Greg Konrad, SVP on the Aerospace and Defense Equity Research team at Jefferies, and welcome to our annual Jefferies Industrial Conference. Very excited to have, Peter Cannito, chairman and CEO of Redwire, joining us today. I think we're gonna—you're gonna give a brief presentation, and then we'll do a little bit of fireside chat. Or was that wrong?
Yeah, no, Greg, I think we're just eager to hear your questions.
Okay, perfect. Maybe just to start, you know, what you're seeing in terms of demand signals, just given some of the movement we've seen with UAS, Golden Dome, and obviously, we have the reconciliation bill funding. I mean, what are the conversations like today with your customers?
Yeah, no. Well, thanks for having me, first of all, Greg, so it's great to be here, and that's an excellent question. On the demand signal, to be honest, the government, in particular, in the U.S. government, but even in Europe, isn't being very subtle about their demand on the drone side particularly. I mean, they put out a memorandum that talked about drone dominance. So from that perspective, when you start looking at our UAS capability, the demand signal is very strong there. In terms of national security space, on the U.S. side, there's also really exciting, and in many cases, pervasive demand signals out in the marketplace via Golden Dome, because space plays an outsized role in that architecture.
And so, those two areas, in particular, are very strong. NASA are mixed. On the NASA side, you have cuts in the Science Directorate , which is not an area we traditionally do a lot of work in, but there's still a lot of enthusiasm around the Artemis program and in the Exploration Directorate . And but there has been some back and forth in terms of what's going into the bill versus what the president originally wanted and what the Senate and House have added back. And as a matter of fact, it has gotten better for the programs that we're involved in, like Artemis and Gateway, as the process has evolved, so we're very enthusiastic about that.
In Europe, demand for space continues to be high. There's a key milestone coming up. Every three years, the European Union holds a ministerial around space, where they set their budgets, and the last one, we saw a 17% increase, so we'll be watching that very closely. On the international defense side, there's been a lot of demand signal on that as more and more European countries talk about increasing their percentage of GDP that they spend on defense.
That's particularly important with our recent acquisition of Edge Autonomy since, via that acquisition, we have a 100,000 sq ft UAS facility in Latvia that is currently manufacturing drones for the war in Ukraine. We're watching how that evolves as well. By and large, the signals are all predominantly positive. The one area that is less clear is the timing, and this is just the nature sometimes of the first year of an administration, as the new administration comes in and has new areas they wanna focus on. This administration, in particular, has been very aggressive in terms of upsetting the apple cart, in terms of what programs are gonna go forward or and whatnot, and that has led to a lot of back and forth in Congress.
I think the majority of defense analysts out there believe that we are gonna see a Continuing Resolution, which can result in some issues around timing of these things. And of course, the government fiscal year goes from October one to October one, whereas our calendar year, our fiscal year is the calendar year, so that can play across those two time periods. But the demand is there, and especially in the space and UAS segments that we operate in.
And I guess somewhat tied to that, orders have been a little bit slow, which we're seeing across the industry. I mean, what is the catalyst for improvement? Is it budget-driven? Is it people? And how do you think about the drivers of converting that pipeline?
Yeah, I think it's primarily budget-driven. Our customers need to get their funding. Some of it on the European side, interestingly enough, it can be tied to the timing of U.S. budgets. The Europeans, particularly when they look at the Artemis program and Gateway, are waiting to see and ensure that the Gateway program in the U.S. gets funded. So of course, they're not going to continue to lean forward on funding Gateway, which Redwire is a large participant through our International Berthing and Docking System built out of Belgium on the European side of Gateway.
They're obviously gonna hold off to see what the U.S. government will do. But, we're optimistic that as the process works its way out, whether we go into Continuing Resolution or we have ultimately an appropriations bill, that once the bills are funded and the programs start receiving their funding, that the backlog will improve.
And then, I mean, Redwire has its roots in being a merchant supplier. I mean, how do you decide where to prime versus where it makes sense to be a supplier of key technology? And, you know, on the satellite supplier side, I mean, what are you seeing in the market today, just given some of the mega constellations or DoD opportunities?
Yeah. So the simplest answer to your first question is, we look at the market, and we try to determine where we can be differentiated. So we're primarily a merchant supplier when you look at the proliferated LEO constellations that were primarily associated with the work of the Space Development Agency. And for instance, we were a supplier of Link 16 antennas for the tranches associated with that.
But when we decided that we were gonna move out on a strategy that we call moving up the value chain, to become a provider of the full, system spacecraft, of which we now have five, between the U.S. and Europe, rather than pick a market where we didn't feel like we were differentiated and what looked like it already had a number of players in, like the large LEO constellations, we started looking at where we think the next generation of spacecraft are gonna be. And, the two areas that we selected that we are primarily focused on are in what's called very low Earth orbit.
We have two platforms in that orbit, one for U.S. national security called SabreSat, and the other one, being built out of Europe for the European SkimSat program called Phantom. We think there's a lot of advantages that VLEO provides, more so than LEO, because it's closer to the surface of the Earth, so you can get higher fidelity Earth observation data. You can also get stronger signals. There is the challenge of that you're operating somewhat in atmosphere, so it's not one for one in terms of developing satellites. But we have two marquee programs that we're being funded for that are focused on that, so we don't see that as particularly difficult to overcome.
So entering VLEO because there really was no dominant or actually very few who were focused on that market was one aspect of where we chose to prime over being a merchant supplier. The other is in what we call highly maneuverable and refuelable GEO. We have a program with Space Systems Command called Tetra. It's actually a series of programs, I think we're on Tetra-7, that is going to demonstrate the ability to refuel a satellite in GEO.
This is important for a concept of operations that the Space Force is very interested in, called Maneuver Without Regret, meaning in a potential conflict in space, they'll have the ability to maneuver their satellites, and not use up, worry about using up all the fuel on the satellite 'cause they'll have the ability to refuel, and we think that's a really important future capability. So those are advanced concepts, where we've decided to prime because we felt like we had some sort of intellectual property that allowed us to be a leader in that space.
And then, you know, just thinking about that, like, what is that intellectual property? I mean, it seems like whether it's maneuverable GEO or VLEO, those are a bit of white space where there's not as much competition versus your comment on LEO. Like, what really enables that?
In some cases, sometimes, what you do is you pick an area, and you make investments. In the case of VLEO, we made investments in early modeling of the VLEO environment. Like I said, there is actually atmosphere in VLEO. Some people started colloquially referring to our SabreSat platform as an orbital drone, because it does operate in that space between space and airborne assets. And so we started modeling that out with some of our proprietary digital engineering modeling and simulation capability.
Using that, we bid on a program that DARPA- solicited called OTTER, and we were selected as the prime platform for that, and that creates this virtuous cycle of now that we're working on a funded program, we're able to validate the market, build intellectual property through that program, as well as have the confidence to make our own investments. The maneuverable GEO is very similar. We're on the Tetra program. That's a funded program through Space Systems Command, where we are developing the technologies.
We own the intellectual property associated with those technologies, and you get a bit of a funded head start, if you will, working with Space Systems on that experimentation program, where you learn the important requirements associated with what's called Rendezvous and Proximity Operations in space that are required to do refueling. And you take that advantage and that special knowledge that you have and any associated IP that you develop, and you continue to invest, and it gives you a bit of a head start.
Then maybe just transitioning to the acquisition of Edge Autonomy, I mean, you move from multi-orbit in space to adding airborne. I mean, how interrelated are the systems, and how do you think about potential customers or technology overlap and, you know, revenue synergies going forward?
Yeah, there's three primary areas that you have to think about from a technical operational specific. Of course, we did Edge Autonomy because it has a lot of financial advantages as well that complement legacy Redwire space. But on the technical operational side, if you think about it, a uncrewed airborne system is not too dissimilar from a satellite or spacecraft. In some cases, just to prove a point, I will, in a tongue-in-cheek manner, refer to our satellites as uncrewed spaceborne systems to really drive home the point that an uncrewed airborne system and an uncrewed spaceborne system are essentially platforms.
They have structures, they use avionics, they require a certain level of autonomy in order to operate. They do t hey have cameras or electro-optic infrared sensors on them. In some cases, they have radio frequency payloads or RF payloads on them, so a lot of the technologies associated with both satellites and UAS systems are similar, so for instance, we provide the cameras that went on both the Intuitive Machines missions to the moon, IM-1 and IM-2, and we also provided the cameras to Blue Ghost.
Likewise, Edge Autonomy has a gimbaled electro-optic infrared payload, an optic that they sell in many cases to our customers in addition to us, so those are very similar technology areas. On the operational side, drones do things like intelligence, surveillance, reconnaissance. Satellites perform the same functions. In many cases, drones act as communications relays. Satellites also function in that area. Lastly, the emerging concepts coming out of the U.S. national security CONOPs or advanced operational concepts emphasize that it's a multi-domain fight, and that's how they want to fight in the future.
They don't want stovepipes between airborne, space, seaborne, ground. Being a company that can vertically integrate a combined space and UAS solution, we think positions us really well when procurements start coming out, looking at a multi-domain operational construct.
I guess just on Edge specifically, I mean, we've seen some movement with LRR, along with the Blue List. I mean, what are the biggest drivers of that business going forward, and how do you think about the domestic versus international pipeline, you know, contributing to future growth?
The Drone Dominance memorandum is a key aspect of it. The Department of Defense has made it very clear that Drone Dominance based on drones that are manufactured inside the United States is a key priority for them. That positions us really well because we manufacture our drones here inside the United States. In order to be put on the Blue List, the DoD does an evaluation of your supply chain to ensure that you have a secure supply chain, and you don't have vulnerabilities through foreign parts. We qualify for that and therefore are really well positioned to take advantage of that key demand coming from the DoD for domestically sourced drones.
On the Army side, we, we've already are working on major programs out of the Marine Corps and Special Operations Forces. We recently announced they call it a prototype award from the Army for the LRR program, which is a key indicator that they're very interested in our platform for that program. Of course, it's a bit of a misnomer because the system that we're providing, the Stalker, is not a prototype. They're really just calling it a prototype program because they're putting it out in the field to see how their operators use it. But that is another key demand driver.
We already have multiple branches of the military that have used our system in the field in the U.S., so they understand how it works, and we're confident that the Army's gonna find it to be a value add as well as part of their evaluation. So that's really exciting. On the international side, like I mentioned, we're a proven platform. We have over 200 drones that have seen operations on the battlefield in Ukraine, and that's a key competitive advantage for us because they're battlefield proven. We understand the lessons learned necessary to operate in that kind of environment.
So as you look at Europe enhancing their defense spending as a % of GDP, we have the factory and facility in Latvia and the battlefield experience to satisfy a lot of that demand. So, we see that as an important indicator.
And then maybe staying on Europe, I mean, and touching on the international piece, I mean, you did a deal several years ago for Redwire Space NV, and you know, you mentioned Edge Autonomy has significant European operations as well. I mean, what are the advantages of being a localized producer, and how does that maybe shape the space and airborne opportunity set in Europe?
I wish I could sit here and say that I anticipated tariffs when we did the Space NV transaction, but that's not true. In that case, we probably got a little bit lucky. The important thing, you know, Europe is an important part of the global market for space and uncrewed airborne systems, and it's actually a fast growing area of the market. We believe that it was important to be there, and but if you're gonna participate in the European market, it's important that you have European manufacturing capabilities. They're like the United States that wants to buy from domestic sources.
In the cases of tariffs, actually, it's been a real benefit because having a European part of the European industrial base selling to critical European customers, there is no trade that is occurring. So we have the ability to sell our space capabilities out of Europe to Europe, and our UAS capabilities out of Europe to Europe. Likewise, in the U.S., we have the ability to sell a domestic manufactured drones to the U.S. So that mitigates a lot of the concern about tariffs.
And then maybe to touch on two other opportunity areas, I mean, you recently launched a new venture company, SpaceMD. Can you maybe talk a bit about the benefits and timing of launching a new entity? And then what does that allow or unlock, just looking forward, the opportunity for generating royalties?
Yeah, so for over a decade, through our legacy companies, we've been doing manufacturing in microgravity. We are one of the leaders, if not the leader, in microgravity work, research and development, and the ISS. One of the areas we've been doing a lot of this work is on the manufacturing of crystals in microgravity, which is a big advantage in terms of manufacturing crystals for biopharma because you get a high-fidelity crystal formation because gravity, there is no gravity there to upset the formation process like there is terrestrially.
We've launched over 28 of our proprietary PIL-BOX systems over the years to develop, refine, and demonstrate that this ability to create crystals for biopharma is very real. In some of our most recent, R&D programs, where we grew crystals in the PIL-BOX, we took, some of the seed crystals back down, terrestrial and demonstrated that we could recreate, without losing fidelity, those same crystals.
Once we had the template that was built in space, we could do it terrestrially, so now we only need to actually develop the seed crystals on orbit, and, we can bring that out, down, to the Earth and, proliferate it, which is a key part of the, controlling costs, 'cause as you can imagine, it's expensive to manufacture, things in space, so we've been talking about this for a number of years. I believe on many of our calls, even yourself, you had asked us the question of, "When are we gonna commercialize this?"
And now we've finally reached that point where there's been enough research and experimentation with partners like Eli Lilly and Bristol Myers Squibb, and our recently announced partnership with ExesaLibero Pharma, where it's no longer just R&D. We've proven the commercial viability of the manufacturing process, and therefore, we launched SpaceMD to be that company that takes the results of compounds that we're gonna fly ourselves, and those seed crystals, which is very valuable intellectual property, and commercialize that with biopharma partners through royalty agreements. So we're really excited about where this is headed. Obviously, if we can make better drugs, it'll be quite a revolutionary business.
I feel like another area we hear a lot about is private space stations and, you know, potential acceleration of missions to Moon and Mars. I mean, what are the biggest opportunities for Redwire around those missions, and how does that build upon some of the work or technology that you're building on today?
Yeah, so we're very excited about commercial space stations. There was recently I believe a directive that came out of NASA that slightly changed the commercial LEO destination procurement. That was an indicator that real funding should start flowing very soon. Our positioning on the commercial LEO destinations or private space stations is twofold, as both a provider of world-class infrastructure, like our Roll-Out Solar Arrays . Since our Roll-Out Solar Arrays are already functioning and deployed on the current International Space Station, that's a great level of past performance that gives CLD providers the confidence that that is a technology that would work for their space station as well.
And we have other infrastructure-based capabilities, like our International Berthing and Docking System, that is relevant to them, and so that's on the. We're a key supplier for the building of space stations. We're also in many cases considered an orbital outfitter. Our experience putting experiments on the International Space Station for decades have demonstrated that we can partner with these CLD providers to put relevant capability in their space stations. Ultimately, a space station isn't gonna have a lot of value if it doesn't have something that it's producing inside other than perhaps billionaires going up and doing somersaults.
But capabilities like the PIL-BOX and our advanced biopharma manufacturing and other capabilities are things that we envision being contracted to go onto these commercial space stations. So we're really excited about where that's headed.
And then maybe just finally on profitability, what's the path to drive improvement and get back to the pro forma model? How much is tied to volume, mix, you know, program progression, just thinking about development versus production? And then, you know, with the acquisition complete of Edge Autonomy, you know, how does that contribute to that model going forward?
Yeah, no, excellent question. So one of the big drivers for our path to profitability that we've talked about in the past is scale. So the acquisition of Edge Autonomy gives us additional scale, which we don't need to grow SG&A, for instance, at the same slope of the curve or the same rate of growth as you do with the additional revenue that an acquisition of that size brings to the table. So that's important. We've also talked a lot about improving our margin profiles, and Edge Autonomy has a very attractive margin profile that's at a blend in a blended way certainly improves our overall profitability.
I think, one of the areas that we think is very complementary, between Redwire, legacy Redwire Space and Edge Autonomy, is the maturity of the two industries and the differences in that effect. Space is still a very early-stage, development-focused industry, where there's a lot of space companies that are, primarily focused on top-line growth, on getting market share, and that's why a lot of them are not profitable, is because whether they're building rockets or, have other capabilities, they're trying to, garner as much market share as possible, and that's important to us as well.
But we're looking at having a balanced breakfast. UAS's or drones are a much more, mature market. There's, less advanced development required. The baselines are fairly stable and fairly advanced. So instead of being development-focused, they're more of a point-of-sale, commercial, off-the-shelf product, and we think by combining those, it not only gives us more resiliency to participate in the great potential on the space side of the house, but it also allows us to continue to invest as the margins in space grow as that industry starts to mature and many of the advanced capabilities that we have right now move from being primarily development programs into full rate production.
With that, that's the end of the questions, but if there's any questions from the audience.