sales and marketing were $900,000 compared to $600,000 in the first quarter of last year.

G&A expenses were $1.5 million in the first quarter compared to $0.7 million last year with a significant increase related to our newly established U.S. presence. Operating loss was at about $0.6 million in the first quarter compared to a profit of $0.2 million in the same quarter of last year.

Net loss attributable to our shareholders for the first quarter was $0.5 million compared to $0.2 million of profit in the first quarter of last year.

I would like to summarize and point out some highlights from our balance sheet as of March 31, 2019. We ended the quarter with $21.5 million in net cash and no financial debt at all. I would also like to point out the new FASB 842 regulations that is relevant to operating leasing assets and liabilities. This new regulation was adopted by RADA in the first quarter of 2019, and as a result, we present $1.9 million of operating lease assets and liabilities, both short and long term. Our shareholders' equity stands at about $43 million.

In summary, as Dov mentioned and as the financial results demonstrate, we are pleased with our progress and on track with our plans. 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 Michael Brcic of National Securities.

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Michael Brcic, National Securities Corporation - SVP of Investments [2]

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Congratulations again. Two quick questions. One is on the profit or loss. Was there any FX -- did foreign exchange change anything or as -- because most of it is in U.S. dollars, didn't have a big effect?

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

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No, our currency of operation is U.S. dollar, and most of our revenues are measured in U.S. dollars. Most of our expenses though, in -- at least in Israel are in the new Israeli shekel, but the influence was insignificant.

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Michael Brcic, National Securities Corporation - SVP of Investments [4]

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Got it. I guess this is more of a question for down the road. But do you see on the protection side, is it possible to get commercial applications, for example, like protecting a big shopping mall or something like that from some sort of aerial problem?

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

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We are doing radars, and radars are a part of, let's say, the protection system or in military terms, weapon system. Radars need some -- a little distance in order to become effective and to queue the whole solution to the detection.

Shopping malls typically within urban areas are not threatened by long-range threats. It's done by very short-range, manually piloted drones. Let's say, if you're referring to drones, you don't need radars for that. The ranges are small and there are other means for that.

We also believe that the solution to the urban area and to the civil area, the short-range nuisance that today's world is experiencing will come to an end very soon through technology, through communications with each and every drone, through licensing and so on.

However, there are other civilian or semi-civilian facilities that will need radars in order to address the noncooperative drones such as airports, such as critical infrastructure, and then our radars will become effective and be part of a complete solution that we believe will be provided by the same defense players. Because at that moment when you detect something, it is clearly hostile, and you need to do something against its continuation of patterns.

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Michael Brcic, National Securities Corporation - SVP of Investments [6]

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Got it. Finally, you sort of, I guess, addressed this a little bit about building the production line here in the U.S. I'm just trying to think of your capacity to be able to fill -- if you get some big orders, how is the planning going for that?

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

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Okay. Our current capacity in Israel is measured, is sized at about close to $100 million worth of radar deliveries. And once we have the U.S. facility, it doubles that. I don't think we are there at all yet.

And if we do come close to that, within 6 months we can add another production line in a reasonable investment and triple it. So I don't think that capacity is an issue at all at our stage and also looking into the future.

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Operator [8]

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The next question is from Kevin Dede of H.C. Wainwright.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [9]

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So Dov, you mentioned, I think, 2 specific plans. One was the -- in conjunction with Elbit on the Bradley. And then another one was, I think you said 150 vehicles in conjunction with the Army. I was just wondering if you could just go over those again, please, maybe a little more color. And I apologize, I missed the names of the programs.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [10]

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Okay. Let's start with the 144 vehicles that are planned as part of the IM-SHORAD program of the U.S. Army. This is short-range air defense solution, and our radars are part of the system. This is one program. Another program is the Bradley, the active protection system for the Bradley. Here we are talking about a brigade, which is again 150 vehicles as a starting point.

But we're also talking about the Marine Corps GBAD, ground-based air defense program, which is being crystallized. We have assisted them with quite a few radars. I mean we have delivered to the Marine Corps over 100 radars in the last year or 2 as part of their feasibility studies tests, field tests and even operational deployments, but they are now preparing the GBAD program of record, which we are planning to be part of.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [11]

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Okay. You also mentioned that you could see the total potential going to 15,000 tactical relevant vehicles. Is that the sum total of all 3 of those programs?

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

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No. There is a bit of confusion here. The SHORAD vehicles are different from the active protection vehicles. When you're talking about active protection on a tactical vehicle, you're talking about protecting the vehicle itself.

Here we say that the total addressable market may be as high as 15,000 vehicles. It heavily depends on affordability and the doctrine of the forces, but this is total addressable market. When we're talking about short-range air defense and GBAD, ground-based air defense, which are synonyms, we're talking about mission vehicles that protect an area that protect the force, and the numbers are dramatically less.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [13]

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Okay. Okay. Would you say of the roughly $8 million generated in March quarter, was it, say, 90% radar or were there some avionics and navigation component sales?

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

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It's a mixture of both avionics and radars.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [15]

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Okay. Is that -- is it fair enough to say 50-50, or can you give me a rough ballpark on that mix?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [16]

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We don't give that breakdown as you already know from previous conversations. But we estimate the avionics market, and that's not a secret as well, on a yearly basis to be between -- every number between $10 million to $30 million, that's what we expected and we are in line with that.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [17]

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Okay. Dov, could you go over the rollout in Maryland and the timing on your road to production there?

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

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Yes. We have leased a space. We are recruiting people. We have issued orders for the heavy equipment that takes a few months to get delivered. And the plan is to start delivering to customers from our U.S. facility in the fourth quarter of this year.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [19]

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Okay. What do you suspect, Avi, might be the implication to the P&L as the Maryland facility comes online?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [20]

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As to the P&L, we're talking about the leasing expenses obviously and the maintenance expenses for the space. It's all budgeted and expected. The numbers are -- as you can imagine, we're talking about roundabout 25,000 square foot in total, including offices as well as production space. Prices are well known in the U.S., no surprise. So the P&L, we are not talking about -- as production will grow, it will be part of cost of goods sold mainly.

As far as this new regulation of 842, this operating lease presentation, the lease agreement is pretty long. It's for like 7 years-plus options, so it will have a substantial influence on the balance sheet. But excuse me for treating it as a technical presentation, there is no new information that was not exposed in the notes up until today. Now it's on the face of the balance sheet. It's no more than that.

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Kevin Darryl Dede, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [21]

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No, I understood. My thinking might be though that you could see margins compress a little bit as volumes roll out. Is that a fair assumption?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [22]

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No, it's too early to say what will happen, what will be the magnitude of the growth. The split between production in Israel and production in the U.S., that's way too early to say at this moment.

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Operator [23]

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The next question is from [Isaac Vidomlanski].

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Unidentified Analyst [24]

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I just read that in the last skirmish between Hamas and Israel, they used new weapon, drones that release bombs. In an interview with you, Dov, you said that RADA has the ability to discover even flying bees. My question is, what is the procedure? How do you convince the Israeli Army to buy your equipment?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [25]

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The usual way, we demonstrate, we meet, we show and then hopefully, they will buy.

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Unidentified Analyst [26]

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Do you have a special connection with them? I mean how often do you meet them to show your radars?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [27]

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We do whatever is needed in order to promote our business and being successful.

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Operator [28]

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(Operator Instructions) The next question is from Jeff Bernstein of Cowen.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [29]

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Just a couple questions. What's the CapEx expected to be in 2019?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [30]

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We mentioned that will be -- the estimate is any number between (technical difficulty) million dollars as what we (technical difficulty). In Israel, we are also renovating and enlarging our facilities in order to deal with higher quantities as reflected in our financials and as planned for the rest of the year and the years to follow. We as of now at RADA say no more than $1 million. So CapEx for 2019 is a combination of these 2.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [31]

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That's great. And then so it sounded like we should expect operating expenses to be at these kinds of levels, which wouldn't -- don't necessarily imply profitability this year and potentially being breakeven again next year. Is that kind of general statement correct?

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

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You will excuse me for not commenting on next year profitability, especially at this stage. It's way too early to say. This year, as Dov mentioned already, we focus on our growth while maintaining our gross margins, currently in the last 5 quarters being pretty stable at 36%. This is where our focus is.

R&D is growing and -- but will not substantially grow since we're coming to the area of whenever we will feel pretty comfortable. G&A will grow as a result of the growth of our U.S. presence. But these are the components that will reflect our OpEx in the coming year or so.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [33]

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Got you. Okay. That's great. And then you talked about R&D on some new products. Will we hear some details about new products this year or is that next year's business?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [34]

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Some of them will be launched earlier -- later on this year and some of them in 2020.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [35]

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Great. And then lastly, I guess Raytheon and Lockheed Martin are combining their efforts on this U.S. sensor program. What does that mean for the program in your mind? What does it mean for you guys' potential participation there?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [36]

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It's a good question. I mean you can imagine that if Lockheed Martin and Raytheon are joining forces on this program, probably there is a slight room for anybody else. The program is still in its RFI stages. Requirements are not stable.

And also from the beginning, we did not assume that -- if it is relevant to us at all, we did not assume that we can approach directly to the customers and then users here. We will explore our options with these big boys, and then we will see how it goes.

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Operator [37]

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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 [38]

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Yes. I'd like to thank you all for participating in this call on behalf of the management and myself. I want you to be aware that we are going to present the company this Thursday at the B. Riley conference in Los Angeles and the week after in New York City on Thursday at the Ladenburg conference.

I will be in New York City end of next week, so if you want to meet me, you can connect with our IR people and either set a call or a face-to-face meeting if you prefer. We look forward to speaking you -- speaking with you and updating you next time. Thank you all. Bye-bye.

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Operator [39]

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