Leonardo DRS (DRS) 2 Nov 232023 Q3 Earnings call transcript

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third 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. I would like to now turn the conference over to Steve Vather, Vice President of Investor Relations and Corporate Finance. ahead. go Please

Management They and welcome, future is earnings future and during the caution you may Lynn, release in for on a differ Relations due events, forward the the to our participating presentation. Chairman highlights, of involve are strategy, Good make results call portion webcast this financial those and call. and the everyone. from also statements forward-looking on of materially We With statements will earnings quarterly performance statements risks may forward-looking and difficult trends CFO. Dippold, Mike conference predict. also CEO; Today's uncertainties not Bill where discuss me today's Actual regarding future find future are variety to projected guarantees our and operational factors. supplemental call you company. morning, performance results anticipated outlook. that and Thanks will being such today anticipated of website our Investor are and of the that

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

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

I'll our Bill. the of to reconciliation release. call a find measures time, on call can non-GAAP turn Bill? earnings You discussed this At this the in over

us joining this all Steve, Thanks, you and thank for morning.

The demonstrate attacks the heartfelt threats and concern nature the that face of our people by occurred sharing of deep and me allies. month and our support us begin that unpredictable global dangerous last for horrific Israel. Let

and face electric the innovation systems. portfolio, our continue the by most an plus for of assets and components families The conflict employees threat team In to elevated propulsion term, for remain on environment, the In we supporting are key monitoring the billion we closely to Columbia-class class timing remaining the that seeing our critical to progress award our the resilient, $X that look of defense there need with safe. our and the Israel adversaries the operations their coupled broad advanced sophistication most QX award in DRS ongoing backlog. are forward in confident our and with near and but global thankful priority our are submarines missions. We support covers supplemental appropriations keeping bipartisan global customer contract as be of to and support agility our FY 'XX funding. contract as broad of previously with well increased deter and investment and under effectively contract to driving additive This counter to is we the for maintain power to demand total is X is recent recognizing and efficiently. relevant technology threats clarity technologies challenging allies. Columbia The most not our respect customers' growing and the remains need of rest exemplified

ratio. the considerably an to results, our to the strong XX% parts of which that translating and of of year, quarter, from X.X organically. were a the strength pleased come billion another we portfolio. delivered have We QX, $X.X Moving in our quarter expectations our Throughout diverse seen quarter. book-to-bill growth accelerated report to secured robust on varying broad revenue I'm update we to for demand of ahead quarter. bookings the third In

solid stair is and is $X.X by thank across higher. margin force and and want to flow quarterly protection, metrics, soldier The team another XX% focus with the better momentum and focused and on and billion, and quarter. our strong quarter, of and for which of meeting we year us revenue sincerely drive to continues their customers including backlog in and and fourth in I are push our strong full the QX while year. also finish solutions growth there EBITDA shareholders. sensing, for excellence commitments the year-over-year for driving advanced demand our for dismounted necessary now profit work financial for key bookings ground has generation And matched up sight quarter, Their excellent allowed line adjusted steadfast to the steady year. sequentially. increase to to was bookings to was at sits naval our hard customer for the expansion the up linearity a the is This quarter communications most clearly tactical evident climb in computing. the performance the executing incrementally throughout Backlog acceleration

on the aggregate stable. operating an good operational complexities update environment. Supply be is news chain that the supply from our to remains Moving impact to to business focus. The a chain fairly continues key

However, capital appropriate our to impact mitigations proactive operational and have faced the the we implement historical as and much conversion to but on line, years and to in team to on norms. Throughout with above be past discussed we more as a every said, now alloys contain over we'll are specialty reduce our keep prior are the few and our of been chain emerging in where of area concern. supply supply That microelectronics, as have the stability has seeing continue castings new that and specific calls, face, still elongated reside. observed front, revenue the challenge complexities chain possible. evolution aggressive as we a issues bookings raw shifts to working working materials XXXX, continue and Bottom cycle

a with quick comment to labor Lastly, let offer inflation. and me availability respect

but linger, these of improving both they on slow are trajectory. While factors a continue to progressing

tailwinds flipping Our the expectations And to as promise will over potential the variables both term. show static. slight fairly to headwinds out for we they they continue service while remain medium close year, of

business Now quarter. highlights to some shifting from the

The program business. our class the strong in overall remain Columbia continue financials. Our improving across in execution program evident to our dynamics strong results reflect

well. However, steadfast migrate from the better over we production programs said, seeing programs are year. we focus those to fully development That as we as on smaller to work coming execution are maintaining also execution other

Moving to growth.

are sensing, in robust propulsion, year-to-date and We electric power broader strong capabilities force our quarterly our customer advanced compute and as experiencing by demand and network for protection evidenced bookings.

the Additionally, growth across remain key clear opportunities business.

remain We adjudications have electric that the expected several power and sensing with proposals and evaluation propulsion under and XX in next months. over advanced outstanding

a vision contract Army award are AI-capable pleased recently the capabilities. of to integration that On and initiative integrated but from sensing. our prior discussed to I to We to small am further continuing important innovate into sensors. the have also that we our received for I advance computing calls, enable report

are we emerge and are requirements protection On also seeing the radar domestic we for technologies. experiencing steady global force tactical systems, multi-mission front, active our demand protection for

the been our acquiring are thesis our working Furthermore, to investment has RADA, and are teams the together by synergies requirements As rest strong anniversary we customer respond of visible of macro our the solutions. integrated approach propose validated environment. and routinely business X-year opportunities with and to

growth of about business. We opportunities diversity our the across organic are excited

detail to this capital to are Investor pleased whether customers maintaining R&D are best manifest am date, DRS more expenditures. at our on execution on to Day with but incremental these our evaluating and overall a to our We sharing XX. investments, we our how regularly on performance We in through commitments or thoughtful strategy forward look position shareholders. New York I operational to City focus and on meet Overall, March both as

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

Thanks, Bill.

effort deliver Let also thanking me team another to for excellent quarter. incredible begin by the their DRS

I but organic also power The of our the the revenue at financial XX% network back for growth the programs, Columbia XX% updated our in compute contribution usual, guidance. and Total and of healthy naval metrics through growth saw will the from quarter. QX namely the Class, company for accelerated growth on discuss As both segment very which ground was trends a and the bulk then level walk businesses. naval year-over-year, we key represented and quarter our

were from due up solid X% as view. Moving tactical inorganic well to growth RADA. as to in the segment communications the slight compute network tailwind segment ASC and revenues

of delivered revenue segment of IMS Our quarter growth another organic impressive XX%.

EBITDA $XX remarkable year. from representing EBITDA. last million, growth XX% a to in was Adjusted the quarter Now of adjusted

and Our were look in profitability. to EBITDA At segment bolstered adjusted results, This expect a meaningfully greater by XX.X%. segment basis. all which G&A, our and points IMS were on XXX drop expense will up similar momentum increased is to On next and due XXX year period up in basis was fourth XXX we compute has power that higher was on our led program to this basis and margins network adjusted QX, volumes, XX% XX% favorable business, points to better mix we sequential and also and by EBITDA Columbia than expanded means slightly line. to largely mix as EBITDA In margins most EBITDA our quarter. segment, across continued volume. fact our execution execution Historically, program ASC year points higher programs, driven Class. our margins laser basis, adjusted up naval evident last quarter bottom cadence by volume Strong due higher basis this our the the adjusted a we a been programs better

metrics. line bottom the to Moving

down considerably million and $X.XX our over was million and year the due diluted divestitures. Third AAC both quarter $XXX net GES $XX last last earnings gain share, EPS net a were year for recorded to

the XXX% and flowed Strong to and tax earnings these net diluted along which with adjusted healthy related adjusted for a execution, were tailwind and normalized and XX%, gain Our credits metrics. items $X.XX of development research nonoperational $XX of other EPS respectively. up to a operational million share, onetime

for still of RADA. a our share stock as higher compares result the significantly a However, reflect the metrics a headwind count combination EPS from with

continued working free cash more free flow favorably to Cash sequentially driving generated third the are Despite to million capital improve enhancing we in constraints, also and and flow. We conversion. $XX focused continued of year-over-year. collections supply Moving chain efficient on quarter. cash cash trended

dominant we quarter pointing our accelerating fairly very are annual cash We much that as consistent have source cash been focused generation. in as the of such, to And on flow. fourth the

to narrowing raising for revenue our Now and ranges the are the performance, forward diluted our adjusted on EBITDA strength guidance Based EPS. for we year-to-date of the guidance adjusted outlook. and

between in and midpoint, the full $XXXX range and the will achieving tightening still growth. organic material million revenue be receipts. largest to level variable $XXXX fourth are and X% said, this the At million. reflects year That timing results We approximately quarter of the expected factor

Our $XXX $XXX is million million. on EBITDA between and revised adjusted view

of heavily As discussed expensing earlier, influence G&A. revenue given volume output our our profit will period

drive driving revenue. mix that program be The will within other important variability the range will factor the

our and adjusted $X.XX We are share. between for increasing $X.XX expectations EPS to per diluted

is year continued XX%, the Our for the R&D thanks to from now tax the underlying the credit. assumption for tax rate benefit

still are a long-term as well holding and for quarter as rate XX% tax we However, fourth of for beyond. the XXXX

our of and our respect late guidance maintaining pacing fully the exercises is the count February. to the our also you year-to-date. quarter for it XXXX, given are color million $XXX year, realized share call We in provide intent With of fourth our in diluted option official on to

As confidence are have and we opportunity how pleased public, quickly performed with we being the approach year ahead. a in of the business has

have portfolio to we as unique needs a ready and remain questions. for are as critical With shareholders. and customers position We clear to We a value. execution take strategy, well create strong your of that, meeting our focused our delivering the market on a

Instructions]The will conduct Research. first with we this question-and-answer the Thank [Operation's question comes time, Stallard Vertical from session. you. Robert At

of Bill, at of system. What put budget you. case the moment sort Quite a later uncertainty on the government or this year? repeat might place even what questions A of getting you couple I'll with through of a have in environment. down contingencies in the regard you lot shutdown macro the start D.C. there call is with a sequestration in to

anticipated the extreme mean pass amount Congress always Washington this this this little through I bills of But fair the of we think this And when by bit turmoil the a at the picture year. quarter big time over almost we there's version I October we've plan, X. built what more -- point is CRs year. a in on in seen

individually doesn't there built a getting is that's if the quite short which but and A shutdown, shutdown CR material impact is into a January on passing plan. is isn't would likely then through Omnibus. through I see to think be into So we'll either We and built likely, go bills into probably a it us. sort of less they'll what more have the think plan, the or some

investment the anything moment, could in which to there there come DRS? Congress at then in Is Okay. And is there for there's the regarding the defense in an supplemental through base. ultimately that amount the request, industrial

about would I of our What and until funding Congress support touches -- And be the before support with the the remains support possible. mean capacity up impetus yards supplier be the to to the great The to shipyards our we money base we be certainly that submarines Navy and to money. came supplemental that. to and could the are going particular, the money, that in the that's eaches There's X in are expansion. that the capabilities in increase seen active have money Yes, to to after that the discussions passes and expand how was candidates to certainly the that it for are the a submarine industrial us. base industrial it's throughput year. base per move

a Yes. maybe And then Mike. for couple

your free then for the what X months be year? expectation cash flow situation working said track changed that all, likely year, how capital at expect First where do that? to versus the heading ago? And And of next is for into all to that you what's you has also, within

the And question. Sure. for thanks

million we the perspective, outsize our into our kind year to order the to adjusted regards and cash cash lot you're year. customers XX% that the in means commitments that and maintain schedule working ability conversion $XXX off we investment commitment. in on net throughout in here earnings. Obviously, working conversion quarter put made quarters. driving in tax was earlier free to a the of from what capital prior going as see for a a the that kind flow maintain anticipate our cash financial for So of trajectory that to the QX we adjusted with that still start We're of of payment pay that deliver versus feel capital, confident With to still of is fourth the

trend our and in see you're us the unwind a to from that's So little for commitment bit assist cash year. the to going going working capital, delivering the

year, all next you year you similar then do build seasonal deliver a the And and in pattern the capital Okay. QX? then expect sort working through of it

in procurement kind our set focusing obviously stabilization revised current the chain. there getting We're We Yes. supply the on of that is times a for think there. lead

generation look in change, of portion improving historically, has that we'll trend. be but we if So focusing the has to see been that been our QX. won't on But are focus -- continued on this large you seasonality. That our cash improving

Next question comes from Michael Ciarmoli with Trust Securities.

clearly It Bill, as mean, I moving frame maybe but reference raw like availability think I sounds to to that, as you at I about things this just trying concerning flagged, I access just some you mean are a on looking better, material to of specialty materials. how supply is? guess, 'XX, you get chain. think, alloys, into getting how

I theme mean is stability. I Yes. think the Michael, here, overall

a supply have the in bit up. have stability metals it's of the popped stabilized But a and specialty -- whack more seeing the seeing little are of a chain. where kind the microelectronics now said, that We we're mole

be We very proactive. to have learned

we so to just but enabling ahead And need well of to 'XX buying and will customer meet not meet as our able anticipate revenue steps we disruptions. do commitments, And think any stockpiling are commitments, well. are our those through we 'XX, through us be to that and

keep maybe on inventory some kind more capital, you to Or contemplated guess the does if normal? that working you're just carrying of plan? I upward back of question, have into that kind do Rob's Okay. pressure than

the plan. cost elevated of is a that them, kinds built absolutely working there steps, increase capital. capital. reflected cost does We've working and But in to that the really It the into these is

the for some we'd would down be, but where above we in wind is quarter, fourth steps, will it but it. I said, guess, at those look be Mike the otherwise to As way

annual an and kind Got pricing surprises in there I the be I it. to growth better we program expectation the 'XX the Any to should was on revenues got you move just rate. grow continue Columbia cadence with that as even out then of And think Navy? additive on booking into booking, run we work of years, of of Columbia or margins? annual to negotiations terms the the that into and Or think of and expect sort there, the with that

those both. will the delivery do margins And into the will gets and built that's we and -- and bookings with grow to of of because on the of contracts be to for get a Navy some is That is them get we've It benefit. the supply terms to more getting it stability And negotiated. this of in decade. work they're better of That the pricing. the shipyard get additive work that thrust the absorb suppliers the assurance lets pricing, going us our chain, risk to through

does defense win-win of completely it reflect forward is convinced really it's the everybody. for as budget. So going program what is Columbia the And planned. stability go a to the is in this program Everybody

possible. And do trying the to it most in efficient so way do is what we're

Got one just labor. it. for Last me,

there facilities Israel. at of You've obviously as potential of into you've labor duty got called of in look you RADA, framing risk employees reserves you are kind or just the operations how the potential given current in environment? your got there disruption, Any terms

question. to Israel point. some attentive we with of very it's working Defense. operating that the are produce managing the that expect, -- that important There Ministry right -- reserve and in They you obviously obviously are Yes, this faces would very conflict are terms been of We're the Israeli the operations. products now. at fully for call-ups thanks There we're the but as have

is at facility this everybody interested in capacity. keeping our So going maximum --

that basically of a have the a things. do we that in backstop U.S. a largely facility lot same have a also can We duplicative

this point. disruption, adapt hasn't to there's can any been if there but disruption we So

of Andre with Next Bank Madrid from question America. comes

question the on up Colombia. Does the that that on projecting basis any think I profile you were the in of years? something Michael's of company-wide guys guys maybe that expansion kind repricing. margin out on closer expansion follow margin booking to said through you points XXX do think after to the received derisks quarter like end, to you Maybe you way XX Colombia

can any you if on clarity that? So give

Yes.

commitment that ability continue we in more I to be where to efficient. and perspective price on landed think our aid a negotiation the will

It's what clear force to So environment. helping supply right our us production way has maintain given work labor said, helping about think continuous a it's our this the visibility. us is in Bill this I think chain. It's us

All of margin are expansion in to us on, will leaning Andre. we going that those create been driving efficiencies that have help that

Got the then business for driven came one talk that on another about you a a know It lot you. more broadly? book-to-bill quarter looks Could of it's Colombia. by in demand And IMS broadly. profile X.Xx. at I soft across little like maybe the

So the we just front lumpiness moving expect kind could of of the business? some Is on forward? nature that that

Yes.

at in a quarterly little Looking a book-to-bill gets difficult. cadence

You're in that the right, a book-to-bill a on QX, X.Xx. of it book-to-bill was X.Xx of QX but was about from heels

to holistically Colombia, of segment, protection the got our arena. year. the more it even little the in at getting outside of look IMS really we're seeing throughout tensions a demand and macro from course force our you environment the within And lot we're So of a

that the and through year I very So results. from IMS the demand robust, coming in you'll think is see

Next Tanwanteng from question Securities. went comes CJS with John

what's into can increased And that, adjusted Was little get driving John. then color EPS the there any one orders was This on just outlook? pull following we QX? is morning. Justin I on for a

sure. Sure,

some the So driven saw credit. the the by benefits from the increase outlook EPS that tax we is in R&D adjusted really of

tax option bit from largely count the EBITDA the side, hence, some of on guide both have side an know, to share is tailwind exercises as increase more of on into a through adjusted tightened increased the but adjusted we the employees. of little the been you EPS the And seeing as standpoint, that R&D that's on credit metric. in as kind little the tax flow-through offset the benefit rate by from we've revenue well So the a certainly operational the bit a conviction part continue higher we from

an helpful. orbit a efforts? That's And follow-up. then give update just earth on quickly low Can your Okay. you

into generally, development venue that moved where NASA well quite give those in for space, In the Yes. low that a technology to space been we're as us cooling a months that orbit the to the the And the and into next more we and as We've agency, us to our of really won niche the we're XX opportunities on for opportunities see would for to the we'll the demonstration potential has weather take payload And as that's think space over tracking a satellite able and really XX is on wake have have pull XX months weight to chance more has demand what capability technology, really over earth a core to those. position it we business. are next burden. take advantage open, as to because opening system the a of then doing really XX uncooled you a other put lower is. which

next Jan-Frans comes Our Engelbrecht. question from

I to Colombia. to just quickly return want

of you've ships that just was you think learned Navy the today. program? but a labor Or when would a over I on gradual achieve some and from it as highlight perspective the then you've lessons to that you the X technical steady-state wondering sort of And expect to program XX both on improvement well initial sort profitability about of lifetime? just I as sort could if be delivered

the question. I'll let financial take Yes. Mike

to development first as through the system. able develop well was me of ship is do set been -- what which the Let we've the contract, first the as

sets. I to We're think system, electric the was production to which we've a propulsion the able working delivered scaled-up We've unavailable been Navy now on before. ship that. develop

lessons one surprises. that seeing we hard in development show -- the are the we're learned not up we lessons the that seeing production, in think we I the

very of we're an transfer an was -- we've to new capacity. going really I thorough it very predictability with good think to domestic. foreign both program enormous the And classes And development is worked that's X production be this the this -- we're ships. years amount enormous technology feeling over of And of we leads several about able think a of and -- next through testing. opportunity to this years. where that the

And that take is in the drive why we're to we're confident hit new financial I going Bill expansion. the margin from side, this be that it's I'll to And the what is we've -- the it. We've you the for but production yes, prototypes. through built in community. evaluation testing that first submarine tested remind built the the about just I'll think rigor also proposal and the able goes set, We ship

learned those So lessons lot a we have of through efforts.

We demanded are -- the and to very it's ability execute. our confident it's And obviously, in customer. by mandated

good feel we So there.

this did economic also We program today's in environment.

from content us production, margin So revenue and our you're of going lift. the derisked that the that to this associated become see from and believe is and the production had to margins as more that's where opportunity move begins aspect. the side to we're more with And -- margins we from that development where little you some a on that do which drag program, gives

negotiated dependent become us the and we You're revenue contribution moving these shipset that first and for going as will to newly see additional it into development less opportunity the afford the production contracts marginality. on from

give general. really just Middle I'd Europe there. in in could geopolitical Land follow-up. if But where you're additional given DRS any demand color there Ukraine, of seeing up just some Are That's then a areas elevated show imagine you quick it helpful. And just would East, sort Perfect. foreign specific the backdrop, Systems.

we're Russian from attack Ukrainians force mission as experiencing the partially Yes. from platforms, attack mean, Obviously, from in their highlighted Ukraine rocket protection vehicles certainly both is on I experience the -- area grenades vulnerability I well has and what as ground, a tank are systems, their propel weapons seeing attack drones. that the and by of mean the land to drones. been anti

states of really and had for kind set that's highlighted which increases post-cold highlighted in and those more Russia, importance the really in the force has era, this atrophy border ground We're Europe, particularly systems. war the demand of seeing systems. force of a in really So generally also capabilities, systems that protection protection that

into that they now And were years pulled and so being like frame. acceleration you things you're an Poland seeing in of out several current time Romania are look the

push an well. as on demand upward that's So

Robert have Stallard open. is from Vertical your another Research, line now if question you

of couple follow-ups here. a quick Just

the here? might you First realizing might And of have actually. seen capital they deployment, sign then sort for out Leonardo secondly, be given Bill cash maybe stake and year-to-date, On down performance are in defense this opportunities be interested any share their that all, of there you again, seeing price bringing environment? some what in from this M&A

Rob. to is do is Sure, today. a thing question. best think to point me I for Thanks On to probably Leonardo, week the for from you Leonardo the their going have earnings call

have elevated, on I with have for computing, We've and that's market network protection, in sensing, or that, fairly that are the the a the might so advanced areas point And power update we're plans. think announce some any can't of we they opportunities electric well strict on to look pursued which we've we I mean on doesn't them, On at update force focused criteria. do but in seen not we're their move, place an anything. we're capital deployment, to X propulsion. have And we all would we actively looking -- fairly is -- say still -- and position steps, move financial further this valuations but criteria to as on as have strategic

months that's going So to it's take through be going to a 'XX. process

looking of So is line the time these kinds examinations. for at we're

further this no questions. time, At I Okay. see

to back closing remarks. for it turn will I Steve So

Enjoy And your in for very again all forward thank any the Please DRS. and soon. And continued this have your hesitate you all look to we you day. in don't speaking to you. interest Thank with morning if tuning follow-ups. reach rest you of out

you. Thank today's This conference. concludes

Thank your for you now. disconnect may participation. You