Leonardo DRS (DRS) 2 Aug 232023 Q2 Earnings call transcript

Ladies and gentlemen, good day. And welcome to the Leonardo DRS Second Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Following the company’s prepared remarks, there will be an opportunity to ask questions and instructions will be given at that time.

As a reminder, this event is being recorded.

like President the Corporate of now Steve over Finance. would Vice Vather, Investor I to conference turn to And Relations and Sir, ahead. please go

release today’s will With and earnings CEO; Lynn, and morning, welcome, our Thanks and participating Good CFO. Dippold, They everyone. of call and find on the webcast our highlights, our results financial Chairman conference today being will strategy, me presentation. on call. you and Relations supplemental is the portion operational Mike the where are earnings discuss Bill forward outlook. for quarterly Today’s website Investor

future forward-looking during you and future caution performance uncertainties and make also may difficult involve events, anticipated the future of call that anticipated such Management predict. risks and future performance the are statements of that this statements We regarding to are company. trends guarantees not

Actual forward-looking differ the those statements of projected due results in factors. materially variety a may from to

these latest undertake our please made full factors, refer discussion a on obligation this to our no SEC of other the update any call. to forward-looking For of and statements risk filings. XX-K Form We

management as call, GAAP measures. we should for be financial measures measures, isolation These this provide for useful During also information discuss believe investors. in evaluated not a non-GAAP will substitute or non-GAAP which performance

non-GAAP find in the can You a this reconciliation measures call on discussed of our earnings release.

call Bill. Bill? to over time, this the pleasure is it turn At to my

growth pleased I quarter. increased line organic Steve, digits. report for with and morning. second revenues for us we am expectations the mid-single our the In accelerated to Thanks, delivered thank all results our you that to this QX, strong and in joining

year-over-year of $XXX at representing the book-to-bill quarter, Backlog a bookings which XX% customer We and stands demand also in in is see also continue sequentially. and funded billion, up up now secured ratio. is X.X nearly $X.X to million momentum

bookings and led power evident was technologies. across network tactical and for computing propulsion, QX by diverse with electric portfolio requirements radar our being Demand technology our

solid a and our adjusted adjusted the by the will details in demonstrated EPS for later as Mike profitability healthy quarter. trends diluted and bit EBITDA, the generated also We call. margins through walk

year-to-date continue stair to continues profit up our our planned to guidance. achieve in ability to performance ability as Overall, this track trajectory quarterly demonstrated to and fundamentals We execute. increase business on stepped to remain our our performance based revenue our staircase necessary to confident XXXX and the solid

a spending macro bipartisan defense a reached the the few to raise Shifting to agreement in months environment. framework future levels. The debt ceiling ago for resulted

request. consistent agreed levels a President’s the the budget XXXX, with which FY upon indicate is For of growth X%,

at the For is lower FY XXXX, X%. growth

military However, be exempt expect levels. upward global environment. there the supplemental support bipartisan we will from upon an these spending, U.S. including the to defense that budgets, is threat given bias for recognition of long-term Overall, elevated Ukraine, agreed

strong customer alignment gives confidence priorities, platform-agnostic to us business Furthermore, technology offering model, our in continued our pipeline and differentiated growth prospects.

operational operating has team The the done job a Moving great through to environment. highlights. managing complex

challenge. However, factors, biggest the supply labor levels continues remain these factors three inflation to varying as impact of chain pose to chain all business. supply availability with and Of the

of we likely back and incremental. gradual we commentary, any be XXXX improvement are prior not our on improvement in will the with in XXXX. Consistent half relying material potential the expect Furthermore,

material inputs. With in respect better we stability inflation, seeing to price are our

next As we become will work course of that through cautiously less our inflation year. we optimistic own repricing headwind exercise, normal remain a

challenging. retention said, of pacing helping seeing That which rates, On hiring. some our pockets where the front, hiring is we improvement remains the are net still in labor there are

of we development that we are continue the operating but programs quarters. will environment positively, all, pleased the from the production particularly focused coming is we several transition over execution, on trending in remain to and as All vigilant

from programmatic highlights some the to quarter. Moving

We results. program, continues to continuing which on for technology International our well remain excited this growth our in are competitive We electric build near-term execute Class we opportunities. technology. and Columbia the power interest reflected the propulsion to about and are overall closely is domestic opportunities the in tracking

recently space These a wins wins Shifting payloads two to moment. LEO to strategic help satellites. develop civilian secured We for are footholds. strategic market space for important

are traction this optimized sensing and our build We provider market, expand a our presence as power. continuing size, we encouraged and for by our weight differentiated on to as reputation capabilities in go for

business that for Additionally, applications. the we and in the defense our expand proposals further several new offer to both quarter submitted business potential civilian space

We that differentiated in solutions customers amidst competitive value optimistic are our will carefully a find field.

delighted This to is been and am to single-vehicle solution. critical of counter a of report quickly to innovation. the we our customer UAS meet Last make our to-date strategic our the our to R&D validation ability discussed that I customers. reaction has investments Moving quarter, favorable. needs quite agility

years, thoughtfully the Over have differentiate and technology past our development few our expand research and further investments we increased to portfolio.

small This midsized intelligence, improved deliver and to the surveillance, quarter, capabilities. that platforms announced arena we innovation with X-inch targeting sensing UAS for new a gimbal will reconnaissance in

and There presence rich programs, strategy. is sensing, electronics across opportunity and is of customers platforms with DRS all to fundamental platform a our to broader capabilities. its unmanned part bear a our survivability platforms Bringing our expand for on of DRS

And expand am to include excited see I to that RADA.

to a synergies basis rationale. on opportunities revenue underpinned pipeline pursuing actively transaction the and that looking joint drive are our We are

Security Award Agency wanted Cogswell to XXXX and Counterintelligence industrial us outstanding has at Defense for a awarded I in that facility our Lastly, Missouri. Bridgeton, security highlight the achievement

standards field the XX,XXX Award of one this year utmost the to awarded the from for years, Cogswell XXst our past in XX This security. our of received marks XX reflecting a maintaining facilities. highest We commitment

pleased meet am to and but to commitments I shareholders. a execution maintaining our operational on both with steadfast we are customers focus Overall, to-date, performance our

to to Mike, so our detail. call through that I’d over in like turn can you Now he walk the more financials

broader quarter Thanks, another results. Bill. thank solid to DRS team helping the in I of want deliver

the then through step discuss trends and for our quarter me metrics the guidance. financial Let updated key and

QX essentially were revenues flat year-over-year.

quarter the the revenues were for our versus up impact, divestiture mid-single year. net QX of digits the Excluding prior

the last had impact. we the divestiture reminder, Just full where quarter this net as a is

the will partial a QX. August, divestiture early We anniversary resulting to and impact smaller in in quarter

were segment X%, to Advanced revenues Moving net and the due Sensing impact. down to divestiture segment Computing mostly trends. the

factor, the a elongate supply been supply this decline conversion bookings impactful have to our the revenue. ASC of Excluding chain roughly of challenges to couple chain Overall, more points continue challenges to as segment. was

Our incrementally Integrated our program stream. growth Mission move as Systems the enjoyed impressive of organic revenues production XX% segment Columbia Class towards

from the X% margins was down to Adjusted last XX of of million, costs adjusted in and representing year-over-year decrease basis public contraction EBITDA development. research EBITDA. by company higher up The a in were driven Now sequentially increased quarter from but XXX and Resulting from and year. adjusted adjusted QX points margin investments points basis last quarter. XXXX, EBITDA EBITDA was $XX X.X%, decline

$XX the this the for This came one-time no metrics. reserve probable. of risk environmental In via million to of the financial excluded drove non-GAAP legal longer liability out an us all an acquisition related note, several to quarter, facts our liability. benefit recent reversed aged matter and reassess this decades we Please ago have as we

increased Moving investments adjusted to to segment the trends. to EBITDA the the declined R&D segment segment. internal adjusted allocated In QX, higher margins company costs public and and EBITDA in ASC due decreased

program and program. adjusted Columbia segment EBITDA strong naval expenses, and business, in our to particularly on volume margins primarily higher Class increased operating the power Despite execution were due up, IMS the

that performance drove There bottomline the and a metrics. factors of couple discrete to were trends. Moving

by was benefit bottomline development million research $X translated primarily Our to solid the credits. execution but related net to and aided a tax

Additionally, $XX our GAAP a discussed that reflected metrics was reserve reversal legal million earlier.

and prior quarter year, The up million, up adjusted XX% net over the resulting net the $XX $XX were million were earnings earnings of in XX%.

at lower XXXX, EPS was As line, resulting our little of count expected, the increased RADA. trending share given all-stock the the a combination from in

and EPS up to Diluted $X.XX $X.XX the decline representing as year. a EPS was share, a was diluted a $X.XX prior XX% share, adjusted compared

share and Year-to-date strength than our stock our count. expected up exercises option drove also price higher ticked in diluted performance

evident fourth little Moving a outflow the remember cash with an remained priority most is the in second us. capital top cash for to flow typical working flow. free conversion lower a cash optimizing million in strength remains quarter. that Cash quarter. $XX and Driving Please of our sluggish

for to our Halfway EPS. year, our diluted outlook. narrowing forward adjusted by Now are adjusted and the the revenue, we updating ranges through guidance EBITDA

the $X.XXX now organic are this between $X.X and billion. for still X% growth. midpoint, approximately revenue reflects At We calling billion

view $XXX $XXX updated between to and per $X.XX now per million. is on EPS diluted adjusted million EBITDA share share. is adjusted The Our range $X.XX for

assumption the tax underlying Our the Thanks is the of now XX%. for tax year benefit rate to credit. for R&D the

future R&D We a periods, and rate benefit recurring should our in anticipate we to credits tax drop. see from

rate modeling a leverage purposes, XX% moving forward. you For effective should tax

share a Our and led strong result, year-to-date stock exercises, option diluted the count year. for higher a XXX a we than higher million expected to as are of now assuming performance fully

the contributing to particularly stepped second continue with a of trajectory metrics, across disproportionately we cash but and all expect fourth the previously, As discussed costs driven have fixed absorption to quarter half by flow. stair the free profit

me Longer positioning. year. our of opportunities Let aggressively growth are our term, are we saying in but us performance in the on are and momentum by we we have sharpen about year-to-date of focused close results, the excited solid for the to competitive balance that working accelerated front

questions. With take to ready your are that, we

Thank Instructions] proceed Stallard Please Robert questions of your you. Vertical the question. line [Operator of first Our Research. from with come

Thanks so Good morning. much.

Good morning.

with couple off a for Bill. kick will I

could your that another interest are in of year. there? CR Historically, sort if you First the looking this of where start I to of impact could of export on was and then be, has Thank could fiscal what We could XXXX? your on you. on customers comments had in be DRS on all, there follow-up see of programs sort elaborate what DoD sort what And implications budget. for wondering the export propulsion. also the electric at

Rob. Thanks, Yeah.

sure not defense almost time, expecting year. think this been that the so first we was to we really since XX bill CR. point, are a I years it’s happen the to On -- see passed are We on

next of numbers. see bill Generally, at how that’s very have very this defense what That’s about a built end we into year. would you expect the the beginning So our year year, planned. calendar of at the we that’s calendar and the

great anticipate don’t money So start programs, fiscal lot by spend from don’t impacted what’s that that. you can’t the start new a until new a actually most year a is on have CRs have We you of bill. new which I disruption and

said have power evaluation in proposal right we for what earlier, With electric a your destroyer. we -- on regard interest That’s Korean a -- now. in put internationally, to

other don’t a is interest specific expect And there, months, hear in to next that of We have have a countries as then I not the couple far along. we don’t other other countries, there’s but date. in

just follow-ups Okay. couple Mike. a for of quick Maybe

On Bill. you. quarter, charge might not all, I free $X related what maybe that elaborate could the cash capital you count the the to. some be year Thank why million, of if secondly, deployment, restructuring First for flow offset of anticipated in Michael, wondering on for share which was then the was increase? to this And use

restructuring our footprint to lower Okay. we opportunity and excellence. I our charge, assess manufacturing here center and condense footprint will facility the overall our We constantly kind some start our saw of cost The rationalize of structure. expenditures to a cost here.

quarter. did there. So long benefit implemented during that’s the what have that’s think the run will some in we We and we that what

deployment not money of so the count think, that something the incremental buyback. deployment count kind in our suited of is capital the the with capital float share reducing On from and piece, be is we offsetting a where terms piece, on that best float where it would Rob, share

and that cash methods. then in generating focused first flow, So all, putting that on use other cash of we to are

Okay. Thanks so much.

One next question. our moment please for you. Thank

questions Peter with proceed Please from your Next Baird. come of Arment will question.

Good Bill. Steve. Bill, Hey, Thanks. Mike, morning,

Hi, Peter.

thinking whole kind you step-up how pressure sensing spending. about the that think advanced margins the year? that How the continue of just R&D mentioned from the the impact internal we should about when are -- On we throughout on the this Does think year? you margins, about

to I’d and Sure. take Peter. jump that in one, like

bit. to start, to all, a point So, bit unwound was thing first a with that attributed is of to the a actually will segment, of primarily I a which off hot little mix QX the first ASC little you got

going we we increased That and the when company see to in were public kind of keep guide year-over-year. indicate gave cost growth, did costs increased the some terms margins the what we We going were that to of which anticipated is flat IRAD.

of the tracking increase that’s margins The to as you about down these of and kind back segment higher of stepping the we the to stair drive relatively But I the ASC is G&A, segment. going costs. going think stable fixed stay would it’s continue is towards IRAD volume, ultimately, are and that’s to revenue of going the process see the the in volume to way kind cost, the for this going year our half and fixed absorb the expectation the

then of that to or one maybe Thanks, Mike. are countries color. for And Thanks. seeing appreciate for I you bookings in terms step-up Ukraine Bill, related in protection Europe? just, -- in other any you, force

Ukraine certainly those airborne well based as of Russian against forces. grenades, emphasized both shoulder-launched force vulnerability protection, in all seeing YouTube missiles Peter, the of videos things Yeah. particular, has the threats, importance and the like as of drones ground

reflected The that way has to has I have its been direct moved Ukraine. and systems of movement In been sales. has Ukraine interest the some some there its U.S. -- into Avenger been been particular, some there Avenger -- has think

backfill here to is, of those revenue. backlog probably, for a the than by short-range The with air I in is by happens mean, SHORAD, Avengers, U.S. that, modern impact defense, us in going more system. what ultimately, the been And more has terms

add happen equipment to but Ukraine. not it’s doesn’t move the contemporaneous our It will happening that to of with backlog, immediately. So the

next So programs, to doesn’t current in but the of it in year. the happen years, over up we a couple those tick do see expect

Thanks. results. Nice color. the all Appreciate

Peter. Thanks. Thanks,

one moment please question. next Thank you. our And for

come Please Securities. Tanwanteng next with your proceed CJS Our of will question. from question Jon

side? question. here Hi. think domestically? I are KDDX, the taking base on update Thank wondering Good my naval state I are more about at destroyers moving forward subs industrial the I you the morning. expansion new hearing heard you programs on the you is, and was for first the My one but and any

Yeah. Thanks. Jon. Thanks,

Navy path programs, first domestic the a is the start the step wants facility. for proceed the they in propulsion new before new the test design The DDGx system a destroyer, testing they destroyer. is the to On where and new

the an are testing going the quarter for facility past submitted. submitted proposal the the few this So proposal is know and DDGx exactly see next never will the in to but -- have we the testing see is you you next facility a step and we results when award,

system. submarine. SSNx, decided next Columbia propulsion is They still behind an at of the I have electric the evaluating submarine motor, magnet Class is what into should permanent put are which have we they say that. on what kind DDGx,

It’s SSNx, running the of On are still they behind evaluation. couple doing a destroyer. that the years

our congressional is grow. base of and In terms even current there. we and the is in expect to per move expansion, current submarine of demand capability half U.S. about facility move pressure The under the one demand there’s a the wants which demand the to industrial two from to and year, about of per year that

And accomplish several in so overall, how how the would try active increase. to and see our are are the that you supplier shipyards with and doubling and the with years into accomplish working the we we ourselves including over next customers that do capacity Navy discussions the base,

Okay. Great. you. Thank

to in quality. call the your it, recover and QX. your efforts help their little Second, recipes, actually -- I in know in ASC were it, wondering call if you your yields a seeing their you supply mentioned their challenge I bit progress chain more was suppliers,

understand in help on the Just me down going level? supplier what’s

start expand. Mike stability in me chain. greater the we supply are then Let and Overall, let seeing

We are saw times but lead past the not seeing we in not way either. yet we seeing increase them are contract years,

that’s those are not we are but of say lead times. seeing seeing contraction not So stability we a we why improvement, when

microelectronics. issues. movement. we contract some it there’s are I castings, year, seeing -- we components, year stability are more was are would thing the seeing -- is, electromechanical other This there, last biggest manufacturing problem in seeing The some generally, see but in just more it say we

with it’s series to a to challenges have address moving schedules our we As are on and actively attention that we But issues suppliers those pay of track. to. keep you our constant indicated, working

little segment. Let let the more Mike me in add a color terms of

that casting dealing The recipe, alluded you improving houses the they really some in are to the showing some we we that other comment from quality I that stability will just vendors is in that aiding that It’s will, add relearning have if of to. thing terms improvements. kind Yeah. and of Bill the been only with, that, are making efforts and the Jon, of

more We those of are to quality of in improvements. timing the deliveries because the of starting the get confidence and because efforts

So conversion, word stabilization not that times, we the along, use and not our be continues is moving again, that are accelerating lead backlog contracting to what we the but that’s seeing.

and certain The solution. improvements other doing making been that difficulties is those be vendors are had our are some thing not that have where to part qualified we second to have is, source and and we of those working we progress starting get is ready as well, to seeing that

taking in not still from are a all, yet chain focused this another on we supply So, quarter perspective, it’s I lead the contracting times. but step forward think, stability,

Okay. Great. for Thanks. One me. more

opportunities management. wondering, the for Just DRS. accrues that that of at upside recently parent there mentioned you are might be is the too They help DRS for be what with? at room more with parent Is early understand about, was Leonardo, something it new that -- would reported or synergies more me I think level? to thinking to you there just

it’s Cingolani, in to new latter, as we. It’s think early very are little think I The probably looking too the for CEO, a interested Roberto synergies is Jon. about.

his on in his focus areas -- particular. in highlighted is the he he call, think I space,

opportunities the go new to As we that’s expand CEO have talked think about, well. we and to in wants I as have real space where

thought think I think you So we too want area sizing that’s give any but to mind, on opportunities. or I it’s an early in the

Thank in jump will queue. I you. Understood. Okay. back

for one next And you. please moment question. Thank our

from will Please with Truist. proceed Ciarmoli question Our of Michael come question. your

guess, more little Bill, I for just guys. bit morning, taking on bookings. Good questions. color maybe the Hey. Thanks a

around anything the were surprises you or overall upside NATO give status international ahead Can and But kind did called you the maybe here? some ACS of spending being any you sort but expecting what with any increases of more implications the you Ukraine, maybe budget? and are of expectations. the us think I in detail revenue out mentioned of then DoD know of trajectory you where I growth mention from the for as

Yeah. Thanks, Michael.

On more so smaller it’s in direct to offices on increase utilize that a general we European and Ukraine more moving the opportunities hit bringing the offered are of Europe, NATO has as good certainly, members, to continue side, target. opportunities also the X% to side and budgets some and seek Leonardo’s the in European them

moving. that a step. That first was So is

bookings the take the bookings, our we On guide bookings. we target X:X But gate don’t first I beat kind will you of know, on has well. side, come bookings. any of that the on book-to-bill officially and as But half performance out give ratio to the

So X.X a we at about sitting are ratio. book-to-bill

our only the has also but backlog grown Columbia due year-over-year not Year-to-date, to sequentially. funding

we across lines increasing The So we to last in demand of are seems performing there those key four to all that backlog quarter. well out our markets. be record put product are

nice So look we as the we foundation think are future. out building a we into

then, the customers go there, to of to guess, maybe maybe Just that much these on with guess, further just you contracts, the you I balance And happening or headwinds? offset of inflationary get have I some some what’s do Mike, status to on color discussions or repricing Perfect. any of side? provide How contracts. can in of Okay. some these

front. Nothing on Yeah. really new that

very We have diverse a portfolio.

average total, But each contracts the between we puts there’s in and are that. repricing cycle programs. talked of in for about of the takes kind of different obviously, middle our we on and still three-year this have So,

is programs cycle be of still because kind which year changed. that the the is of two will three-year environment that priced most global from before inflation year pressures, we impacted that it in This think I the

from new based nothing upon what said we our guide. So

on those profit, seeing year-over-year. We driving relatively flat still margin EBITDA a is pressures which are the

we are we expansion as seeing tailwind So seeing margin provide that, into forward. future, efforts look we some we will also out the and look the hopefully, are opportunities repricing that but be successful as and a

I going just on Got give generation but me that you the know rate But maybe weighting. for us or one last XQ cash it. help you like magnitude it, to could us then maybe it provide of it’s didn’t any flow, color with? you guidance for for -- another free year And cash on heavy the a can be looks conversion

Yeah.

to still We caveat targeting are adjusted we one make. with the XXX and earnings of tax net conversion that the R&D payment XX% asterisk of Section that had

and change said back-end So tracking is you have get path and there. a no there are that like loaded to It accordingly. we

Thanks, guys. queue. jump I Perfect. back in will

our follow-up for you. Thank Please we And [Operator Tanwanteng Securities. proceed Jon your please from have CJS with Instructions] of next question. One moment question. a

charge. was Yes. about the Hi. just restructuring wondering I

part that years addressed a little I rate annual it year more an bit is was of I guidance think the for on that’s run earlier, this what you And that from basis? generating savings or wondering but your here? cost impact kind does of forward

a the for of savings that set had restructuring that’s the with these We to rationalization. majority facility X:X The expectation this is going for forward-looking. a be Yeah. look minimum at we and effort cost with ratio annually the efforts

is that there QX? event QX or and Okay. And a at is least into over QX more one-time

of in majority QX. here is The it

going but are of QX. the some treatments when the the it because drips the timing in share to We we is will of accounting lion’s recognition, and in have order of

it. Got you. Thank Okay.

the Instructions] I seeing questions further no queue. in Thank am you. [Operator

the So, at closing turn Steve I to back floor remarks. this will time, Vather for

your for morning in in all this interest you tuning continued DRS. Thank and

the don’t to please of follow-up Enjoy always As of to out you forward your questions. all day. We rest reach you again any soon. have look if to hesitate speaking

Thank you. today’s This conference. concludes

now and for have your a disconnect. may day. You Thank you participation pleasant