Redwire Corporation (NYSE:RDW) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings, and welcome to Redwire’s Corporation Q1 2023 Earnings Call. At this time, all participants are in a listen-only mode and the floor will be open for questions, following the presentation. [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.

Jeff Zeunik: Thank you, Karen, and good morning everyone. Welcome to Redwire first quarter 2023 earnings call. We hope that you’ve seen our earnings release, which we issued yesterday afternoon. It has also been posted in the investor relations section of our website@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 risk and uncertainties that are described in more detail on slide two. Additionally, to the extent we discussed non-GAAP measures during the call, please leave slide three, our earnings 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, 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?

Peter Cannito: 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 six. 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 place 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 three 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 proc — 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 customer’s 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 microgravity. 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 three key areas, focus areas in a variety of ways, such as by having Redwire products on two 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 a hundred years of flight heritage across our various legacy business — businesses and growing to over 700 employees at 10 facilities in both the United States and Europe. Please turn to slide seven. 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. An improved our net loss to $7.3 million, a significant improvement from the same period last year. More on that in a moment. We entered 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 three solutions on two launches, continuing our proven track record of delivering real flight heritage. Please turn to slide eight, Beating our previous record in the last quarter of 2022, Redwire’s revenue growth achieved a new record 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 nine. 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 accomplish 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 GPS II SV-06 satellite from Cape Canaveral, Florida with two complete Redwire fine sensor — fine sun sensor systems of or each sensor consisted of four fine sun sensor heads and two processor electronics. Redwire sun sensors are key navigational tools that provide sun acquisition, solar array pointing and fail safe recovery options for GPS II SV-06 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 70 NASA emissions. A clear example of our incredible Space heritage. Please turn to slide 11. During the first quarter of 2023, Redwire delivered two more Rosa wings, numbers five and six to Boeing to be launched on an upcoming commercial resupply mission to the International Space Station.

Today, four Rosa Wings have been launched and installed and are operating efficiently and effectively. With the addition of Wings five and six, 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 Sawtooth 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 five experiments that have been completed on orbit represent the first half of the PFM I Ascent investigation. Please turn to slide 13 as we enter a new era of Space exploration and commercialization.

Redwire is a 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’s Studios Guardians of the Galaxy Volume three, 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 three, Redwire and Microsoft have produced an engaging educational video to motivate the next generation of astronauts, engineerings — engineers and scientists. In addition, through a sponsorship from the ISS National Laboratory, Redwire and Microsoft intend to 3D print a Microsoft Zoom on the ISS using Redwire’s additive manufacturing facility to illustrate Space 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 Wars zoom. 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 in 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 zoom.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 two European Space Agency Proba three Spacecraft that will perform the world’s first precision formation flying mission. In the Proba-3 mission, two small satellites will launch together and separate in 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, improving 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 Space NV was awarded a EUR14 million contract to design, develop, and qualify the 3D print — 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 two 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 change changes will provide meaningful insights and to contract award trends and increased 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?

Jonathan Baliff: 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 zero three 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 three focus areas for Redwire that Pete talked about. Redwire’s doing critical work now 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 ex expand on a number of first quarter 2023 themes that Peaches 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 and 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 GPS II SV-06 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 first, 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 a 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. It 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 US businesses due to the significant growth in backlog, not just due to the excellent partnership and acquisition of Space nv, as you’ll see on the next slide, but also as our government business expanded. Over 85% of our revenue is derived from funding governed funded government programs or from global marquee customers who are delivering in the National Security LEO Commercialization and Habitation and Exploration of Space Domain. 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 three 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, ISA 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 marque global prime aeroSpace systems and service providers, and it’s 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 improve $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 three times 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 one-time items. As you can see, during the first quarter of 2023, free cash flow consumption increased to a use of cash of $14.8 million compared with the fourth quarter of 2020 twos $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 historic increase in networking capital driven by our top line growth and given the significant backlog growth going into 2023. And 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 networking 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 networking capital. Redwire’s management remains very focused on improvement 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 is 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 networking capital. Finally, given our improved financial position, especially our improvement in gross profit in adjusted EBITDA and effective May 1, the company met the requirements to end the incremental 2% pick interest required under our credit facility with Adams Street Partners. This achievement saves significant expense and is 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.

Peter Cannito: 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 affirm 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 into Space. Go Redwire. Thank you, and we will now open the floor for a question.

Q&A Session

Operator: Thank you. [Operator instructions] we’ll take our first question from Mike Crawford from B. Riley. Please go ahead, Mike?

Operator: Thank you. And we’ll take our next question from Greg Konrad from Jeffries. Please go ahead, Greg?

Operator: [Operator instructions] . And our next question comes from Suji DeSilva from ROTH MKM. Please go ahead.

Operator: As a reminder, star one, if you do have a question or comment, and there are no further questions at this time, I’d like to turn the floor back over to management for closing remarks.

Peter Cannito: Yes. Again, I’d like to thank everybody for joining the call. And reiterate just how proud red Wire is of our employees for delivering a great first quarter and looking forward to the remainder of 2023. Thank you and have a good day. Thank you.