Redwire Corporation (RDW) Earnings Call Transcript & Summary

Greetings, and welcome to the Redwire Corporation Q1 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, it is my pleasure to turn the call over to Jeff Zeunik. Sir, the floor is yours.

Thank you, Karen, and good morning, everyone. Welcome to Redwire's First Quarter 2023 Earnings Call. We hope that you've seen in our earnings release which we issued yesterday afternoon. It has also been posted in the Investor Relations section of our website at redwirespace.com. Let me remind everyone that during the call, Redwire Management may make forward-looking statements that reflect our beliefs, expectations, intentions or predictions of the future. Our forward-looking statements are subject to risks and uncertainties that are described in more detail on Slide 2. Additionally, to the extent we discuss non-GAAP measures during the call, please leave Slide 3, of our earnings release or the investor presentation on our website for the calculation of these measures and non-GAAP reconciliations. I am Jeff Zeunik, Redwire's Senior Vice President of Financial Planning and Analysis. Joining me on today's call are Peter Cannito, Chairman and Chief Executive Officer and Jonathan Baliff, Chief Financial Officer. With that, I would like to turn the call over to Pete. Pete?

Thank you, Jeff. During today's call, I will take you through a discussion of our key accomplishments in the first quarter of 2023, followed by Jonathan, who will present the financial highlights for the same period. We will also discuss our continuing outlook for the remainder of 2023, after which we will open the floor for Q&A. Please move to Slide 6. Before we get into the details, as I did last quarter, I'd like to start with an overview of Redwire's high-level positioning in the space industry. Redwire is an integrated pure-play space infrastructure company with mission solutions and payloads for civil, commercial and national security space customers, and our mission is to accelerate humanity's expansion into space by delivering reliable, economical and sustainable infrastructure for future generations. With decades of proven flight heritage, combined with innovative products and culture, Redwire is uniquely positioned to assist our customers in solving the complex challenges of future space missions and industries. Redwire has 3 primary areas of focus that form our business; number one, as the fully integrated mission enabler, Redwire is empowering space mission providers such as government agencies and large prime contractors with a broad portfolio of space infrastructure, systems, subsystems and components that can be procured either as a single item or in a tailored bundle for maximum supply chain efficiency. In addition to efficiency, this scalable model is currently solving some of our customers' most critical supply chain issues by providing resiliency and reliability. Number two, providing the infrastructure and technology needed for people to permanently explore, live and work in space, increasing our understanding of the moon, Mars and beyond as well as developing breakthrough commercial technologies for the benefit of life on earth that can only be produced in micro-gravity. This area is generating real revenue and gross profit today. And lastly, supporting multinational access to space for countries that recognize space as a unique opportunity to build national prestige and accelerate economic development. We continually demonstrate our commitment to and expertise in our 3 key areas -- focus areas in a variety of ways such as -- by having Redwire products on 2 launches in Q1, having developed 20 research facilities for the ISS, with 10 currently operating on the ISS to deliver world-leading research, possessing well over 100 years of flight heritage across our various legacy businesses and growing to over 700 employees at 10 facilities in both the United States and Europe. Please turn to Slide 7. The first quarter of 2023 was another record quarter for Redwire. Our revenues of $57.6 million were the highest of any quarter to date. We achieved positive adjusted EBITDA of $4.3 million, an improvement of $5.1 million versus the fourth quarter of 2022 and improved our net loss to $7.3 million, a significant improvement from the same period last year. More on that in a moment. We ended the quarter with contracted backlog of $286.8 million. As an administrative note, starting with this quarter, we have switched from focusing on total backlog which included both contracted and uncontracted backlog to simply reporting contracted backlog. There was no change in our calculation of contracted backlog from previous reporting and we made this change to simplify reporting and increase comparability of the company's performance metrics with industry peers. Notably, in this quarter, we also launched 3 solutions on 2 launches, continuing our proven track record of delivering real flight heritage. Please turn to Slide 8. Beating our previous record in the last quarter of 2022, Redwire's revenue growth achieved a new record level of $57.6 million during the first quarter of 2023. Year-over-year compared with the first quarter of 2022, Redwire's total revenue grew by 75.3%. And on a sequential basis, we grew Redwire's total revenue by 7.3% over our previous record revenue in fourth quarter of 2022. Notably, even if you exclude revenue contributions from our acquisition of Space NV, Redwire revenues grew by 37.9% year-over-year, which demonstrates strong performance from our baseline operations in the same quarter last year. Please turn to Slide 9. Although strong revenue growth is very positive, we are not solely focused on top line growth. We are also focused on profitable growth. As such, we are pleased to report we have achieved a year-over-year improvement of net income on the order of a $10 million positive move to the upside as our losses decreased from a $17.3 million net loss in the first quarter of 2022 to a $7.3 million net loss in the first quarter of 2023. Moving to adjusted EBITDA, I am very pleased to report that our adjusted EBITDA has increased by $9 million on a year-over-year basis. For this first quarter of 2023, we generated an adjusted EBITDA of positive $4.3 million versus a negative $4.7 million adjusted EBITDA for the first quarter of 2022. Achieving positive adjusted EBITDA for the first time as a public company is an important milestone and an outstanding accomplished on both an absolute and percentage growth basis and has given us significant financial momentum heading into the remainder of 2023. Please turn to Slide 10. Now let's move beyond the numbers to continue to emphasize that this financial performance is driven by our proven ability to deliver differentiated solutions for our customers. Slide 10 to 15 share just a few examples of successes in the first quarter of 2023 that highlight the importance of our capabilities. For example, in Q1, the U.S. Space Force and SpaceX launched the GPS3-SV06 satellite from Cape Canaveral, Florida, with 2 complete Redwire -- Fine Sun Sensor systems of orbit. Each sensor consisted of 4 Fine Sun Sensor heads and 2 processor electronics. Redwire's Sun Sensors are key navigational tools that provide sun acquisition, solar array pointing and failsafe recovery options for GPS3-SV06 as it orbits 12,550 miles above the surface of the earth. Redwire has been a key supplier of critical Sun Sensors for more than 50 years, and this technology has enabled more than 17 NAS emissions, a clear example of our incredible space heritage. Please turn to Slide 11. During the first quarter of 2023, Redwire delivered 2 more ROSA wings, numbers 5 and 6 to Boeing to be launched on an upcoming commercial resupply mission to the International Space Station. To date, 4 ROSA wings have been launched and installed and are operating efficiently and effectively. With the additional wings 5 and 6, the overall power generating capability of the ISS will be improved by 20% to 30%, a substantial increase. ROSAs are not only used for the international space station. Redwire is also producing various modular versions of ROSA for many government and commercial space flight applications, including the power and propulsion element for NASA's Gateway program. Please turn to Slide 12. As I mentioned at the beginning of this presentation, Redwire is a leader when it comes to developing breakthrough commercial intellectual property for the benefit of life on earth that can only be produced in microgravity. As an example, we are currently managing research and microgravity to discover a new type of electronic system. During Q1, 20 days of on-orbit experiments were completed with the Redwire managed, poor formation and mobility investigation facility as part of the asymmetric sore tooth and cavity enhanced nucleation driven transport investigation or PFMI-ASCENT. The findings of the PFMI ASCENT space physics study will help with the design of passive cooling systems for spacecraft electronics, which are often limited by available space and electric power, and for consumer electronics here on earth. The 5 experiments that have been completed on-orbit represent the first half of the PFMI-ASCENT investigation. Please turn to Slide 13. As we enter a new era of space exploration and commercialization, Redwire is the leader in developing inspirational content with commercial thought leaders to inspire future generations. As an example, Redwire is collaborating with Microsoft to create a unique learning opportunity inspired by Marvel Studios, Guardians of the Galaxy Volume 3 to engage students in science, technology, engineering, the arts and mathematics topics, including 3D printing for future space exploration and microgravity R&D and manufacturing for the benefit of humanity. In conjunction with Guardians of the Galaxy Volume 3, Redwire and Microsoft have produced an engaging educational video to motivate the next generation of astronauts, engineers and scientists. In addition, through a sponsorship from the ISS National Laboratory, Redwire and Microsoft intend to 3D print a Microsoft Zoon on the ISS using Redwire's additive manufacturing facility to illustrate space-based manufacturing in an engaging way. Redwire has manufactured more than 200 parts in space and is the only company currently providing commercial 3D printing on the ISS Redwire was the natural choice to 3D print Star Wards Zoon. On the right side of this slide, you can see our Guardians of the Galaxy stem promotional patch featuring Cosmo and Rocket from the movie as well as a highly visible digital cube display in Times Square in New York City, promoting the Marvel, Microsoft and Redwire team. It is important to note that this effort was not a paid promotion by Redwire, but rather we were a paid partner as part of Microsoft's plan to leverage the power of space and their branding. We believe this is an excellent template for future Redwire offerings to provide space-based branding content for other commercial partners. For more information on this effort, please visit zoon.net. Please turn to Slide 14. Space is a multinational endeavor, and Redwire Space is a global leader in international space missions. In the first quarter of 2023, Redwire Space Europe fully integrated 2 European Space Agency, Proba-3 spacecraft that will perform the world's first precision formation flying mission. In the Proba-3 mission, 2 small satellites will launch together and separate and maintaining a specific distance and working as one unit as they orbit around the earth. On this program, Redwire is building and integrating the satellites themselves to include developing the onboard computer and advanced avionics. This mission is important in proving orbital formation flying technologies and rendezvous experiments for future science astronomy and Earth observation missions that will require satellites to seamlessly cooperate on Orbit. Please turn to Slide 15. Next, I'd like to highlight a Redwire Space Europe project that kicked off during the first quarter of 2023, a 3D bioprinting system. We have discussed Redwire's NASA-funded BioFabrication facility on previous earnings calls, but this is a completely different mission funded by the European Space Agency. Redwire's Space NV was awarded a EUR 14 million contract to design, develop and qualify the 3D bioprinting system. System will leverage the latest 3D bioprinting technologies to provide a modular, powerful and unique system to sustain a large number of experiments. With the 3D bioprinting system, Redwire is expanding its leadership of in-space manufacturing and bioprinting on the International Space Station for exploration and improving life here on Earth. Please turn to Slide 16. Turning back to the numbers. Our bookings during the first quarter were $29.7 million. However, as a reminder, our contracted awards for the fourth quarter of 2022 totaled $91.2 million. It is important to note that Redwire's bookings are typically lumpy and the first quarter historically is usually the lowest of the year. Using a longer period of measure to smooth out the lumpiness as of Q1 2023, our last 12-month book-to-bill ratio was 1.6. I'd like to point out that during the first quarter of 2023, Redwire made 2 changes with respect to our key performance indicators. First, we changed to using contracted backlog only. Second, we changed the book-to-bill calculation to present this metric on a last 12 months or LTM basis, whereas prior period disclosures were presented on a year-to-date basis. We believe these presentation changes will provide meaningful insights into contract award trends and increase comparability of the company's performance metrics with industry peers. Finally, as you can see from the bar chart on the right-hand side of this slide, our contracted backlog has more than doubled since March 31, 2022, of last year to a contracted backlog at the end of Q1 2023 of $286.8 million. This 108.8% growth in contracted backlog is one factor that gives us confidence in our future growth and stability. With that, I'd now like to turn the call over to Jonathan Baliff, Redwire's Chief Financial Officer. Jonathan?

Thank you. Please turn to Slide 17. Before we begin the financial section, I'd like to highlight the picture shown on Slide 17. This is the Redwire Managed plant Habitat 03 experiment on the ISS. The ability to grow fresh crops in space will be critical for exploring, living and working in space, one of the 3 focus areas for Redwire that Pete talked about. Redwire is doing critical work now and earning revenue and gross profit now to support space industries, including the agricultural industry in orbit. Please turn to Slide 18. Similar to last quarter, I will help quantify and expound on a number of first quarter 2023 themes that Pete just talked about, including: one, key financial takeaways starting with quarterly revenue here on the right-hand chart and then continuing with other quarterly financial information. And two, a brief update to our financial outlook for the remainder of the year. Key points to reiterate in detail for this quarter's financials: one, Redwire's excellence in execution initiatives continue to deliver on our promise and path to profitability as we scale our business with record revenues and record gross profit. We are providing our government and marquee customers with critical, proven and differentiated space infrastructure and payloads from the ROSA Wings, the GPS3-SV06 sun sensors to the PFMI- ASCENT and 3D biosystem facility. These and other solutions, digital engineering and payload created in our over 300,000 square feet of facilities by our outstanding team members across the globe, drove this first quarter 2023 revenue and gross profit growth. Two, first quarter 2023 saw our first positive adjusted EBITDA quarter since becoming a public company and record positive adjusted EBITDA overall. In the first quarter of 2023, Redwire has continued to win and deliver on more profitable contracts to more than double gross profit. But we are also doing this more efficiently as we drove more operating leverage into the business with absolute and percentage reductions in operating expenses and SG&A this quarter. Turning to revenue, as you can see from the chart on the right, we had $57.6 million for the first quarter of 2023 versus $53.7 million for the fourth quarter of 2022, representing an increase of 7.3% on a sequential basis. On a year-over-year basis, this represents 75.3% increase over revenues of $32.9 million in the first quarter of 2022. On the last 12 months basis, we also grew at a rate of over 33%. Importantly, excluding the revenue contributed by Space NV, our first quarter revenues were $45.3 million, a comparable 37.9% increase over Q1 2022 revenues. This almost 40% growth is an important milestone as historically, the first quarter has generally been a lower revenue growth quarter. We were able to achieve this in the legacy U.S. businesses due to the significant growth in backlog, not just due to the excellent partnership and acquisition of Space NV, as you will see on the next slide, but also as our government business expanded, over 85% of our revenue is derived from funded government programs or from global marquee customers who are delivering in the national security, LEO commercialization inhabitation and exploration of space demand. Please turn to Slide 19. Continuing with revenue. This is our year-to-date revenue slide for fiscal year 2023. So given it is our first quarter, the growth is identical to the previous slide. But let's discuss the makeup of that growth. First, Redwire saw year-over-year revenue growth across all the 3 primary focus areas, whether it be Space Systems as an integrated space mission enabler or payloads to explore, live and work in space or with Redwire Europe with our multinational space leadership. All focus areas saw growth year-over-year. From a customer's perspective, again, all customer types, national security, civil and commercial grew on a year-over-year basis. To remind you on the call of these types, civil customers are with civilian space agencies like NASA, ESA or the Luxembourg Space Agency. National Security revenue is derived from U.S. and allied countries, defense or security departments and ministries like Space Force, SDA and Air Force Research Labs. Finally, commercial revenue is derived from predominantly large marquee global prime aerospace systems and service providers. And it is important to note that this commercial type of revenue is mostly derived from funded government programs that ultimately face a national security or civil space entity. Of note for this quarter, our commercial revenues have seen the largest percentage increase, more than 129% year-over-year. So our customer diversity is balanced, especially now that our customer types include a larger portion globally. Please turn to Slide 20. Revenue, Redwire's path to profitability continued successfully in this quarter, as you can see from the progress made on the chart on the right, with a steady march of quarterly financial improvement in 2022 now continuing in 2023, with growth we discussed on the previous slides, leading to more profitable growth over the past year. Under U.S. GAAP, we had a significant improvement, $10 million improvement from a net loss of $17.3 million a year ago to a net loss of $7.3 million during the first quarter of 2023. And sequentially, we improved even more compared to the fourth quarter of 2022. We also saw our quarterly adjusted EBITDA improved $9 million year-over-year to a positive $4.3 million, an improvement of 193%. And sequentially, this positive $4.3 million was an improvement of $5.1 million over the fourth quarter of 2022. This adjusted EBITDA improvement was primarily driven by our improvement in Redwire gross profit. Our excellence in execution initiatives, the roll-off of lower margin contracts, better labor utilization, better program management and cost control, increased our year-over-year gross margin from 15.7% to 24.7%, with our year-over-year gross profit nearly 3x higher from $5.2 million to $14.2 million. The adjusted EBITDA improvement was also supported by being more efficient with our indirect operating expenses. First quarter Redwire SG&A year-over-year improvement occurred on both an absolute and percentage of revenue basis. Absolute SG&A declined 23.4% from $21 million in the first quarter of 2022 to $16 million in the first quarter of 2023 and now stands at 27.8% of revenue. This represents a significant drop from Redwire's first quarter of 2022 SG&A margins. Please turn to Slide 21. Similar to our fourth quarter, on the left-hand chart, we show free cash flow. As a reminder, free cash flow provides a perspective based on our operating cash flow and CapEx, unadjusted for onetime items. As you can see, during the first quarter 2023, free cash flow consumption increased to a use of cash of $14.8 million compared with the fourth quarter of 2022's $5.5 million. Although we saw a significant improvement in our profit and loss statement, the sequential increase in free cash flow consumption was driven by a historic increase in net working capital driven by our top line growth and given the significant backlog growth going into 2023. This quarter's consumption was very different from last year's as the cash consumption was attributable last year to losses due to a significantly lower gross profit and much higher SG&A. This quarter's net working capital build was the primary result of growth in our contracted assets and decrease in our deferred revenue. And since the end of March, we are seeing much less cash consumption with a notable reduction in net working capital. Red Wire's management remains very focused on improving trend in our free cash flow as we execute on the revenue growth conversion of our $287 million of contracted backlog. On the right-hand chart, we show our available liquidity as of March 31, 2023, which totaled $36.3 million. This quarter's liquidity has much improved from a year ago as we continued our path to profitability. And again, since the end of Q1, we are seeing much less cash consumption with a notable reduction in net working capital. Finally, given our improved financial position, especially our improvement in gross profit and adjusted EBITDA and effective May 1, the company met the requirements to end the incremental 2% PIK interest required under our credit facility with Adam Street Partners. This achievement saves significant expense and it's a direct result of the global Redwire team's commercial and operational successes leading to an excellent start to the year that Pete and I have been discussing throughout this call. I will now turn the presentation back over to Pete to provide a brief outlook for the remainder of 2023. Please turn to Slide 22.

Thank you, Jonathan. Please turn to Slide 23 for a brief reminder of the outlook for the remainder of 2023. Our most recent first quarter was a strong start to the year. As a result, for 2023, we affirmed that we expect our full year revenue to be between $220 million to $250 million, which represents 46% year-over-year growth at the midpoint of the range. With that, I'd like to thank all of the Redwire employees for an excellent first quarter. Thank you for all the hard work you do across the world every day to accelerate humanity's expansion in the space. Go Redwire. Thank you, and we will now open the floor for questions.

[Operator Instructions] We'll take our first question from Mike Crawford from B. Riley.

Just to start off where we left off. I was hoping we could go a little bit further into your outlook, where you're talking about better program management, cost control and increased gross margin and you expect gross margin improvement during the year. But do you expect -- I know there's a big range of products. So it's like Sun Sensors on the lower side and ROSA on the higher side. But what more can you tell us about gross margin percentages that you're targeting directionally for the rest of this year? Maybe we could start with that.

Mike, thanks for your question. So that was a lot. So I'll just go to the gross margin part because I think that was the sense of it is, yes, as you can see, we're significantly improving our gross margin over time. And some of the reason for this is, if you think about the history of Redwire, one of the built-in systemic efficiencies that we're able to achieve is to take a lot of the companies that were previously small businesses and inject more programmatic discipline, better systems, through things like ERP implementations and taking a hard look at the gross margins and the pricing power that we can achieve by going to market in the integrated bundles and things like that as a much larger company. So all of those different improvements are what you see happening in gross margins to date and the improvements that you see there. And then we expect to continue to be able to improve on those gross margins as we continue into the future, and that's essentially the plan because I can tell you some of the really unique technologies that we have that are highly differentiated, like you mentioned, ROSA, have increasing pricing power in the marketplace and are gaining much wider adoption now that we have so many wings on the ISS. Jonathan, anything you want to add to that?

I would just say we improved our gross margin from 15.7% to 24.7%. I would say that level of improvement is aspirational, Mike. I know you want a specific number, but we do believe we can start moving this gross margin into -- not just from the mid-20s but higher than that. It's just from a timing standpoint, just being able to do that in 3, 4 months. It takes a number of months to do it, but we have an intent to do it. We're seeing the performance improvement. This is a 65% improvement over gross margin even last quarter. I just want to warn you that being able to get that level of improvement on a quarter-over-quarter basis is more aspirational. I do believe we can get there. Just I wouldn't want to put it all in 2023.

And to that end, I do know there's a wide variance in margin on Japan products that you're delivering. And so it's not necessarily going to be a straight line. Is that correct?

That's right, Mike. When we look at it, it's a bit of a product mix, but I would say across all of our focus areas, whether it be enabling space missions and space industries with the payloads and then Europe, we're improving margins across the board because of the excellence and execution that Pete talked about. And so in certain areas, you're seeing multiple 400, 500 basis points of margin improvement. And as we again see the roll-off of older contracts that Pete talked about, you just start to see that positive impact create kind of a virtuous cycle.

Okay. And just one more on this, if you don't mind. I think you mentioned 300,000 square feet of space, a lot of that manufacturing. And how much room does Redwire had to grow before you have to have significant CapEx, which was $100 million in the quarter?

Yes. No, great question. No, I think that there's a healthy amount of growth in that space that's already out there. As you know, a lot of our facilities and not necessarily our facilities, but our capabilities that would otherwise be CapEx is paid for by customers in many cases and because we've really acquired a lot of significant in-place capabilities, I think we're -- we have what we need to achieve the goals we've outlined for 2023.

One of the reasons we're seeing margin improvement as we're efficiently using these facilities.

Okay. And again, I do reference the question with I know there's a mix issue on revenue, so you can't answer specifically regarding EBITDA. But I would think it's fair to assume a steady block higher on SG&A now as opposed to those -- that going down further from here?

So the SG&A -- there's still opportunities to continue to improve on our SG&A as a percentage of revenue. So in an absolute basis as revenue grows, of course, SG&A will grow as well. But we're very focused on maintaining SG&A at a level commensurate to our revenue that achieves our overall profit objectives. I think the broader idea is would be within SG&A of the swing in internal research and development and how much we spend on that, that will be more variable based on the number of opportunities that we have that present themselves throughout the year.

And we'll take our next question from Greg Konrad from Jefferies.

Maybe not to continue the last set of questions, but obviously, EBITDA was very strong in the quarter. I mean, you talked about some of the drivers. You had the EACs last year and some mix. I mean how are you thinking about just sustainability on an EBITDA perspective, just given tailwinds, headwinds through the year? I mean, should we expect to remain positive from an EBITDA perspective for the rest of the year?

So again, just to kind of expand a little bit more on the -- the last question. So there's a fair amount of efficiency that we can continue to pull out just through excellence in execution. And that is kind of our broad nomenclature for this idea of enhancing our delivery systems through a more disciplined approach than perhaps some of the legacy organizations and some of the legacy projects that comprise Redwire as we came together over the last couple of years. So there's a amount of profitability that we can pull out of that. And that, of course, is typically tied to the EACs. However, there's also what we are doing from a strategic perspective because when you look at our growth rate, 30% plus growth rate is there's a lot of demand out there in the marketplace that we don't want to miss out on if it required some sort of IRAD investment. So the swing factor in EBITDA for us is going to be steady increases in efficiencies, but throttling up or down IRAD based on the opportunities that are presented throughout the year. Does that make sense?

Yes. I mean -- so there's some variability when you think out in the plan based on internal actions where the results will be a little bit harder to forecast.