Leonardo DRS (DRS) 30 Oct 242024 Q3 Earnings call transcript

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.

Good morning, and thanks for participating on today's quarterly earnings conference call.

Bill CFO. Chairman are Mike CEO; today our Dippold, me Lynn, and our and Joining our operational discuss They'll strategy, outlook. and forward highlights, financial results of and supplemental being Investor will Today's on presentation. find the portion also release is you website earnings call the where webcast Relations the

future risks the are also anticipated factors. involve company. the performance uncertainties you such forward-looking a statements We to guarantees difficult Actual future make anticipated of to and variety the may statements forward-looking materially results during the caution and Management regarding that are may future of not due future in call from and statements events, trends performance of predict. projected those that differ

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

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

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

At Bill? I to this over Bill. will turn the time, call

DRS Good welcome, and Steve. to earnings everyone, Thanks, call. the morning, QX

quarter third in and We with our are pleased strong the momentum year-to-date. continued performance the

my date. excellent the for impressive accomplishments performance Our into customer want to exemplifies DRS on and their focus critical team Their also shareholders. commend the incredible steadfast is efforts in express outcomes and delivering to translating dedication. thanks entire to for team's them tenacity our technology their I for

for infrared quarter. Demand bookings technologies computing, our $X.X sensing protection line a profit differentiated and X.X were advanced appetite growth, and book-to-bill electric solid generation. across drove top our power in reflect improved our ratio billion Healthy network quarterly contributors steady of flow results key Our and orders, exceeding customer QX. revenue customer free our propulsion, force to of naval portfolio the cash expansion, for

higher marched sequential backlog and As both a on basis. a result, year-over-year a

was Quarterly revenue over growth last year. XX%

delivered margin grew We also our points basis XX adjusted QX. of in expansion XX% and by EBITDA

Lastly, strong by propelled adjusted execution year-over-year. XX% diluted EPS and was up similarly operational

environment. to Shifting macro the

are hopeful As that do December much 'XX impact necessary this appropriations a the timely foresee which is our under of began funding especially We in through we XX. currently elevated resolution, with environment. CR. threat our a Congress important expected, and clarity, which passes of light lasts not XXXX to manner in we an in short-term increasingly customers said, customers That FY complex global from the provide continuing

believe investment. election Irrespective the outcome environment that of of and week, next threat will allied U.S. prolonged and defense the we higher the require robust

and Our positioned needs. to mission agnostic platform diverse remains challenging our customers' well meet portfolio most

Shifting to operations.

achieved Our and customer milestones business continues enjoy success healthy innovation the quarter. as demand by to evidenced broad-based this

items. of Let me noteworthy couple review a

greater the quantity our rationale platforms effective First, only business for and the X through radars has ago, of and proliferated performed has RADA people be being acquiring centralized traditional air and a imperative The achieved and increased. years is tactical to strategic protect model. nearly validated threats more defense continues Today, well. airborne distributed urgency versus capable from to

mission. similar the earth missile with space low orbit is is This satellites and to happening what shift tracking to for detection in

has airborne growth. tactical our international interest multi-mission our tactical threat applications against Our radars deployed missiles environment air and drones, are global of and which is reinforced defense threats. being The bookings and short-range domestic a other reflected diversity for close-in radars, and in for

computing infrared positions work. for several and follow-on in robust the sensing customer is also awards reflected our network are markets the In portfolio. across experiencing to demand build on which our quarter, sole-source continued advanced with We we contract multi-domain

combatants. for award One million U.S. surface $XXX a naval deployed includes of contract production contracts on these radars

our into our we new we fortifying portfolio to for adjacencies. radar of secured our range sensing are customers modalities to new contract an I report radar with more threats. This and expansion positions, to awards over-the-horizon leading addition sophisticated provide that logical successfully am In cutting-edge penetrating pleased market technology. market marks

seeing into are building look we our Additionally, sensing these infrared years further the footholds in small drone come. tactical others on expand to forward capability We applications. initial and to

share strategic our Across working innovation with we and agility. of are business, that partners our spirit

our team energy X -- as Just drone and a its AUSA, distance. down at am designed, incredibly threats X solution X developed few adds directed proud few as to Stryker-based and this defeat unveiled in I DRS a tested to a months, proven at drone note our This new and and mechanism successfully integrates counter capability X, threat protection to weeks we ago solutions that portfolio. Class capability. a to

to sets production-ready go address apart ability challenging mission requirements in and rapid concept manner us Our from the operational a customer and capabilities competition. to from

solutions. sensing our Sticking collaboration target recently and with are with an the platforms. innovation, we of customers, and capability In AI tested AI integration aided we partners recognition into developed multiple close our on advancing

we new Charleston, electric track I also Carolina. South the making down propulsion steady and to want facility our on portion of are Columbia remain are our class that well progress in business, in and Lastly, performing highlight power on program. we on the

perspective, on priced of out we of executing incremental further quality our to From more and also shifting a benefit chipsets. customers are production, into seeing the delivering are financial the We schedule. with attractively

our year. strong our we Overall, to evident which in execution out pleased our a operational results, momentum the success. with strategy foundation close fundamental and lays rigorous adherence are to year-to-date strong Disciplined the to long-term are

that our look I our excited sharpening forward, agility, market-leading are people positions. talented As innovation and I'm

to call our financials over you greater me detail. that, With who through in turn Mike, will the let walk

Bill. Thanks,

my demand, and quarter. completely receipts the congratulations revenue in to -- team expectations. above in Let XX% me offer material the solid Impressive another timing also growth delivering quarter and customer favorable organic. our was broader Revenue

to tailwinds quarter. in radars related key programs force protection the infrared Our growth were to sensing, advanced tactical and

from was revenue by protection and sensing IMS From year-over-year, radars. to infrared advanced programs. a programs increases ASC revenue perspective, aided X%, at segment up up modestly in our growth was tactical bolstered XX% force by

XX% quarter Increased volume the expansion $XXX in growth primary EBITDA million, for the year. representing Adjusted EBITDA. driver the generated was margin of last adjusted in to points was the quarter. from basis XX Now

EBITDA volume EBITDA XX XX% slightly efficient by the ASC segment basis across up and favorable segment. with margin points more higher net execution to program improved points view. execution increased the margin adjusted on adjusted program mix, and XX Shifting due X% volume. to higher and IMS expanded was basis up program

On to the bottom line metrics.

$X.XX diluted quarter Third $XX was EPS a XX%, XX% up earnings net and and million share, respectively. were

share diluted respectively. XX%, $X.XX eclipsed year-over-year and $XX XX% a tax million operational and EPS rate of expense were adjusted up Our adjusted net compare. earnings of Crisp execution the higher and in the

collections Cash than increased profitability higher fueled Moving and were to significantly net last more efficient working free by cash year, capital. flow.

Next let me review our increased guidance. XXXX

across metrics. Our unlocked for our higher remarkable growth annual all year-to-date key of path a has performance

Starting with revenue.

fourth of are timing the growth, QX With to quarter progress the chain in variability we the and XX% the our in supply quarter on anniversary now rest visibility the We implied labor material benefits extent, The year, billion fact to we anticipating inputs. drivers of discrete the that remaining clear The will due tough began which XX% $X.XX fairly in XXXX. to billion have reflected is of improvements the that range. sources year-over-year in compare range from revenue some $X.XX is a the from revenue. largely X receipts to revised and on

to Class $XXX Our by transition EBITDA margin year-over-year now $XXX as the leverage range Columbia driven increased The adjusted revised is million. range operational from well production volume. expansion million to healthy higher maintained as

IMS ASC margin contribute annual both improvement. anticipate growth revenue Additionally, we to segments still and to and

Next The between new forecasted and our higher with tax range meaningfully a of share. is EPS be adjusted to reflects now a diluted revised $X.XX rate XX%. the range $X.XX anticipated lower

at our diluted from However, our million. guide prior is count static fully XXX share

adjusted XX% approximately the free earnings are for we Lastly, net our still flow of conversion year. cash targeting

our adjusted with Moving XXXX. forecast. XX%. materialize revenue plan your establish in to at XXXX EBITDA we call internal practice, with past margin a year with I in offer of approximately to formal quarter with growth fiscal what are projecting XXXX more are off our conjunction fourth thoughts Consistent February. to revised to our in guidance we midpoint we briefly X% and guidance Currently, seeing preliminary calibrate to framework want X%

closing Let up thoughts. me with some wrap

quickly delivering is the way years with are approach the to of of past excellence for well-earned business the the unwavering success X public markets, over we direct executing value. being to look shareholders. pleased our strategy in our continue performed commitment As we and back positioning we enjoyed and forward in customers unlock We future. has the years The few have incremental on the for team's a result

your we that, take are With questions. to ready

of Peter line comes Instructions] And our of first [Operator from the question Arment Baird.

of results. start the it's just existing And we future, to up start if How require Bill, materially that's maybe you like the and -- kind seems whether force facilities? in within demand. could protection can has your going that we'd Nice ramping CapEx you more changed. It handle with

Yes. Thanks, Peter.

something decade in the on protection force last part think changed that peer as driven the is latter was I U.S. strategy the competitors. its more to of focus

air and forces. Russia has the grown. now threat significant same the have drone China, threat So across against obviously At going we're the that threats, spectrum time,

with I of protection. of Counter frankly, and we that up got Shore force move in And that a started think UAS. ahead all Ad

that need sometimes on highlighted videos defending unit, for YouTube couldn't the needs force that protection some Each which perimeter. what Ukraine, you had at you organic old protection. each then vehicle with force exactly dramatic go just And system of the was even

force forest Shore troops numbers ad the trends have number the its defense So units, those even structure they've as devoted, now drone, to I overall counter expanded the of and protection overall. of shrunk expand Army think short-range driven the and

facilitization, of a of a Louis force of as years terms expansion. the facility new In ago couple part built in we protection St.

more area. not that right for CapEx a need So in we're seeing now

there? Got And Charleston, or facility naval -- you there? seeing to efforts it. up on the in I shipyards, a from on outsourcing I are appreciate going of terms are chain kind the you're what benefit setting then on that going supply in obviously of but the just know that. the

have develop really some efforts decade, out the margins. Part pulling was drive that to that to more more to a have we involves than of goes of us reason more that is whole line a now South with outsourcing. that the our insourcing production which that's -- revenue, going on more contract a a delivery and lets build pull build higher facility. the And and inside, of do Well, efficient it Columbia reason efficient since than Carolina work Columbia to to mechanism

that highlight -- resolved. gets key And And CR the commentary to what there? growth your just that of for any you want X% points in assumes to kind line XXXX, lastly, top a -- that underwrites of X% about kind just other growth just

Yes, I'll take that, Peter.

think guide. here is past, I we've become the into CR discussed of a has pretty in industry. much That kind as the our commonplace for baked

revenue of have through coming continuation. We that's coming XXXX out the And the on not backlog. majority remainder in coming is of that's out of a backlog the program of lot

not from headwind CR, viewing too a an the guide, how in Peter. terms that's we're of extended XXXX So much but

comes Vertical Our next Research. of question of from Stallard Robert line the

with I'll Bill, start you.

some on First had conservative the day. on financials if problems Dynamics you I was of schedule all, a other whole as risk about sort to and the any program And to General see of comments submarines elsewhere? indirect due program. wondering Columbia class the your pretty

and have they're on shipyard from for there We're we in terms of schedule -- intent the component we the point, they've contract the actually think we the yard to And that of based that I didn't out ahead frankly, this the -- other have for proving point. a goes getting was mean the Rob. out insulate decade. at components. segregated this Not system a at contracts I And the contract that propulsion variability critical that out Navy. is

end low Good. up fairly to or about you range range high your revenue XXXX on X% at Peter's X% follow And big. next that year? of the then end framework. is the to growth What The question put might

Yes.

chain supply in pocket when the order becomes Our in range our availability the program. of the material execute kind of and the always been has moderated to by material

that's of driver So variability. always biggest the

swing receive we The portion other But be that typically the pacing will that Rob. will us the some awards that within is are X a things range, timing the of those of the on book-to-bill. the

ago, you the final one if report then On was there? for again X deployment, are capital anything a on out months nothing And just But Bill. seeing for I M&A to Okay. suppose. front me of since I interest wondering

in volume. and an uptick Rob. We are, we remains M&A have our seen priority,

that markets we those We opportunities about, seeing X computing. talked are advanced and power, in naval protection actionable force core sensing, network

of volume actionability. to Nothing that as you but we're said. in terms are yet diligence, uptick So seeing we announce, in very active and

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

Maybe stay here. of Mike, the guess, to I of kind 'XX, Real line on X% nice or to Bill X% results just on Rob's growth. questioning.

to You've obviously them for got X. this 'XX X framework, call

You're implied I any puts you like going there. row. I guess, target outgrow mean should a out of to of that reason kind we if know it years maybe close, is But takes force implications to -- driven some if lot you But is there's any upward we're seeing from does a have on deceleration? of X wars this this kind of uptempo about went to any in and or kind through term Ukraine? definitely that you East the that I bit material come up put there demand. 'XX pressure sort these Can obviously you 'XX. Can think little Middle in of of view? protection frame kind a seems any the longer-term of nature, on shorter from a

of to it sales overwhelming Ukraine, Ukraine direct been impact in an us. -- been to has not terms hasn't

being think in you're is our of X delivered 'XX, -- X there about to So to sitting Ukraine. sales

I that, would limited has impact. that So a say

result. we on from X% more ticked about with. 'XX we to that 'XX is, to X% are we out 'XX growth. base out I the good one, as is importantly, that came to to X% up the from It well. look We think higher growth X% from And be you going a feel as increasing that

I we backdrop are. mid-single we budget to that But we're where about given and think going still the is good be prospectively. the feel where growth

Got it.

a just then Replicator Any Stryker I a on? guys the out it And you of there systems, for you called target to potential for is program in option. think on X Is working you guys are opportunity Okay. the the sort sounds -- counter-UAS and participate like what that initiative? --

X Replicator X did move been initiative. Army by just the Ukraine It directed for it I months increases that think, UAS a efforts. now, and need a structure the technology we making I has about drive -- in hasn't force right the counter the big the show the in energy plus quite gotten But our Army. developed, that to it's I guess We different directions. was version as development. said, driven could

specific as well as I X Replicator the the initiative think driving developments through increases it it's ]. and those that's structure technological threat department less than [ a

And it. Got just one, Columbia it. on Got last class.

plan the guys shipset X to X. to think on I now? start shipset was Are you

we Yes, laid along And much we we're schedule are. proceeding that Yes. out. pretty that

schedule. and time on going everything's on So

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

quarter. in I QX. then so So I question. And rate that's I sales sensing of advanced see the given guess fourth margin wanted on the just computing margin first part -- -- the strength to in the we'll EBITDA embedded of and that's I some that, ask the in on guess, just leverage assume, first

part, is it the And or up for -- there IMS, quarter kind about Columbia, that second anticipated a step-up then milestone the a drives like fourth of seems in anything profitability? that's the

Yes.

take those. I'll So

volume that's you're If to QX, from right. We math revised expense what from the drop-through, on us G&A, margin. perspective, if guidance, the a profitability you is QX confidence in period sequentially, of based the talking drive the from you're look kind to the and going gives

the a XXX driven of really seeing had If similar from perspective. about marginality X you're aspects. output, basis points a comparing where pickup year to prior from revenue we you're That's

a a seeing necessarily what's revenue revenue the radars. is priced we're the And having here and side, not higher the ASC I on coming milestone, later towards you're the when importantly, more The those expansion. the predominantly from where proportionality but the driving move you're newer profit on side, then maybe Columbia tactical say IMS shipsets of and talking the the shipsets, first mix. it And mix is seeing, that's

Right.

a I kind to that's as that's something of of extent so -- that that's won't milestone, go -- level that that ongoing? like become fourth we of quarter first volume a becomes that, see does And the mix but quarter not we the XXXX? guess change into just

That's exactly correct. That's correct.

but multiyear there, So should going benefit, margin get a volume that's us target you of to be the XX% what's to the won't to that and bridge driving marginality.

Right.

Okay.

extent in at sheet? Okay. And a a little the the Obviously, point options then to M&A question balance are that maybe to does up there to for about it cash become coming follow time quarter. think earlier the in, opportunities just the out some there, about of lot other and fourth

but I priority, M&A, but mean, not our it's remains it's Yes. highest our one. our only -- that's priority

look as will shareholders to cash other M&A. well ways at we So as returning of

Our Jon question CJS Securities. next Tanwanteng . of of line from comes the

is in This now? end seeing domestic more strength for on you Jon. Justin Are relative international or markets right

internationally, faster term and It's our posing I geographically right now, with the crossing and all in Putin markets that's near is to Middle East It's, East Middle are Europe, mean and by increasingly the And Europe. threats allies Asia true I the higher borders behavior, in Iran think, than threats defense as U.S. the in that true the budget. that's the aggressive China budgets. defense in driving its overall, near by then growing international driven well.

years. And revenue that we've to revenue of international We've X% over years outpacing And couple X our expect next least. see at long-term we to seen last about that the over X in international of revenue from trend XX% to our the base. continue doubled or

remained for revenue more new color contracted? that'd one duration And same, Can orders? time talk that, could. So you if helpful. helpful. on That's I longer, any more, that be has gotten to and the then Just the about

Yes.

the quicker is we a conversion look to pre-COVID to that is way rewinding clock much it if of and booking were than So is that backlog today. you environment, that at our revenue the

when the on the supply the are chain in but still has elongated. think I stabilized, some of it quarters, comments made the lead Bill past times

is But be to time a the 'XX, from little historical recent, comparison So comparing than 'XX seen. from longer stable our of kind the you're kind a norms, should we had if pretty conversion frame. to of it

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

just it? strategy? you guys are how M&A? Bill, us what's your M&A Or sourcing are can broadly, it kind Is you you're finding kind walk -- you doing finding at are of of deals? bankers through How you bring looking

Yes. Ron, on said. have We what dedicated mission does areas. the as -- of investment they teasers a reviews we we team focused banks those core X all you review that particularly those, just from it out. bring And properties get

always We out shaping where also be portfolio. moves term. financial are both been or to we ultimately might to I reach that there think financial strategics be owners to consolidated. financial some over long the -- strategics going think about There's sellers and a buyers mean

that investigate sometimes we what timing And the is. So we pull together. all

as properties in growth financial our accretive And what and in of actionable said, meet and our areas core is our ROIC X margin we're supporting in terms criteria have. targets we for that I looking the

you And relationship a different Ron, ultimately past one will. using of best-in-breed That of our that also nice for partnering are the we of incubator, had technologies. segment, for us solutions. the is a that up in lot about, and insight particularly or and comments an bringing if Bill's And to I'll to acquisition thing a just cultivating capabilities you in success think gives add IMS if coming we've coalition

I'll be in could answer mean isn't then probably it. that to Defense it. Is anything it that guys And Boeing to -- you but core necessarily there them? core Got can't I the ask Got this, anyway. you portfolio

read mean, news, I this It's we with have anything possible. at point actionable don't but I too, Boeing. always the

mean, Yes. And may. counter I thinking the Got maybe you UAS Got back I X, market could mean one it. then directed how of energy? ultimately, and earlier demand are Replicator going just maybe for about I some kind if that it. how of more, be? With big questions, just on

I early stage in defense similar think we're Well, air at drone. Army out it's battalions I number of think short-range mean, the counter still X of the filling portfolio the a and I of,

I think the years. several -- take beyond -- will that

we I I you're the point. launch think are become think, the where possible. are which point at sales just that, that's and international sales, moving once system, is where beyond international you've at into developed It's this production,

the to -- And to favorable from system down And moving attractive our vehicle the that to those and a take initiative drone was in X solution units. makes easier dime. X we to a it more it Army a terms things did that X our that But on cut system one to the deployed operate international really R&D in supposed that counter vehicle, own of affordable buyers. it from single and -- make both vehicle early to more to then

that's kind the I think next opening. So of

next comes question the Liwag Morgan Stanley. of from Kristine Our of line

for This is [ on Justin Kristine. ]

on 'XX profile growth going next X% on we Or was detail there with growth the IMS the that some might factors the X% across in consider outlook. similar get call Just at could XQ to more back are drive this year? and variation if the point guide. 'XX? ASC curious looks I know we'll I

say getting demand you book-to-bill both can segments. year-to-date would the period, I we're across pretty see in in consistent almost the Yes.

a from rates we're think contribute to we out we're the both of that XXXX. expect where would at, the there to perspective trend these projecting I I'll put So segments growth of pricing you talked we IMS a Columbia of little that an is from which bit on asteric side also get expansion. the assisting the the margin little where about, in tailwind extra

here and helpful. should over quarters? about profile provide the investment just facility And the next CapEx. one South little a quick color just more one from how few then maybe on pace build think on the we Carolina you of That's out Can the Great. Okay.

CapEx tick the expect in likely as Yes. a up of land QX. We a revenue. the see into percentage you'll do in somewhere I CapEx would say little from to Xs a to mid- that high

Obviously, the since revenue changed said down. had X. pushing to I that would then, guide be close that think has percentage we initially

We've you'll nothing remains. was in started ramp a the project slower to the the in half. for first changed the little That's here. what really think on But XXXX. up has pacing see catch I It QX and

Instructions] ] of BTIG. [ question from of next our comes [Operator And line Ned the Morgan

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

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

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

you. concludes This Thank today's conference.

disconnect participation. thank may You and for you your now,