Leonardo DRS (DRS) 27 Feb 242023 Q4 Earnings call transcript

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator instruction] 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. Please go ahead.

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

discuss factors, For and refer a full We update discussion of we in SEC evaluated performance for statements will other the our measures, investors. measures. financial for these information management undertake XX-K call.During risk substitute believe made Form useful or of obligation this to please non-GAAP call, measures any not which These GAAP as a latest filings. no this to our also should forward-looking provide isolation be on non-GAAP

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

expressing the DRS. incredible all Steve, interest sincere Leonardo Thanks, in start delivering for I'd in my contributions and entire to by shareholders. and like customers you tuning gratitude DRS our in team to their your and for thank for our both

track and financial the ended record execution year footing, our on XXXX. for results exceptional build resulting solid to in continue We on

For for we approximately organic grew our basis. an the growth impact, divestiture adjusting the X% net year, revenue when X%. to accelerated on And

for network electric and advanced year. for a achieved naval power and X.X and We ground Additionally, ratio computing, we excelled and in bookings sensing. saw demand impressive solutions at the propulsion multi-mission our capturing book-to-bill

power reflects set our a We contract by awards grew had but we higher electric internal billion over costs. through of line. $X top peak a XXXX, of propulsion adjusted This briefly secured greater mentioned and G&A increased for pace inflationary in the and total company also slightly investment systems EBITDA also diverse throughout Our delivered quarter billion. last Columbia I company managed public XX% the to the class year.In and rest and R&D that growth than of contract new $X.X record from at a lower headwinds backlog

cash and Lastly, quarter XXXX robust fourth of a collections.Moving stronger-than-expected and free $XXX to market budget the was flow at million significantly environment. was result

growth We this pipeline.Shifting this new continued now positions, timely threats connected investments. and growing are more progress need on counter prompting we power is we opportunity long-term at and is and our years modernize strong increasingly to year, are and our robust expand also sensing, confidence our R&D strength multiple the well-fortified in demand customers healthy backstopped by computing, for our technologies customer evidenced advanced to through by priorities, and the Throughout propulsion. force domains business. and its time, our and backlog aligned with our deter closely global spurring cautiously across the our accelerate sophisticated the FY to passage. monitoring allies.Our investment contested 'XX of The I'm closely to growing market is these evident and threat dynamic well-funded ability in across protection increased electric optimistic and have environment bookings And defense of and palpable, Furthermore, appropriations. network sharpened is highlights. differentiation secured broad to spending The we wins our capabilities. portfolio to continued drive is in it to our operational and pleased is business

end given the reflected resilient XX% now propulsion growing drove is The electric propulsion is our Navy mix.First, requirements and destroyers power naval computing a business nearly decades. power is next-generation as a demand diverse a the fundamentally the in for We next not several X need in largest adversaries.Alternative well Navy and next-generation global when, of evolving is of are network to future. peer us drive strong and the our a businesses needed is for in fast-growing first and if, million which opportunity $XXX to our clear growth approximately of even resulted represents for customer, to long-term our our strategy given ability capital long-term the meaningful become Our a by is an see to customer network long-term platforms.Secondly, XX growth this greater in their initial increase of allies over potential other recent facility XXXX. inadequate in adopted Navy capabilities for the and as last set a investment today scale importance overmatch new Carolina. advanced to goal total power and revenue opportunity form secured the years, This near Columbia backlog investment the technologies and computing months.The we There of percentage ground for of electric new it for in question with is DRS technology addressable occupancy believe in with South international class customers' the sensing to our driving that the contracts revenues. from in technologies this in

the of customer revenue XX% international year. Our exposure grew for

clear in there addition and new business.In we to mix, for demand are addressable growing emerge our ASC customer technologies. our international to evident opportunities in for segment, most across residing see technologies shift our missions we growth are a was customer continuing believe While

radars, tactical stand defined sensors, frequency out radios software infrared in and uncooled particular. Our high

progress missile in both that satellites that defense civilian missiles ground also Some to XXXX. space That said, slower force saw customer applications wins arena, airborne continued of but we the to intelligence, market pleased in been contract weather include in protection.I'm through in has and report secure make the next-generation to missions interest these translate increasing technology, on and awards. communications, in also interest into we solid signals our

for our in costs an the XXXX growing investment. in of that share focus space increased defense on the G&A mentioned I was internal a long-term R&D uptick We are market.Earlier, maintaining in drivers one

future know, was growth. a invest this in and you differentiation expanding decision propelling As to conscious our

approached force air as strong models.On demand advancements. new percentage across portfolio X% our tactical radars that and sensing, debuted received Today, assured wanted has a our active revenue calls, force is highlight peers radar generate continue including and brand-new markets. for among and which been air consistent with protection, defense.Overall, of UAS R&D protection counter as incredibly comparable applications other mobility investment cyber XXXX, of hardened prior we customer to the some internal X I capabilities initiatives, PNT throughout for Our detailed longer-range network to year, well solutions, technology I integrated business in for have protection operating increased we defense in computing,

made lasers and a computing Secondly, lasers wider that we spectrum commercial advancing are These remarkable to sensing to solve has execution. helping execution. We in significant new new unveiled light. in program of in job across our of sustainable to portfolio. quantum recently problems progress a defense into The advance done and development team programs the critical challenges.Shifting efforts improving a cover family XXXX foundational the production

have Mike, customers shareholders. creating I'm proud that I this focus turn though outcomes the achieved. over let up for We we is underscoring to of front our me our our what by for consistent maximize a remarks our alike.Before wrap my and employees strategy to and value on shareholders will call maintain customers,

focus to cash growth, and review you performance generate margin on flow.Mike, to outlook. to and our Our accelerate our strategy over execute drive to remains financial expansion continuing XXXX consistent

excellent accelerating deliver efforts fourth Bill, the to the their quarter, for XX% Thanks, financial an results $XXX to basis. was growth the Revenue total remarkable the you year and throughout million thank on and organic to entire XX% for XXXX. team for

adjusted segment for line resulted in margin line increased XX.X% due mix. adjusted X% programs XXXX. company revenues G&A by broad-based demand year, and the beyond.Now of QX For We These the class $X.X segment, at the basis growth and the advanced favorably and drive better EBITDA in primarily EBITDA tactical year, and for to an the the in greater lasers, growth, year, In were strong representing adjusted In quarter the to faced and $XXX and growth ASC sensing spend to full to EBITDA. due Computing the and margins headwinds Resulting to Advanced fourth Systems warfare the a from but higher tactical costs.Moving in was fourth public organic from EBITDA trends. communications computing which from X% Integrated higher towards headwinds growth electric points, growth Sensing billion, in year-over-year saw full Columbia revenue top XX internal to electronic particularly year was propulsion year. driven the uptick metrics. XXXX down we margin and X%, programs, for growth leveraging radars, program, our higher drive decline naval revenue total and and Higher EBITDA margins of for XXXX network volume growth our on strength year, the year. multimission segment is was million masked our G&A from and our X% expanded Adjusted margin and better unfavorable for investments respectively. and strong Emission segment XX were on the year.Now for R&D adjusted for for million and respectively. the power quarter in contribution full execution mostly progressing mix XX.X% technology. IMS segment, to representing volume $XXX and EBITDA a benefited adjusted and both bottom

the operational to the fourth for declined growth earnings translated full to quarter, for million net but year. Solid $XX execution XX% of

of skewed year in were As flow trends, cash share adjusted continued X% and the robust fourth quarter million count net free the diluted favorable gain is RADA. be count by year-end for from a accelerated the comparisons exhibited all-stock reflecting Exiting XXXX.Adjusted into full $XXX cash quarter. should EPS and share full both full the $XXX net diluted EPS and forward stability, X% historical cleaner.Moving free benefit a given fully year, the making million to growth demonstrating diluted strength compares diluted compare earnings and the the reminder, our the with year million more timing in a net to Consistent for the impacted for The QX, quarter have combination the year, the hopefully and moving versus for year. the collections from was flow. growth in divestitures $XX with earnings prior recorded on and the sizable that cash

$XXX free full at result, year cash flow ahead of our significantly a was expectations million. As

deployment We have for focused and growth. capital continued capital value-enhancing to on inorganic balance discussed, our is and strategy both strengthen organic our deployment.As sheet expanded capacity

investments to business, we in our the not show and value are and fit on.Organic found our opportunities continue long-term bolt-on date opportunities we that value potential to to term remain evaluate our additive greater have near being strategy to While disciplined business. presenting M&A compelling of transact to

and has briefly determined we support of Bill expect As and next CapEx, M&A path will strategic have not is overwhelming to Carolina investment a This earlier, our even interest cash new our in proceed targets uptick few business. aligned the active over our returns our propulsion electric mentioned term. maintain free clear have on pursuing a we that delivering and building financial guidance. conversion.We in fast-growing this to have long over and criteria.Now coastal to XXXX This organic project are an the flow merits the invested to with investment capital But our there power solid our rigorously excess expenditures capital of return in on targets to capital changed years. reason increase South facility embarking in to evaluated

the We XXXX expect capitalize and built strong margin growth organic to momentum this throughout expansion year. into on

billion, of $X.XXX $X.XXX range and revenue growth, organic. We X% all a are is X% between representing initiating to billion a which

pronounced has Assuming to we that we FY what to in trend still revenues cadence to anticipating guidance we the to with average expect appropriations, timely comparable are prior will statements and XXXX. at less XXXX, the passage on but where year general compared a our build XXXX years throughout same quarterly saw the reasonable be the

expect of to $XXX you for just million.Moving revenue I to revenue, Lastly, condition adjusted EBITDA. shy QX would

transition and as between expansion. are for development implied The $XXX namely Class, XXX in million margin million our significant but improvement margin primary for production, to the of drivers of $XXX The Columbia We points. others to this year-over-year XXX is the well, programs are range expecting XXXX. basis

impact stability on expect costs a easing as thus, as our you period we drops expense volume inflation of an percentage of our greater and revenue portfolio.Finally, G&A, Additionally, revenue we recall, to the in adjusted G&A our EBITDA. typically may

your calibrate our to adjusted diluted you should Given my comments on revenue models trajectory, quarterly EPS. accordingly.Now

a $X.XX of and $X.XX between Embedded the range a share. is rate in initiating tax are We this guidance XX.X%.

approximately of note would a towards trend And million. we count I are free of respect X.X% depreciation cash from previously conversion also the fully the with the We the costal new to to adjustment of that communicated revenue.Lastly, flow first target adjusting with expect our XX% entirely we This assuming share XXX are conversion, diluted due facility year costs is XX% for year. to to associated project.

Our Separately, it's there modification is on questions. up Section strong while ability couple optimism premature we flow XXX with generate the before remains believe we to this a to of me incorporate into outlook.Let our to wrap move unchanged. cash of thoughts provisions, some

XXXX themselves. results for Our momentum are business evident and and speak

is growing, have environment consistency backlog and dynamic, a ability we execute. remains clear While our is macro there demonstrated the our in demand, customer to

long-term for leveraging are market look in that, to forward a are to customers, With our focused our seeing our position upcoming take many employees.We drive value few at and Day York shareholders to we Investor in team, of your on New As we a weeks XX. questions. you March strong our for on ready

[Operator comes the line question Research. Stallard with instruction] Vertical first of from Robert Our

this Bill. from a don't of business any in in, in budget you uncertainty this as on get On D.C., I'll yet? And we actually case situation whole your sort building budget? start seen have what impact you're actually contingency with

mean, CRs too shutdowns I short become Yes. standard. unfortunately, and even a have bit little short-term

support in defense right given now China. we longer-term -- a as still still threat us. for an in So unlikely, that's and Longer-term strong there's bipartisan show the in because those the Ukraine, CR, see on impact threat wouldn't order

event, only the that's guidance of way whole low think the you long-term the is that our see if So a risk. any end And captures range fails. But process CR we budget in unlikely. downside

M&A sheet, XXXX a net here, being balance interested to think paying you something And Okay. feasible and still the about couple cash cash a you situation of in. secondly, But do dividend? made thinking start with you on about then the a you're finished comments it's given

investment. the for our Rob, moving our markets. And organic we X maritime point, this that. at priorities actively we're on And be forward looking we're M&A core to continue facility, in so announced

seeing do have strict might a we are criteria. We We have pipeline. attractive. good financial But that opportunities be we think

have at point, to we're looking We but nothing actively announce this for M&A.

M&A and that investment. organic remains so priority, And the

sort pan wondering, support investment. do in for the government up you Mike or on And this do South contracts profile Okay. over of this just years? And one the then finally, relation on to lined Carolina you CapEx I investment? next facility was any have couple out of to how expect the

Sure. I'll commencing we're is initiative. latter first, just which the that part start of with this

are that the date Bill be linear through to. profile So alluded the today between will where we XXXX occupancy spend relatively

in So your think of way, of kind Rob, it model. that

really the this this investment In return where that's class towards this investment, terms rest is of we're Columbia on to program, investment. and a make class geared really and the expected of

it of referenced is conversations this, million that's $XXX the so the to Rob. it prospectively. is part really throughput -- base increase does the to we enables DRS's though, initiatives industrial And we're us that's how be viewing therefore, do, So for investment. What

from Our with next question the line Seth JPMorgan. of comes Seifman

I And of grow advanced particular at that fair in if growth of we'll level I company QX. Wanted sequentially computing guess, you're that about saw of off see forecasting I a mean, should we asking start than for that so assumption a in the and here, thinking XXXX. business that the kind ASC growth average that I growth all, profile for we mean, and about faster that it just the weighs you're seem would know is overall and first given But that to growth and you're to little a quarter, significantly the get level to, quarterly is average as fourth the make? bit to the so, kind step that the strong looking down there growth sensing a company, that of I in results level the something forecasting? there's IMS of saw guess, in down that given

view is really, there that proportional the that book-to-bill segments and wouldn't growth and looking take we the in outlined between on being that in I'm where as kind make proportionately. growth backlog, guide both segment at that the pretty bookings profile of growth the expect of those I the piece growth XXXX one. ASD had I'll And IMS. IMS. comment the the excluding the ratio and segment to I And differentiated unfunded to backlog, we necessarily Colombia contribute the at do had when we for both

-- a to and the there quarterly you I to XQ really of reason run run But a go computing not something understand in I outsized -- kind but advanced rate, at about in rate? see run 'XX terms of seasonally that seasonally least was results quarterly is Do some suggest wouldn't -- that a then, guess quarterly it's this adjusted there think adjusted from rate? about sensing up to QX

get question. Yes. a No, I good you're going where now.

think contribution I predicted we And stabilization. to the to up setting we and from for chain other was really ASC make -- the our on started the ramp. the the sure of that QX contributing factors alluded procurements to QX previous stabilize can started one chain that kind output that supply calls, to and as mitigations So have advanced see supply we that of we we

that don't I you. think the proactive that confidence as in bow you're able of our going wave going So little chain a in supply took QX secure to in to seen this in be bit being deliver because what anomaly we've for in see QX. and pronounced to that mitigations we there was the quite ramp created we knew a of XXXX in that to ASC

in to disconnected that's think I the adding QX. So

of And the just about XXXX, XXXX, in are line understanding the maybe that kind one is then contracts how this you aren't think when the what opportunities Columbia more book-to-bill about there. potential you you opportunities that, up bookings of year think picked there for for kind related including about the top relative and to giant out thinking

Yes.

unfunded So our don't include perspective, we a say first, do when we ratio, the from book-to-bill I'll XXXX piece.

Bill his the was so these bookings, to XXXX Colombia. dominated alluded We So we that moment book-to-bill by guide saw ago. to in stemming out number, kind book-to-bill, threats are in It exceeding that X.X demand that we continue a really to sure from was from a actually holistic look as that put a X:X not don't to the have speech don't we just do we ratio. able target our to execute and but backlog. be going we're into bookings And grow of book-to-bill make we that to 'XX, evolving confidence

Our with Baird. line next from Peter of comes Arment question the

Mike, to you out adjusted helping you expansion as of the others. EBITDA basis a programs margin other of there XXX Maybe could you on a expansion XXX called side. you big Colombia the little some the that were about being points. color give just more of the piece are But said us

Yes.

programs. So couple there's a of

Colombia the And IMS. piece in of ASC ground-based sensing highlight on as then we that, next-generation showed our others we've but of programs. these base. been on kind been a as the We're been I it's of larger the think production historically past programs has this been seeing and segment. years, of into Columbia to that margin got couple expansion dismounted our out transition there's over you've moving kind particularly

and that So see margin is headline move drive occurrence to the you're that this anticipating. positive going real we're is to continue

to CapEx back then Carolina. the And just in Okay. South circling

maybe part other at would up -- do for that picks to on being so conversation it's So propulsion a for ships? it lot the that more yards like incremental we help Colombia thoughts, sounds about all Bill? and How think electronic throughput eventually opportunities business. then just of supporting CapEx, the require surface this and And high-level

us with to capacity after to investment us the expansion talking it to margins. in the that parallel, that conversation. gave us facility how facility right. position work go facility, Mike drive it's capability Yes. based industrial between positions is got that Navy key increased investment on That in to suppliers But drive of pursuing. part The going will does go that case and to the expansion. gives the No, we're Columbia throughput on And And business is the award. initial – the and new work Navy us, the drive was and $XXX it capacity ability then forward is the a upside million yards Peter, the for active general the for that of yards basically you've participate to as multiyear the is higher large and and assurance that's the it it that's and but additional you platforms. also future Congress to part that in as kind base about, the And align submarine the a funding key of discussions this

question America. next with from line of of comes Ronald Ronald Bank Epstein Our -- the

in This the the you're for space? an there's think in opportunity what is guys opportunities seeing look Jordan you talk fighter those prosylarated opportunities the war for SDA you or Lyonnais like? Do on Could Ron. about

question, Yes. for No, thanks Jordan. the

now new from and core long-term As doing a play try niche capability about, a on our and focused move a we've really with we space to really really move have talked just for part us. what we're of base. What is is that

interest had success focused, our satellites. customer defense, have on We seen the as payloads. we about in in missile we've weather is strong question And talked early your where

to do first we some That's continue We XX to and this longer-term going we're tracking over customer low X to think just the receptivity, a and earth But layer need That to next have more awards. have did XX pursue we translate the award. play. months. But -- capabilities step, into that unique in area. the a we orbit have tranche that's

comes Ciarmoli Truist Securities. from of Michael the line Our next question with

low do you you a quick have I but ones a in you of we've just got guys book-to-bill think how I budget terms about have like you thinking uncertainty. I missed -- end But of couple kind do greater captures know can the maybe of some sounds are outlook? think range can of bookings X guess, It Maybe it, first. Mike, bookings, that. the you in than 'XX? the

Yes. we differently. bookings, to answer don't think I don't get But said bookings. but question guide your as -- earlier, little we a going That's to the I I'm

I evolution think demand seeing the that's seeing that threat continuing drive we're the set. certainly we're the highlighted that that and by our being globe to product is around conflicts to

we're push for we although confident to don't than So XXXX. higher guide that we bookings, can a ratio X:X book-to-bill

you give I of of range seeing mean across you you Okay. color? one Any I stronger could pipeline could kind growth give are your others? us in of mean, than overall area the Is color us opportunities any there? capabilities? becoming

Yes.

advanced that a seeing radars, that the from I became battlefield. more we're Ukraine apparent Bill in particular. where That and don't in of Protection of what The a both those. stemming a from seeing or direct Israel highlighted have we're although tactical that need and to a point Sensicspace what the of conflicts demand to, alluded of demand we certainly lot business, in to the is these see Force communicated lot kind really that Israel at seeing a with integrated capability we're conflicts we're with time. abroad, this our lot we're And to you They sales seeing where think, Ukraine. as have starting in is

you revenues. have lot but mean total? international do you have said think you to do percent a can or Israel, guys I of revenues just of where the a where you of think international Ukraine into you I you goal of don't about target talked international? a you And have a as as or target get kind mean a then you sort

specific a set target. haven't We

hit As or we programs to we've proportion. as kind of development we've from propulsion development the our moved And bubble up a those have It's production that XX%, talked of last the are X sensing both from doubling move when as of you production. to production, moving see that about, represents we programs international area we over said, programs a that as to in years, X and a opportunities.

we're right target. we may named to a international now, But we're those, think refine to as opportunities. we So looking increase, see haven't but a we more going steady have target. specific a we And set

for then And last one me.

Columbia shipset a the on general you give program X. Just update? you're I working think Can itself. just us currently

I shipset expected X, were for think and that be pretty to was think I you said program starting of margins. maybe kind positive you

have Are do guys along stated sort there? right? that we kind So you to of of path marching your

new and just you still was we're actually is have the -- which shipset that back negotiated better better X, contract, shipset goes Basically, -- on which because part which still working it's we to the of initial contract one are finishing margins, margins with inflation we've started higher X, the assumption. had that

step up the go see that we'll of each year. that in So stair for initial step margins least at that as we kind up each ship ones, set,

Tanwanteng question next comes Securities. Our from of with line instruction] [Operator the John CJS

facility. the wondering I was about new

to You your mostly basis the mentioned per boat on it that comes it for or does for a Columbia a basis do What program online? Colombia. economics when company consolidated

Sure, John.

complex this maximize towards this is investment maximize we looking we our the margins. what goes and efficiencies, as Columbia to inside this facility And on new sure got when returns builds take that at now path can on figure program driving efficiencies, here executing start increase geared yes, by. make with the our from we So that we that, really a facility, we've good believe and

or versus do industrial then And in base the future? Navy still government-funded expansion you in in self-funding participate the to expect Okay.

it and compares goal, business well -- to kind that as multiple of acquisition. give Columbia you the analysis, that acquisition. the did analysis to sub-XX an We Mike that That's class case John. based think a have give in it said, you would It for the you'd comparing the on an facilities would

move. also be strong part a by to So positions investment base industrial in that was of financially, it suggesting, that. of as the submarine you're But a and this very part us, Navy expansion extension,

throughput suppliers. look this to at the moving if improve work Navy their some would we to we as the forward go were expand facility for investment So by we yards to

'XX And takes then basis? cadence. any just the to puts historical how in your your from if be versus slow you've flow are cash performance? there you that Or and historical about Is versus Mike, talk a seasonal expected could and seen that in normal

Yes.

kind that it's seasonality in and going same typically the terms of trend as towards of skewing be fourth think that seen we've I quarterly quarter. to

linearity bit still will the majority large will But the I improved. in cash think I think be the reside of a QX.

the you you through help QX? any where trough us work go ballpark there be can of as will way Is level cash

of we kind goes see of revenue with from along output. typically kind It Yes. what the

So of and the towards as better mentioned and the additional we to profit have will, linear, fixed a a revenue see linearity liquidations year pushing really profit up. we up That we're this you'll pretty from kind you bit And rate, of start cash. revenues that capital tick with although that's to will going a that G&A be we way QX, if perspective. come liquidating working

into So modeling brand, really the if start cash to drive you I you QX be to at just the out of the that kind look revenue, impetus will. the

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

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

a or please if hesitate Have of with course, you to you don't call all We forward look Of follow-up day. soon. speaking have to again e-mail questions, me. great

you. concludes This Thank today's conference.

you now. may disconnect participating. Thank You all for