Q4 2023 Leonardo DRS Inc Earnings Call

February 27, 2024

Ladies and gentlemen, good day and welcome to the Leonardo D. R. S fourth quarter and full 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.

Operator: Ladies and gentlemen, good day and welcome to the Leonardo DRS fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen only mode.

Operator: 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. Please go ahead.

As a reminder, this event is being recorded I would like to now turn the conference over to Steve Bother 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 with me today are Bill Lynn, our chairman and CEO and Mike <unk> our CFO.

Steve Vather: Good morning and welcome, everyone. Thanks for participating in today's quarterly earnings conference call. With me today are Bill Lynn, our chairman and CEO, and Mike DePold, our CFO. They'll discuss our strategy, operational highlights, financial results, and forward outlook. Today's call is being webcast on the Investor Relations portion of the website, where you will also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events and anticipated future trends. However, to caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call.

Discuss our strategy operational highlights financial results and forward outlook.

Today's call is being webcast on the Investor relations portion of the website.

You'll also find the earnings release and supplemental presentation.

Management May also make forward looking statements during the call regarding future events anticipated future trends.

As stated each performance of the company.

Caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

Actual results may differ materially from those projected in the forward looking statements due to a variety of factors for a full discussion of these risk factors. Please refer to our latest Form 10-K, and our other SEC filings.

Under takes no obligation to update any of the forward looking statements made on this call.

During this call management will also discuss non-GAAP financial measures, which we believe provide useful information for investors.

Steve Vather: During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. However, non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I'll turn the call over to Bill.

These non-GAAP measures should not be evaluated in isolation.

Two for GAAP performance measures.

You can find a reconciliation of the non-GAAP measure.

<unk> discussed on this call and our earnings release.

At this time I'll turn the call over to Bill Bill.

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

William J. Lynn: Thanks, Steve, and thank you all for tuning in and your interest in Leonardo DRS. I'd like to start by expressing my sincere gratitude to the entire DRS team for their incredible contributions in delivering for both our customers and our shareholders. We continue to build on our execution track record and ended the year on solid footing, resulting in exceptional financial results for 2023. For the year, our revenue growth accelerated to 5%, and when adjusting for the net divestiture impact, we grew approximately 7% on an organic basis. Additionally, we excelled at capturing bookings and achieved a 1.2 book-to-bill ratio for the year.

We continue to build on our execution track record and ended the year on solid footing, resulting in exceptional financial results for 2023 for.

For the year, our revenue growth accelerated to six 5% and when adjusting for the net divestiture impact we grew approximately 7% on an organic basis.

Additionally, we excel to capturing bookings and achieved a one two book to bill ratio for the year, we saw impressive demand for our solutions enable and ground network computing electric power and propulsion and multi mission advanced sensors.

William J. Lynn: We saw impressive demand for our solutions in naval and ground network computing, electric power and propulsion, and multi-mission advanced sensors. As a result, our total backlog grew by 82% to a new company record of $7.8 billion. This reflects the over $3 billion contract for the rest of the Columbia class electric power and propulsion systems that I briefly mentioned last quarter, and also a diverse set of contract awards secured throughout the year. In 2023, we also delivered adjusted EBITDA growth, but at a slightly lower pace than our top line. We managed through peak inflationary headwinds and had increased GNA from greater investment in internal R&D and higher public company costs. Lastly, 2023 free cash flow was robust at $159 million and was a result of a significantly stronger than expected fourth quarter collection.

Our total backlog grew by 82% to a new company record of $7 8 billion.

This reflects the over $3 billion contract for the rest of Columbia class Electric power and propulsion systems that I briefly mentioned last quarter and also a diverse set of contract award secured throughout the year.

In 2023, we also delivered adjusted EBITDA growth, but at a slightly lower pace than our top line, we manage through peak inflationary headwinds and had increased G&A from greater investment in internal R&D and higher public company costs.

Lastly, 2023 free cash flow was robust at $159 million and was a result of significantly stronger than expected fourth quarter collections.

Moving to the budget market environment, we are closely monitoring the progress of FY 'twenty four appropriations and at this time, we are cautiously optimistic on its timely passage the need to deter encountered growing in more sophisticated threats across increasingly connected and contested domains is prompting our customers who access.

William J. Lynn: Moving to the budget market environment, we're closely monitoring the progress of FY 24 appropriations, and at this time, we are cautiously optimistic about its timely past. The need to deter and counter growing and more sophisticated threats across increasingly connected and contested domains is prompting our customers to accelerate investment and to modernize capability. Furthermore, the dynamic global threat environment is palpable, and it is also spurring increased defense spending by our allies.

<unk> investment and to modernize capabilities further.

Furthermore, the dynamic global threat environment is palpable and it is also spurring increased defense spending by our allies.

William J. Lynn: Our portfolio is closely aligned to these well-funded priorities, and this is evidenced by our growing backlog and multiple years of robust bookings for our advanced technologies in sensing, network computing, force protection, and electric power and propulsion. The confidence we have in our ability to drive long-term growth is backstopped by strong, continued customer demand in our healthy opportunity pipeline. Shifting now to operational highlights, I'm pleased with the broad strength evident across our business. Throughout the year, we continue to expand our well-fortified market position, secure new business wins, and sharpen our differentiation through R&D investments. Our long-term strategy to drive a growing, resilient, and diverse business is reflected in our evolving mission. First, growth in our electric power and propulsion and naval network computing businesses drove the Navy to become our largest end customer, which is a first for us in several decades. The Navy now represents nearly 40% of revenue today and an even greater percentage of our total backlog, given the recent Columbia class contract secured in the last 18 months.

Our portfolio is closely aligned to these well funded priorities.

And this is evidenced in our growing backlog and multiple years of robust bookings for our advanced technologies in sensing network Computing Force protection and electric power and propulsion.

The confidence we have in our ability to drive long term growth is backstopped by strong continued customer demand and our healthy opportunity pipeline.

Shifting now to operational highlights I am pleased with the broad strength evident across our business throughout the year, we continued to expand our well fortified market positions secured new business wins and sharpened our differentiation through R&D investments.

Our long term strategy to drive a growing resilient and diverse business is reflected in our evolving mix.

First growth in our electric power and propulsion enabled network computing businesses drove the navy to become our largest end customer which is a first for us in several decades. The Navy now represents nearly 40% of revenue today and an even greater percentage of our total backlog given the recent Columbia class contract.

<unk> secured in the last 18 months.

William J. Lynn: The importance of the Navy and the long-term growth opportunity we see with this customer is driving capital investment in the form of a new facility in South Carolina. This new investment is approximately $120 million over the next three years with the goal of initial occupancy by 2026. There is a clear, long-term, fast-growing, addressable opportunity set for DRS, given our customers' need for next-generation capabilities to overmatch potential near peer adversaries. Alternative technologies for electric power and propulsion are inadequate in their ability to scale to the power requirements needed for the future.

The importance of the Navy and the long term growth opportunity, we see with this customer is driving capital investment in the form of a new facility in South Carolina. This new investment is approximately $120 million over the next three years with the goal of initial occupancy by 2026.

There is a clear long term fast growing addressable opportunity set for Drs.

Given our customers' need for next generation capabilities to overmatch potential near peer adversaries.

Alternative technologies to electric power and propulsion are inadequate and their ability to scale to the power requirements needed for the future. We fundamentally believe that it is a question of when not if this technology is adopted for next generation destroyers as well as other platforms.

William J. Lynn: We fundamentally believe that it is a question of when, not if, this technology is adopted for next-generation destroyers as well as other platforms. Secondly, strong global demand from allies for our ground network computing and advanced sensing technologies resulted in a meaningful increase in international exposure. Our international customer exposure grew 10% of revenue for the year. While customer demand was most evident for technologies residing in our ASC segment, we believe there are clear international growth opportunities across our. In addition to a shifting customer mix, we are continuing to see new and growing addressable missions emerge for our technology. Our uncooled infrared sensors, tactical radars, high frequency, and software-defined radios stand out in particular.

Secondly, strong global demand from allies for our ground network computing and advanced sensing technologies resulted in a meaningful increase in international revenues are international customer exposure grew 10% of revenue for the year.

While customer demand was most evident for technologies residing in our ASC segment.

We believe there are clear international growth opportunities across our business.

In addition to a shift in customer mix, we are continuing to see new and growing addressable missions emerge for our technologies.

Our uncalled infrared sensors tactical radars high frequency in software defined radio standout in particular.

Some of these increasing missions include applications in signals intelligence secure communications missiles, and also both ground and Airborne Force protection.

William J. Lynn: Some of these increasing missions include applications in signals intelligence, secure communications, missiles, and also both ground and airborne force protection. I'm pleased to report that we also continued to make progress in the space market through wins on next-generation civilian weather satellites in 2023. That said, in the missile defense arena, we saw a solid customer interest in our technology, but that interest has been slower to translate into contracts.

I am pleased to report that we also continued to make progress in the space market through wins on next generation civilian weather satellites in 2023.

That said in the missile Defense Arena, we saw.

Solid customer interest in our technology.

But that interest has been slower to translate into contract awards, we are maintaining our long term focus on growing our share in this space <unk> defense market.

William J. Lynn: We are maintaining a long-term focus on growing our share in space defense. Earlier, I mentioned that one of the drivers for increased G&A costs in 2023 would be an uptick in internal R&D investment. As you know, this was a conscious decision to invest in expanding our differentiation and propelling future growth. Our internal R&D as a percentage of revenue approached 3% in 2023, which is consistent with peers operating comparable businesses. On prior calls, I have detailed some of our investment initiatives, including integrated sensing, cyber hardened, and assured PNT capabilities for network computing, and increased mobility per counter UAF solution, among other technological advancements. Today, I wanted to highlight that throughout the year, we debuted three brand new radars for new applications in force protection and longer range air defense.

Earlier, I mentioned that one of the drivers for increased G&A costs in 2023 was an uptick in internal R&D investment.

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

Our internal R&D as a percentage of revenue approached 3% in 2023, which is consistent with peers operating comparable business models.

On prior calls I have detailed some of our investment initiatives, including integrated sensing cyber hardened and assured PNT capabilities for network computing.

Increased mobility for counter UAS solutions, among other technology advancements.

I wanted to highlight that throughout the year, we debuted three brand new radars for new applications and force protection and longer range Air Defense.

Overall, our tactical radar.

William J. Lynn: Overall, our tactical radar portfolio has been incredibly well received as we continue to generate strong customer demand across active protection, air defense, and force protection. Secondly, we recently unveiled a new family of lasers that cover a wider spectrum of light. These new lasers are critical to helping solve the foundational problems in advancing defense and commercial quantum computing and sensing.

Portfolio has been incredibly well received as we continue to generate strong customer demand across active protection Air Defense and force protection markets.

Secondly, we recently unveiled a new family of lasers that cover a wider spectrum of like these.

These new lasers are critical to helping solve the foundational problems and advancing defense and commercial quantum computing and sensing challenges.

Shifting to program execution, we made significant progress in 2023 to advance our development programs into sustainable production efforts across the portfolio.

William J. Lynn: Shifting to program execution, we made significant progress in 2023 to advance our development programs into sustainable production efforts across the portfolio. The team has done a remarkable job of improving execution. We will maintain, though, a consistent focus on this front to maximize outcomes for our customers and our shareholders alike. Before I turn the call over to Mike, let me wrap up my remarks by underscoring that our strategy is creating value for our customers, employees, and shareholders. I'm proud of what we have achieved.

The team has done a remarkable job and improving execution.

We will maintain though our consistent focus on this front to maximize outcomes for our customers and our shareholders alike.

Before I turn the call over to Mike, Let me wrap up my remarks by underscoring that our strategy is creating value for our customers employees and shareholders I'm.

I am proud of what we've achieved our focus remains on continuing to execute our strategy to accelerate growth drive margin expansion and generate consistent cash flow.

Mike DePold: Our focus remains on continuing to execute our strategy to accelerate growth, drive margin expansion, and generate consistent cash flow. Mike, over to you to review our financial performance and 2024 outlook. Thanks, Bill, and thank you to the entire team for their remarkable efforts throughout the year to deliver the excellent financial results for 2023. Revenue was $926 million for the fourth quarter, accelerating total growth to 13% and 11% on an organic basis.

Mike.

Over to you.

To review our financial performance in 2020 for outlook.

Thanks, Bill and thank you to the entire team for their remarkable efforts throughout the year to deliver the excellent financial results for 2023.

Revenue was $926 million for the fourth quarter accelerating total growth of 13% and 11% on an organic basis.

Mike DePold: For the year, revenue was $2.8 billion, representing 5% total growth and 7% organic growth from 2022. We saw broad-based demand drive growth in both Q4 and the full year 2023. Our advanced sensing and computing segment revenue growth for the year was driven by strength in naval network computing and multi-mission advanced sensing programs, particularly leveraging our tactical radars, lasers, tactical communications, and electronic warfare technology. Our integrated emission system segment revenues benefited from strong contribution from electric power and propulsion programs to drive growth for the year. Now to Adjusted EBITDA. Adjusted EBITDA was $131 million for the fourth quarter and $324 million for the full year, representing year-over-year growth of 9% and 2%, respectively. Resulting margins were 14.1% for the fourth quarter and 11.5% for the full year, a decline of 60 and 30 basis points, respectively.

For the year revenue was $2 8 billion.

Representing a 5% total growth at 7% organic growth from 2022.

We saw broad based demand drive growth in both Q4 and 2023 full year.

Our advanced sensing and computing segment revenue growth for the year was driven by strength enabled network computing and multi mission advanced sensing.

Programs, particularly leveraging our tactical radars lasers tactical communications and electronic warfare technology.

Our integrated mission systems segment revenues benefited from strong contribution from electric power and propulsion program to drive growth for the year.

Now to adjusted EBITDA, adjusted EBITDA was $131 million for the fourth quarter.

And $324 million for the full year, representing year over year growth of 9% and 2% respectively.

The resulting margins were 14, 1% for the fourth quarter and 11, 5% for the full year, a decline of 60 and 30 basis points respectively.

Higher volume at the top line resulted in adjusted EBITDA growth, but we faced headwinds to adjusted EBITDA margin, primarily from higher G&A due to greater investments in internal R&D and an uptick in public company costs.

Moving to the segment trends ASC segment, adjusted EBITDA increased and margin expanded for the year, mostly on better volumes and better mix.

Ams segment, adjusted EBITDA and margin were down due to unfavorable mix and higher G&A spend for the year.

Mike DePold: Higher volume at the top line resulted in adjusted EBITDA growth, but we faced headwinds to adjusted EBITDA margin, primarily from higher G&A due to greater investments in internal R&D and an uptick in public company costs. Moving to the segment trends, ASC segment adjusted EBITDA increased, and margin expanded for the year, mostly on better volume and better mix. IMF segment adjusted EBITDA and margin were down due to an unfavorable mix and higher G&A spend for the year.

These headwinds masked the strong execution on our Columbia class program, which is progressing favorably towards higher margins in 2024 and beyond.

Now to the bottom line metrics.

Operational execution translated to net earnings growth of 14% to $74 million for the fourth quarter, but declined for the full year as a reminder, the compare for the full year net earnings skewed given the sizable net gain on the divestitures recorded in 2022.

Adjusted net earnings were $83 million for the fourth quarter at $194 million for the full year, demonstrating a growth of 2% and 8% versus the prior year.

Mike DePold: These headwinds map the strong execution on our Columbia-class program, which is progressing favorably towards higher margins in 2024 and beyond. Now to the bottom line metrics. Solid operational execution translated to net earnings growth of 14 percent to 74 million for the fourth quarter, but declined for the full year. As a reminder, the comparison for the full year net earnings is skewed given the sizable net gain on the divestitures recorded in 2022. Adjusted net earnings were $83 million for the fourth quarter and $194 million for the full year, demonstrating a growth of 2% and 8% versus the prior year. However, comparisons for both diluted EPS and adjusted diluted EPS in the quarter and full year continue to be impacted by the diluted share count growth from the all stock combination with RADA.

The compares for both diluted EPS and adjusted diluted EPS in the quarter and full year continued to be impacted by the diluted share count growth from the all stock combination with Rada.

Existing the year, our fully diluted share count should have more stability, making the comparisons moving forward hopefully cleaner.

Moving to free cash flow consistent with historical trends free cash flow dividend year end strength and with $494 million in Q4, reflecting robust collection and benefit from favorable timing that accelerated cash into the quarter.

As a result full year free cash flow was significantly ahead of our expectations at $159 million.

We continue to strengthen our balance sheet and have expanded capacity for value enhancing capital deployment.

Discussed our capital deployment strategy is focused on both organic and inorganic growth.

We continue to evaluate bolt on M&A opportunities that fit our strategy and show potential of being value added into our business. We remain disciplined and to date have not found compelling opportunities to transact on.

Organic investments in the near term are presenting greater long term value to our business.

As Bill briefly mentioned earlier, we are embarking on building a new coastal facility in South Carolina to support our fast growing electric power propulsion business. This.

Mike DePold: Exiting the year, our fully diluted share count should have more stability, making the comparisons moving forward hopefully cleaner. Moving to free cash flow, consistent with historical trends, free cash flow exhibited year-end strength and was $494 million in Q4, reflecting robust collection and benefit from favorable timing that accelerated cash into the quarter. As a result, full-year free cash flow was significantly ahead of our expectations at $159 million.

This investment will increase our capital expenditures over the next few years, but even with that uptick in Capex, we expect to maintain solid free cash flow conversion.

We have rigorously evaluated the merits of this capital project and have determined there is an overwhelming reason to proceed and have a clear path to delivering returns in excess of our return on invested capital targets over the long term.

This organic investment has not changed our active interest in pursuing M&A targets aligned to our strategic and financial criteria.

Now to our 2024 guidance, we expect to capitalize on the momentum built throughout 2023 into strong organic growth and margin expansion. This year.

Mike DePold: We continue to strengthen our balance sheet and have expanded capacity for value-enhancing capital deployment. As discussed, our capital deployment strategy is focused on both organic and inorganic growth. While we continue to evaluate bolt-on M&A opportunities that fit our strategy and show potential to be value-added to our business, we remain disciplined and, to date, have not found compelling opportunities to transact on. However, organic investments in the near term are presenting greater long-term value to our business. As Bill briefly mentioned earlier, we are embarking on building a new coastal facility in South Carolina to support our fast-growing electric power propulsion business. This investment will increase our capital expenditures over the next few years.

We are initiating a revenue range between $2 95 billion and $3, two 5 billion, representing a 4% to 7% growth all of which is organic.

Assumed in our guidance as there is a reasonable and timely passage of the FY 2024 appropriations.

We expect the quarterly cadence to be less pronounced compared to 2023, but we are still anticipating the same general trend where revenues will build throughout the year with comparable statements on average to what we saw in years prior to 2023.

Lastly for revenue at <unk>.

<unk> you to expect Q1 revenue just shy of $650 million.

Moving to adjusted EBITDA, we are expecting between 365 and $390 million for 2024.

The implied year over year margin improvement is in the range of 100 to 140 basis points.

The transition of our development programs to production, mainly in Columbia class, but others as well are the primary drivers for this significant margin expansion.

Mike DePold: But even with that uptick in capex, we expect to maintain solid free cash flow conversion. We have rigorously evaluated the merits of this capital project and have determined there is an overwhelming reason to proceed and have a clear path to delivering returns in excess of our return on invested capital targets over the long term. This organic investment has not changed our active interest in pursuing M&A targets aligned to our strategic and financial criteria.

Additionally, we expect stability in our G&A costs as a percentage of revenue and an easing of the inflation impact on our portfolio.

Finally, as you may recall recall, we period expense our G&A.

Greater revenue volume typically drops to adjusted EBITDA.

My comments on our quarterly revenue trajectory as you calibrate your models accordingly.

Now to adjusted diluted EPS, we are initiating a range between 74 and <unk> 82, a share embedded in this guidance is for the tax rate of 22, 5%.

We are assuming a fully diluted share count of $268 million and I would also note that we expect depreciation to trend towards a two 4% of revenue.

Mike DePold: Now to our 2024 guidance. We expect to capitalize on the momentum built throughout 2023 into strong organic growth and margin expansion this year. We are initiating a revenue range between $2.925 billion and $3.025 billion, representing a four to seven percent growth, all of which is organic. Assumed in our guidance is a reasonable and timely passage of the FY 2024 Appropriations. We expect the quarterly cadence to be less pronounced compared to 2023, but we are still anticipating the same general trend where revenues will build throughout the year with comparable statements on average to Moving to adjusted EBITDA, we are expecting between $365 and $390 million for 2024. The implied year-over-year margin improvement is in the range of 100 to 140 basis points.

Lastly, with respect to free cash flow conversion, we are adjusting the conversion from our previously communicated target of 90% to approximately 80% for the year. This adjustment is entirely due to the first year costs associated with the new coaster facility projects.

Our ability to generate strong cash flow remains unchanged separately, while there is some optimism optimism led modification that section 174 provisions we believe it premature to incorporate this into our outlook.

Let me wrap up with a couple of thoughts before we move to questions.

Our 2023 results and business momentum are evident and speak for themselves while the macro environment remains dynamic there is consistency in our customer demand our backlog is growing and we have demonstrated a clear ability to execute.

As a team we are focused on leveraging our strong market position to drive long term value for our customers for our shareholders and employees.

We look forward to seeing many of you in a few weeks at our upcoming Investor Day in New York on March 14.

With that we're ready to take your questions.

Thank you at this time, we will begin the question and answer session.

To ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Mike DePold: The transition of our development programs to production, namely Columbia class, but others as well, are the primary drivers for this significant margin expansion. Additionally, we expect stability in our G&A costs as a percentage of revenue and an easing of the inflation impact on our portfolio. Finally, as you may recall, we period expense our GNA. Thus, greater revenue volume typically drops to adjusted EBITDA.

Please standby, we compile the Q&A roster.

Our first question comes from the line of Robert Stallard with vertical research. Please proceed with your question.

Thanks, so much good morning.

Good morning.

I'll start with Bill.

This whole budget situation in D. C have you.

<unk> seen any impact on your business from this uncertainty as yet.

What sort of contingencies. The one building in case, we don't actually get a budget.

Yes, thanks, Rob.

Unfortunately short term Crs and even short shutdowns it become a little bit to standard so that those right now wouldn't show an impact.

Mike DePold: Given my comments on our quarterly revenue trajectory, you should calibrate your models accordingly. Now to adjusted diluted EPS. We are initiating a range between $0.74 and $0.82 a share. Embedded in this guidance is a tax rate of 22.5%.

On us.

Longer term CR, we still see is unlikely.

And that's because in order, there's still strong bipartisan support for defense given the.

Mike DePold: We are assuming a fully diluted share count of $268 million, and I would also note that we expect depreciation to trend towards 2.4% of revenue. Lastly, with respect to free cash flow conversion, we are adjusting the conversion from our previously communicated target of 90% to approximately 80% for the year. This adjustment is entirely due to the first year costs associated with the new COPA facility project.

The threat in Ukraine, the longer term threat in China. So the only way you see a long term <unk> is that the whole budget process fails.

That's unlikely but in any event the low end of our guidance range capsule captures that downside risk.

Okay, and then secondly.

2023, with a net cash on the balance sheet and you made a couple of comments about.

M&A still being something you're interested in but given the cash situation here do you think it's feasible to start thinking about paying a dividend.

No Rob at this point, our priorities continue to be.

Operator: Our ability to generate strong cash flow remains unshaken. Additionally, while there is some optimism about the modification of Section 174 provisions, we believe it is premature to incorporate this into our outlook. Let me wrap up with a couple of thoughts before we move to questions. Our 2023 results and business momentum are evident and speak for themselves. While the macro environment remains dynamic, there is consistency in our customer demand, our backlog is growing, and we have demonstrated a clear ability to. As a team, we are focused on leveraging our strong market position to drive long-term value for our customers, for our shareholders, and employees. We look forward to seeing many of you in a few weeks at our upcoming Investor Day in New York on March 14. With that, we are ready to take your questions. Thank you. At this time, we will begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Organic investment, we announced the maritime facilities that were moving forward on that and we're actively looking for M&A in our four core markets. We have a good pipeline, we do have strict financial criteria, but we are seeing.

Opportunities that.

We think might be attractive we have nothing to announce at this point, but we're actively looking for M&A and so that remains the priority M&A and organic investment.

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

Sure I'll start the latter part of that first which is we.

We're just commencing this initiative so the spend profile will be relatively linear.

<unk>, where we are today through the 2026 occupancy day that bill alluded to so think of it kind of that way Robert in your model in.

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

Operator: Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question. Good morning. I'll start with Bill.

$120 million, we referenced is really Drs as investment what it does do though is it enables us to be part of the conversations for.

William J. Lynn: On this whole budget situation... Have you, contingent on the ability, Yeah, thanks, Rob. Unfortunately, short-term CRs and even short shutdowns have become a little bit too standard so that those right now wouldn't show any impact on us. A longer-term CR we still see is unlikely. And that's because, in order, there's still strong bipartisan support for defense given the threat in Ukraine and the longer-term threat in China. So the only way you see a long-term CR is if the whole budget process fails. And we think that's unlikely.

The industrial base initiatives to increase throughput prospectively and that's how we're viewing this ralph.

Okay. That's great. Thanks, so much.

Our next question comes from the line of Seth Sigman with Jpmorgan. Please proceed with your question.

Hey, thanks, very much and good morning.

Good morning.

Wanted to I guess start off asking a little bit about the growth and kind of given the <unk>.

Given the strong results that we saw in <unk> and <unk>.

See in the fourth quarter, I mean, I know, there's a quarterly profile here and so we'll see that step down sequentially in Q1.

William J. Lynn: But in any event, the low end of our guidance range captures that downside risk. Thank you for your time, uh... but given the cash situation, Robert, at this point, our priorities continue to be organic investment. We announced the maritime facility, so we're moving forward on that. And we're actively looking for M&A in our four core markets. We have a good pipeline. We do have strict financial criteria, but we are seeing opportunities that we think might be attractive.

But just given the level of growth that we saw in thinking about the growth that youre looking for overall at the company.

We've seen that.

The advanced sensing and computing business should grow significantly faster than the average level of company growth that youre forecasting for.

For 2020 for I guess first of all is that is that a fair assumption to make.

William J. Lynn: We have nothing to announce at this point, but we're actively looking for M&A. And so that remains the priority, M&A and organic investment. It's just funny. Do you have any?

And if so is there is there something in particular that.

Kind of weighs down the growth at IMS to get to that average level that you're forecasting.

Mike DePold: How do you expect the Here, I'll start the latter part of that first, which is that we're just commencing this initiative. So the spend profile will be relatively linear between where we are today through the 2026 occupancy date that Bill alluded to. So think of it kind of that way, Rob, in your model.

Thanks, Ed.

That one I wouldn't necessarily view the segment growth.

As being differentiated between ASE and IMS.

And really where I'm looking at there when I make that comment is the bookings profile in the book to Bill ratio that we had and the growth in backlog both of those segments had kind of proportional.

On the backlog, excluding the unfunded piece for Colombia at IMS, and we do expect all of the of this segment to contribute to the growth that we outlined in our 24 guide pretty proportionately.

Mike DePold: In terms of this investment, this investment is really geared towards the Columbia class and the rest of the class program. And that's really where we're expecting to make a return on this investment. So, therefore, that's the 120 million we referenced is really DRS's investment. What it does do, though, is it enables us to be part of the conversations for the industrial base initiative to increase throughput. And that's how we're viewing this, Rob.

Right Okay. Okay.

In terms of the then.

Is there some reason to think about whether something really outsized about <unk> 23, and an advanced sensing and computing.

That would suggest that that kind of.

Operator: Our next question comes from the line of Seth Seifman with J.P. Morgan. Please proceed with your question. Hey, thanks very much and good morning.

I understand it's not a quarterly run rate, but at least from a seasonally adjusted quarterly run rate.

Operator: Morning. I wanted to, I guess, start off asking a little bit about the growth and, kind of, given the strong results that we saw in ASC in the fourth quarter, I mean, I know there's a quarterly profile here. And so, you know, we'll see that step down sequentially in Q1, but just given the level of growth that we saw and thinking about the growth that you're looking for overall at the company, it would seem that the advanced sensing and computing business should grow significantly faster than the average level of company growth that you're forecasting for 2024. I guess, first of all, is that a fair assumption to make?

Yes.

I'll take you up to a seasonally adjusted quarterly run rate.

Yes, no. Good question I get when you go now so I think that one of the contributing factors to the Q4 contribution from ASC.

We started to see the supply chain stabilization and as we alluded to on previous calls we started setting up kind of advanced procurements and other mitigation to really stabilize our supply chain to make sure that we can have the output that we predicted for that Q4 ramp. So we knew that there was going to be a little bit about wave that created this anomaly.

In Q4, because of what we've seen in supply chain and the proactive mitigation we took.

To secure our confidence in being able to deliver that ramp in Q4, I don't think youre going to see that quite as pronounced in the in the two.

Mike DePold: I wouldn't necessarily view the segment growth as being differentiated between ASC and IMS. And really, what I'm looking at when I make that comment is the bookings profile and the book to bill ratio that we had in the growth and backlog. Both of those segments had kind of proportional growth in the backlog, excluding the unfunded piece for Columbia at IMS. And we do expect both of the segments to contribute to the growth that we outlaid in the 20-point guide pretty proportionally. Right. Okay. Okay.

'twenty 'twenty four for you so I think thats, adding to that the disconnect in Q4.

Got it got it thanks, Okay, and then maybe one more kind of topline related is just.

When you think about the bookings opportunities for this year and.

Think about the potential book to Bill for 2024.

How are you thinking about that.

Including the opportunities relative to what you picked up in 2023 understanding that there arent that kind of a giant Colombia contra.

Contracts out there.

Yeah. So first I'll say from a 2023 perspective, when we do our book to Bill ratio. We don't include the unfunded piece. So the book to Bill of one two book to Bill in 2023 was not dominated by Colombia was actually a holistic.

Mike DePold: And, but, but I guess in terms of the, then, um, you know, is there some reason to think about it? Was there something really outsized about 4Q23 in advanced sensing and computing that wouldn't suggest that this kind of, I understand it's not a quarterly run rate, but at least from a seasonally adjusted quarterly run rate. Do you feel like the Q4 results took you up to a seasonally adjusted quarterly run rate? Yeah, no, that's a good question.

Demand that we saw from really stemming from these evolving threats that bill alluded to in his.

In his speech this a moment ago we.

We don't guide to bookings that we don't put out a number but we do kind of target to make sure that our bookings are exceeding that one to one book to bill ratio and as we look into 'twenty four we have confidence that we're going to be able to execute and continue to grow backlog.

Mike DePold: I understand where you're going now. So I think that one of the contributing factors to the Q4 contribution from ASC was that we started to see supply chain stabilization. And as we alluded to on previous calls, we started setting up kind of advanced procurements and other mitigations to really stabilize our supply chain and make sure that we could have the output that we predicted for that Q4 ramp. So we knew that there was going to be a little bit of a bow wave that created this anomaly in ASC and Q4 because of what we've seen in the supply chain and the proactive mitigations we took to secure our confidence in I don't think you're going to see that quite as pronounced in 2024.

Great great. Thanks, very much I'll leave it there for now.

Thanks.

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

Yes, good morning, Bill Mike Steve.

Hey, Mike you called out the Columbia as being a big piece of the adjusted EBITDA margin expansion of 100 to 140 basis points, but you said there were others, maybe you could just give us a little more color about some of the other programs that are that are.

Helping you on the on the expansion side.

Yes, so there's a couple of programs I think as we kind of showed this margin expansion historically over the past couple of years, it's been as we've been moving.

These next generation programs into a larger production base, Colombia has been the highlight on that but there's been others, particularly in arcata.

Mike DePold: So I think that's adding to the disconnect in Q4. Got it. Got it.

<unk> ground based and dismount incentive programs, we're seeing that transition out of our ASC segment, and then you've got the Columbia piece on the IMF.

Mike DePold: Thanks. Okay. And then maybe one more kind of top line related question is just, you know, when you think about the booking opportunities for this year and, you know, think about the potential book to bill for 2024, you know, how are you thinking about that, including, you know, the opportunities relative to, to what you picked up in 2023, understanding that there isn't the kind of giant Columbia contract. Yeah, so first, I'll say from a 2023 So the book to bill, the 1.2 book to bill in 2023 was not dominated by Columbia.

The real headline that youre going to see move and continue to drive this positive margin occurrence that were anticipated.

Okay, and then just just circling back to the Capex.

In South Carolina.

It sounds like its all for supporting Colombia, and then eventually being part of the conversation to help throughput at the yards and so that picks up incremental business. How do we think about about other opportunities for electronic propulsion on surface ships and would that require a lot more capex, just maybe high level thoughts bill. Thanks.

Yes.

Peter you've got to write the business case for the facility to 120 million of investment is based on that large multi year, Colombia Award that gave us the assurance to go forward. This facility and it's going to drive additional capability capacity that will drive higher margins.

Mike DePold: It was actually a holistic demand that we saw really stemming from these evolving threats that Bill alluded to in his speech just a moment ago. We don't guide to booking, so we don't put out a number, but we do kind of target to make sure that our bookings are exceeding that 1 to 1 book to bill ratio. And as we look into 24, we have confidence that we're going to be able to execute and continue to grow our backlog. Great, great. Thanks very much.

But it also gives us the ability.

And the capacity to go after future work on new new platforms, and that's a key part thats basically upside to the initial investment.

But it does position us for that kind of expansion and then in parallel it positions us as Mike was talking about to participate in the general expansion of the submarine industrial base that Congress is funding and the Navy.

Operator: I'll leave it there for now. Thanks. Our next question comes from the line of Peter Arment with Baird. Please proceed with your question. Yeah, good morning, Bill, Mike, Steve. Hey, Mike, you called out Columbia as being, you know, a big piece of the Chesapeake margin expansion of 100 to 140 base points, but you said there were others. Maybe you could just give us a little more color about some of the other programs that are, you know, helping you on the expansion side. Yeah, so there are a couple of programs.

Is pursuing and we're in active discussions with the navy and the yards as to how you would align work between the yards and the suppliers too.

Drive that increased throughput and the facility is a key part of that conversation.

I appreciate the color thanks, guys.

Thank you.

<unk>.

Our next question comes from the line of Ronald Ronald Epstein with Bank of America. Please proceed with your question.

Hey, good morning, Thanks for the call this.

As George your line is onto Ron.

Mike DePold: I think as we kind of showed this margin expansion historically over the past couple of years, it's been as we've been moving these next generation programs into a larger production base. Columbia has been a highlight of that, but there have been others, particularly in our kind of ground-based and dismounted sensing programs. We're seeing that transition out of our ASC segment, and then you've got the Columbia piece on the IMS. Those are the real headlines that you're going to see move and continue to drive this positive margin occurrence that we're anticipating. Okay, and then just just circling back to the CapEx in South Carolina.

Could you guys talk about.

The opportunities Youre seeing in space.

Do you think there is an opportunity for the <unk> War fighter and what those opportunities look like.

Yes, no. Thanks for the question.

As we've talked about spaces is a long term play for us what we're really focused on doing is try and move from what we really have now which is a niche capability and move that to have really a core part of our of our.

New base, we have had early successes, we talked about in weather satellites and missile defense, where your question is focused we've seen strong customer interest in our payloads.

William J. Lynn: So this, it sounds like it's all about supporting Columbia and then eventually being part of the conversation to help throughput at the yards. And so that picks up incremental business. How do we think about other opportunities for electronic propulsion on surface ships?

We have some unique capabilities in the <unk>.

Lower orbit area that did translate into a trance one tracking layer award.

But that's just the first step.

We need to have more awards.

Longer term play, but we do think we have customer receptivity and we're going to continue to pursue this over the next 18 to 24 months.

William J. Lynn: And would that require a lot more CapEx? Just maybe, high-level thoughts, Bill. Thanks. Yeah, no, Peter, you've got to write the business case for the facility. The 120 million investment is based on that large, multi-year Columbia award that gave us the assurance to go forward with this facility, and it's going to drive additional capability and capacity that will drive higher margins. But it also gives us the ability and the capacity to go after future work on new platforms. And that's a key part, that's basically the upside to the initial investment, but it does position us for that kind of expansion. And then, in parallel, it positions us, as Mike was talking about, to participate in the general expansion of the submarine industrial base that Congress is funding and the Navy is pursuing. And we're in active discussions with the Navy and the Yards as to how you would align work between the Yards and the suppliers to drive that increased throughput, and the facility is a key part of that conversation. I appreciate the color.

Great. Thank you so much.

Our next question.

Comes from the line of Michael ceremony with true Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the questions.

Maybe just a couple of quick ones first.

I guess Mike.

In terms of bookings do you guys think you can have maybe I missed it but do you think you can have a book to bill greater than 1% and 24.

Got some budget uncertainty it sounds like the low end of the range kind of captures that but how are you thinking about the bookings outlook.

Yes.

As I said earlier I don't think we guide to bookings, but we don't guide to bookings, but I'm going to answer your question a little differently I think that the threat evolution that we're seeing.

And that is being highlighted by by the conflicts that we're seeing around the globe. It's certainly continuing to drive demand to our product set so although we don't guide to bookings, we're confident that we can push higher than a one to one book to bill ratio for 2024.

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

Operator: Thanks, guys. Thank you. Our next question comes from the line of Ronald, sorry, Ronald Epstein with Bank of America. Please proceed with your question. Hey, good morning. Thank you for the call. This is Jordan Linus in Tehran.

Yes, I think as.

Bill kind of alluded to what we're seeing with these conflicts abroad. Although we don't have a lot of direct sales to Ukraine or or to Israel. At this point in time. They have certainly highlighted a capability that you need a more integrated and communicated battlefield and we're starting to see the demands from that in our advanced sensor space in particular.

Operator: Could you guys talk about the opportunities you're seeing in space? Do you think there's an opportunity in SDA for the pro-salaried warfighter or what those opportunities look like? Yeah, no. Thanks for the question, George.

That is where we're seeing a lot of those the fourth protection business the tactical radars.

That is where we're seeing a lot of demand really stemming from what became apparent with the conflict that we're seeing bulk.

William J. Lynn: As we've talked about, space is a long-term play for us. What we're really focused on doing is trying and move from what we really have now, which is a niche capability, and move that to really a core part of our new base. We have had early success, as we talked about, with weather satellites.

<unk> great.

Got it got it.

You talked about.

International revenues I mean, do you guys have sort of a target of where you think international I mean, you. Just said you don't have a lot in Ukraine, or Israel, but do you kind of have a goal or a target as to where you think you can get international revenues as a percent of total.

William J. Lynn: And on missile defense, where your question's focused, we've seen strong customer interest in our payload. We have some unique capabilities in the low-Earth orbit area. That did translate into a TRONS1 tracking layer award, but that's just the first step, and we need to have more awards.

We haven't set a specific part target as we said we've moved up to 10%.

Over the last five or six years that represents a doubling.

William J. Lynn: That's a longer-term play, but we do think we have customer receptivity, and we're going to continue to pursue this over the next 18 to 24 months. Great. Thank you so much.

Of proportion.

And as we move programs from development to production as we've talked about we have a.

Kind of a.

Bubble of programs that are moving in both the sensing and propulsion area from development to production. It's one of those programs hit production as you see international opportunity.

Operator: Our next question comes from the line of Michael Saramoli with Truist Securities. Please proceed with your question. Hey, good morning guys. Thanks for taking the questions. Um, maybe just a couple of quick ones first.

So we think we're going to see more international opportunities as we refine those we may set a target, but right now we're <unk>.

Mike DePold: I guess Mike, um, in terms of bookings, do you guys think you can have, maybe I missed it, but do you think you can have a book-to-bill greater than 1 in 24? I know we've got some budget uncertainty; it sounds like the low end of the range kind of captures that, but how are you thinking about the bookings out there? Yeah, as I said earlier, I don't think we guide to bookings, but we don't guide to bookings. But I'm going to answer your question a little differently.

Looking to have a steady increase but we haven't named.

A specific target.

Got it got it and then last one for me just on the.

The Columbia program itself can you just give us a general update I think Youre currently working ship set too I think maybe you kind of said you were starting ship set three and.

That program was.

Expect it to be pretty positive for margins. So do we have that right or are you guys kind of sort of marching along to your stated path there.

Mike DePold: I think that the threat evolution that we're seeing, and that's being highlighted by the conflicts that we're seeing around the globe, is certainly continuing to drive demand for our product set. So although we don't guide to bookings, we're confident that we can push higher than a one to one book to bill ratio for 2024. Okay. Can you give us any color?

Basically you have right, we're actually still finishing the initial contract which goes back to that one.

We are working on.

Chipset too.

Which is better better margins and we've just started chipset three which had still better margins visit as part of the contract that was negotiated with the new higher inflation assumption. So.

That stair step as we go up each chipset.

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

For the initial ones.

We will see that kind of step up in margins each year.

Got it perfect. Thanks, guys I'll jump back in the queue.

Thanks.

As a reminder to ask a question. Please press star one one on your phone.

Mike DePold: Yeah, I think, as Bill kind of alluded to, what we're seeing with these conflicts abroad, although we don't have a lot of direct sales to Ukraine or to Israel at this point in time, they have certainly highlighted a capability that you need a more integrated and communicated battlefield. And we're starting to see the demands for that in our advanced sensing space, in particular. That is where we're seeing a lot of them.

Our next question comes from the line of Jon <unk> with CJS Securities. Please proceed with your question.

Good morning. Thank you for taking my questions I was wondering about the new facility you.

You mentioned of mostly for the Columbia, what does that do for your Columbia program Economics.

Both basis on a consolidated basis to the company.

When it comes online.

Sure John So yes. This investment is is really geared towards driving efficiencies looking at complex builds on the Colombia and figuring out what we can we can taken inside here and make sure that we maximize our efficiencies maximize our margins and from that with this new facility. We believe we've got a good path to.

Mike DePold: The force protection business, the tactical radars, that is where we're seeing a lot of demand really stemming from what became apparent with the conflict that we're seeing both in Israel and Ukraine. Got it, got it. And then you talked about international revenues. I mean, do you guys have sort of a target of where you think international revenues will come from? I mean, you just said you don't have a lot of money in Ukraine or Israel, but do you kind of have a goal or a target as to where you think you can get international revenues as a percent of total? We haven't set a specific part target.

Increase the returns on the snap program.

As we start executing windows facility goes.

Okay.

Okay, and then do you still expect to participate in Navy or government funded expansion.

In the industrial base versus self funding in the future.

That's that's the goal of John we think.

As Mike said the business case for the facilities based.

William J. Lynn: As we said, we've moved up to 10%, and over the last five or six years, that represents a doubling of proportion. And as we move programs from development to production, as we've talked about, we have a kind of a bubble of programs that are moving in both the sensing and propulsion areas from development to production. It's when those programs hit production that you see international opportunity. So we think we're going to see more international opportunities, and as we refine those, we may set a target, but right now, we're looking to have a steady increase, but we haven't named a specific target. Got it. And then last one for me, just on the Columbia program itself.

On the Columbia class.

That analysis compares well to an acquisition it would.

It would give you.

Did it in that kind of analysis, you would have a sub 10 multiple.

Comparing it to an acquisition. So financially this was a very strong move but also it positions us as youre, suggesting to be.

Part of that submarine industrial base expansion and by extension part of the Navy investment.

In that so we would look at.

As we go forward for some Navy investment if we were to expand this facility.

To improve the throughput at the yards by moving work to the suppliers.

William J. Lynn: Can you just give us a general update? I think you're currently working ship set to I think maybe you kind of said you were starting ship set three, and you know, I think that program is expected to be pretty positive for margins. So do we have that right?

Got it that's helpful and then.

Mike If you could just talk about your your.

Your cash flow in 'twenty, four and the cadence is that expected to be normal from a seasonal basis or are there any puts and takes versus how you've seen that phone historical versus your historical performance.

William J. Lynn: Are you guys kind of sort of marching along to your stated path there? Basically, you have a we're actually still finishing the initial contract, which goes back to that one. We are working on a ship set that is better, with better margins. And we've just started ships that number three, which has still better margins because it's part of the contract that was negotiated with the new higher inflation assumption. So with that, that stair step where as we go up each ship set, at least for the initial ones, we'll see that kind of step up in margins each year.

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

I think the linearity.

<unk>.

But I still think the large majority of the cash will reside in Q4.

Is there any way you can you can help us ballpark, where the trough level of casualty as you go through Q1.

Yes, it typically kind of goes along with what we see from kind of the revenue output. So as we start really liquidating and pushing up the revenue towards Q4, although we mentioned we're going to be a bit better. This year from a linearity perspective that additional revenue in the way, we kind of have a fixed G&A rate. If you will that's pretty low.

Mike DePold: Perfect. Thanks, guys. I'll jump back.

Operator: Thank you. As a reminder, to ask a question, please press star 11 on your phone. Our next question comes from the line of John Tan-Wen Ting with CJS Securities. Please proceed with your question.

Here, you will see that proppant tick up and with that profit will come to working capital liquidations of cash. So as you start modeling out the revenue you kind of look at that to be the impetus to really drive the cash into the Q4.

Ramp if you will.

Operator: Thank you for taking my questions. I was wondering about the new facility you mentioned being mostly for Columbia. What does that do for your Columbia program economics on a per vote basis or a consolidated basis to the company when it comes on? Sure, John.

Got it thank you.

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

Thank you all for your time this morning, and your interest in Drs and of course, if you have follow up questions. Please don't hesitate to call or email me and look forward to speaking with all of you again soon.

Mike DePold: So yeah, this investment is really geared towards driving efficiency, looking at complex bills on the Columbia and figuring out what we can take in inside here, and make sure with that we maximize our efficiencies and maximize our margins. And from that, with this new facility, we believe we've got a good path to increase the returns on that program as we start executing when this facility goes live. Okay, and then do you still expect to participate in Navy or government-funded expansions and the Industrial Base versus Dell funding in the future? That's the goal, John.

Have a great day.

Thank you. This concludes today's conference you may disconnect now thank you all for participating.

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William J. Lynn: We think that, as Mike said, the business case for this facility is based on the Columbia class, and that analysis compares well to an acquisition. It would give you a, if you did it in that kind of analysis, you'd have a sub-10 multiple comparing it to an acquisition.

Okay.

Sure.

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Sure.

Okay.

William J. Lynn: So financially, this was a very strong move. But also, it positions us, as you're suggesting, to be a part of that submarine industrial base expansion, and by extension, part of the Navy investment in that. So we would look, as we go forward, for some Navy investment if we were to expand this facility to improve the throughput at the yards by moving work to their suppliers. Got it. That's helpful.

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Mike DePold: And then, Mike, if you could just talk about your cash flow in 24 and the cadence, is that expected to be normal on a seasonal basis, or are there any puts and takes versus how you've seen that flow historically versus your historical performance? Yeah, I think it's going to be kind of typical as we've seen in terms of that same quarterly trend and that seasonality skewing towards the fourth quarter. I think the linearity will be a bit improved, but I still think the large majority of the cash will reside in Q4. Is there any way you can help us ballpark where the trough level of every cache will be as you go through Q1?

Okay.

Yes.

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Mike DePold: Yeah, it typically kind of goes along with what we see from, you know, the revenue output. So as we start really liquidating and pushing up the revenues towards Q4, although we mentioned we're going to be a bit better this year from a linearity perspective, that additional revenue and the way we, you know, kind of have a fixed GNA rate, if you will, that's pretty linear, you'll see that profit tick up, and with that profit will come the working capital liquidation to cash. So as you start modeling out the revenue, you kind of look at that to be the impetus to really drive the cash into the Q4 ramp, if you will. I got it.

Yeah.

Yes.

Okay.

Operator: At this time, I will turn the floor back to Steve Bather for closing remarks. Thank you all for your time this morning and your interest in DRS. Of course, if you have follow-up questions, please don't hesitate to call or email me. I look forward to speaking with all of you again soon. Have a great day.

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Operator: Thank you. This concludes today's conference. You may disconnect now. Thank you all for participating, www.thevenusproject.com Closing Music, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Ladies and gentlemen, good day and welcome to the Leonardo DRS fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen only mode.

Okay.

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Steve Vather: 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. Please go ahead.

Yes.

Okay.

Steve Vather: Good morning and welcome everyone. Thanks for participating in today's quarterly earnings conference call. With me today are Bill Lynn, our chairman and CEO, and Mike DePold, our CFO. They'll discuss our strategy, operational highlights, financial results, and forward outlooks. Today's call is being webcast on the investor relations portion of the website, where you will also find the earnings release and supplemental presentation.

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Steve Vather: Management may also make forward-looking statements during the call regarding future events and anticipated future trends and the anticipated future performance of the company. However, we caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made in this call.

Yes.

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Steve Vather: During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. Non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I'll turn the call over to Bill.

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William J. Lynn: We saw impressive demand for our solutions in naval and ground network computing, electric power and propulsion, and multi-mission advanced sensors. As a result, our total backlog grew by 82% to a new company record of $7.8 billion. This reflects the over $3 billion contract for the rest of the Columbia class electric power and propulsion systems that I briefly mentioned last quarter, and also a diverse set of contract awards secured throughout the. In 2023, we also delivered adjusted EBITDA growth, but at a slightly lower pace than our top line. We managed through peak inflationary headwinds and had increased GNA from greater investment in internal R&D and higher public company costs. Lastly, 2023 free cash flow was robust at $159 million and was a result of a significantly stronger than expected fourth quarter collection.

Okay.

Yes.

Ladies and gentlemen, good day and welcome to the Leonardo Drs fourth quarter and full year 2023 earnings conference call.

At this time all participants are in a listen only mode.

Following the Companys prepared remarks, there will be an opportunity to ask questions.

<unk> will be given at that time.

As a reminder, this event is being recorded.

I'd like to now turn the conference over to Steve <unk>, 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 with me today are Bill Lynn, our chairman and CEO and Mike <unk>, Our CFO, who will discuss our strategy operational highlights financial results and forward outlook.

Today's call is being webcast on the Investor relations portion of the website.

William J. Lynn: Moving to the budget and market environment, we are closely monitoring the progress of FY24 appropriations, and at this time, we are cautiously optimistic about its timely passing. The need to deter and counter growing and more sophisticated threats across increasingly connected and contested domains is prompting our customers to accelerate investment and to modernize capability. Furthermore, the dynamic global threat environment is palpable, and it is also spurring increased defense spending by our allies.

You will also find the earnings release and supplemental presentation.

Management May also make forward looking statements during the call regarding future events and anticipated future trends.

As stated each performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.

William J. Lynn: Our portfolio is closely aligned to these well-funded priorities, and this is evidenced by our growing backlog and multiple years of robust bookings for our advanced technologies in sensing, network computing, force protection, and electric power and propulsion. The confidence we have in our ability to drive long-term growth is backstopped by strong, continued customer demand in our healthy opportunity pipeline. Shifting now to operational highlights, I'm pleased with the broad strength evident across our business. Throughout the year, we continue to expand our well-fortified market position, secured new business wins, and sharpened our differentiation through R&D investments. Our long-term strategy to drive a growing, resilient, and diverse business is reflected in our evolving mission. First, growth in our electric power and propulsion, and naval network computing businesses drove the Navy to become our largest end customer, which is a first for us in several decades. The Navy now represents nearly 40% of revenue today and an even greater percentage of our total backlog, given the recent Columbia class contract secured in the last 18 months.

Honored take no obligation to update any of the forward looking statements made on this call.

During this call management will also discuss non-GAAP financial measures, which we believe provide useful information for investors.

These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures.

You can find a reconciliation of the non-GAAP measure.

Discussed on this call and our earnings release.

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

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

We continue to build on our execution track record and ended the year on solid footing, resulting in exceptional financial results for 2023 for.

For the year, our revenue growth accelerated to 5% and when adjusting for the net divestiture impact we grew approximately 7% on an organic basis.

William J. Lynn: The importance of the Navy and the long-term growth opportunity we see with this customer is driving capital investment in the form of a new facility in South Carolina. This new investment is approximately $120 million over the next three years with the goal of initial occupancy by 2026. There is a clear, long-term, fast-growing, addressable opportunity set for DRS, given our customers' need for next-generation capabilities to overmatch potential near peers. Alternative technologies to electric power and propulsion are inadequate in their ability to scale to the power requirements needed for the future. We fundamentally believe that it is a question of when, not if, this technology is adopted for next-generation destroyers as well as other platforms.

Our total backlog grew by 82% to a new company record of $7 8 billion.

In 2023, we also delivered adjusted EBITDA growth, but at a slightly lower pace than our topline we manage through peak inflationary headwinds and had increased G&A from greater investment in internal R&D and higher public company costs.

Lastly, 2023 free cash flow was robust at $159 million and was a result of significantly stronger than expected fourth quarter collections.

William J. Lynn: Secondly, strong global demand from allies for our ground network computing and advanced sensing technologies has resulted in a meaningful increase in international demand. Our international customer exposure grew 10% of revenue for the year. While customer demand was most evident for technologies residing in our ASC segment, we believe there are clear international growth opportunities across our. In addition to a shifting customer mix, we are continuing to see new and growing addressable missions emerge for our technology. Our uncooled infrared sensors, tactical radars, high frequency and software defined radios stand out in particular.

Moving to the budget market environment, we are closely monitoring the progress of FY 'twenty four appropriations and at this time, we are cautiously optimistic on its timely passage the need to detour and counter growing in more sophisticated threats across increasingly connected and contested domains is prompting our customers who access.

<unk> investments and to modernize capabilities further.

Furthermore, the dynamic global threat environment is palpable and it is also spurring increased defense spending by our allies.

Our portfolio is closely aligned to these well funded priorities.

And this is evidenced in our growing backlog and multiple years of robust bookings for our advanced technologies in sensing network Computing Force protection and electric power and propulsion.

The confidence we have in our ability to drive long term growth is backstopped by strong continued customer demand and our healthy opportunity pipeline.

William J. Lynn: We are maintaining a long-term focus on growing our share in space defense. Earlier, I mentioned that one of the drivers for increased GNA costs in 2023 would be an uptick in internal R&D investments. As you know, this was a conscious decision to invest in expanding our differentiation and propelling future growth. Our internal R&D is a percentage of revenue approaching 3% in 2023, which is consistent with peers operating comparable businesses. On prior calls, I have detailed some of our investment initiatives, including integrated sensing, cyber-hardened and assured PNT capabilities for network computing, increased mobility for counter-UAS solutions, among other technological advancements. Today, I wanted to highlight that throughout the year, we debuted three brand new radars for new applications in force protection and longer range air defense.

Our long term strategy to drive a growing resilient and diverse business is reflected in our evolving mix.

<unk> secured in the last 18 months.

There is a clear long term fast growing addressable opportunity set for Drs.

Given our customers' need for next generation capabilities to overmatch potential near peer adversaries.

While customer demand was most evident for technologies residing in our ASC segment.

We believe there are clear international growth opportunities across our business.

In addition to a shift in customer mix, we are continuing to see new and growing addressable missions emerge for our technologies.

Our uncalled infrared sensors tactical radars high frequency in software defined radio standout and predictable.

Some of these increasing missions include applications in signals intelligence secure communications missiles, and also both ground and Airborne Force protection.

I am pleased to report that we also continued to make progress in the space market through wins on next generation civilian weather satellites in 2023.

William J. Lynn: Our focus remains on continuing to execute our strategy to accelerate growth, drive margin expansion, and generate consistent cash flow. Mike, over to you to review our financial performance and 2024 outlook. Thanks, Bill, and thank you to the entire team for their remarkable efforts throughout the year to deliver the excellent financial results for 2023. Revenue was $926 million for the fourth quarter, accelerating total growth to 13% and 11% on an organic basis.

That said in the missile Defense Arena, we saw solid customer interest in our technology.

But that interest has been slower to translate into contract awards, we are maintaining our long term focus on growing our share in the space <unk> defense market.

Earlier, I mentioned that one of the drivers for increased G&A costs in 2023 was an uptick in internal R&D investment.

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

Our internal R&D as a percentage of revenue approached 3% in 2023, which is consistent with peers operating comparable business models.

On prior calls I have detailed some of our investment initiatives, including integrated sensing cyber hardened and assured PNT capabilities for network computing.

Increased mobility for counter UAS solutions, among other technology advancements.

Today I wanted to highlight that throughout the year. We debuted three brand new radars for new applications and force protection and longer range Air Defense.

Overall, our tactical radar portfolio has been incredibly well received as we continue to generate strong customer demand across active protection Air Defense and force protection markets.

Secondly, we recently unveiled a new family of lasers that cover a wider spectrum of light.

These new lasers are critical to helping solve the foundational problems and advancing defense and commercial quantum computing and sensing challenges.

Shifting to program execution, we made significant progress in 2023 to advance our development programs into sustainable production efforts across the portfolio the.

The team has done a remarkable job in improving execution.

We will maintain though our consistent focus on this front to maximize outcomes for our customers and our shareholders alike.

Before I turn the call over to Mike, Let me wrap up my remarks by underscoring that our strategy is creating value for our customers employees and shareholders I'm.

Im proud of what we've achieved our focus remains on continuing to execute our strategy to accelerate growth drive margin expansion and generate consistent cash flow Mike.

Over to you.

To review our financial performance in 2020 for outlook.

Thanks, Bill and thank you to the entire team for their remarkable efforts throughout the year to deliver the excellent financial results for 2023.

Revenue was $926 million for the fourth quarter accelerating total growth of 13% and 11% on an organic basis.

For the year revenue was $2 8 billion.

Representing a 5% total growth at 7% organic growth from 2022.

We saw broad based demand drive growth in both Q4 and 2023 full year <unk>.

Our advanced sensing and computing segment revenue growth for the year was driven by strength enabled network computing and multi mission advanced sensing.

Programs, particularly leveraging our tactical radars lasers tactical communications and electronic warfare technology.

Our integrated mission systems segment revenues benefited from strong contribution from electric power and propulsion programs to drive growth for the year.

Now to adjusted EBITDA, adjusted EBITDA was $131 million for the fourth quarter.

And $324 million for the full year, representing year over year growth of 9% and 2% respectively.

The resulting margins were 14, 1% for the fourth quarter and 11, 5% for the full year, a decline of 60% and 30 basis points respectively.

Moving to the segment trends ASC segment, adjusted EBITDA increased and margin expanded for the year, mostly on better volumes and better mix.

<unk> segment, adjusted EBITDA and margin were down due to unfavorable mix and higher G&A spend for the year.

These headwinds masked the strong execution on our Columbia class program, which is progressing favorably towards higher margins in 2024 and beyond.

Now to the bottom line metrics.

Solid operational execution translated to net earnings growth of 14% to $74 million for the fourth quarter, but declined for the full year as a reminder, the compare for the full year net earnings are skewed given the sizable net gain on the divestitures recorded in 2022.

Adjusted net earnings were $83 million for the fourth quarter and $194 million for the full year, demonstrating a growth of 2% and 8% versus the prior year.

Okay.

The compares for both diluted EPS and adjusted diluted EPS in the quarter and full year continued to be impacted by the diluted share count growth from the all stock combination with Rada.

Mike DePold: This investment will increase our capital expenditures over the next few years, but even with that uptick in capex, we expect to maintain solid free cash flow conversion. We have rigorously evaluated the merits of this capital project and have determined there is an overwhelming reason to proceed and have a clear path to delivering returns in excess of our return on invested capital targets over the long term. This organic investment has not changed our active interest in pursuing M&A targets aligned to our strategic and financial criteria.

Exiting the year, our fully diluted share count should have more stability, making the comparisons moving forward hopefully cleaner.

Moving to free cash flow consistent with historical trends free cash flow exhibited year end strength and with $494 million in Q4, reflecting robust collection and benefit from favorable timing that accelerated cash into the quarter.

As a result full year free cash flow was significantly ahead of our expectations at $159 million.

We continued to strengthen our balance sheet and have expanded capacity for value enhancing capital deployment.

As discussed our capital deployment strategy is focused on both organic and inorganic growth.

Organic investments in the near term are presenting greater long term value to our business.

As Bill briefly mentioned earlier, we are embarking on building a new coastal facility in South Carolina to support our fast growing electric power propulsion business. This.

This investment will increase our capital expenditures over the next few years, but even with that uptick in Capex, we expect to maintain solid free cash flow conversion.

This organic investment has not changed our active interest in pursuing M&A targets aligned to our strategic and financial criteria.

Now to our 2024 guidance, we expect to capitalize on the momentum built throughout 2023 into strong organic growth and margin expansion. This year.

We are initiating a revenue range between $2 95 billion and $3, two 5 billion, representing a 4% to 7% growth all of which is organic.

Assumed in our guidance that there is a reasonable and timely passage of the FY 2024 appropriations.

Mike DePold: The transition of our development programs to production, namely Columbia class, but others as well, are the primary drivers for this significant margin expansion. Additionally, we expect stability in our G&A costs as a percentage of revenue and an easing of the inflation impact on our portfolio. Finally, as you may recall, we period expense our G&A. Thus, greater revenue volume typically drops to a just and even debt.

Lastly for revenue our condition you to expect Q1 revenue just shy of $650 million.

Moving to adjusted EBITDA, we are expecting between $365 to $390 million for 2024.

The implied year over year margin improvement is in the range of 100 to 140 basis points.

Mike DePold: Given my comments on our quarterly revenue trajectory, you should calibrate your models accordingly. Now to Adjusted Diluted EPS. We are initiating a range between $0.74 and $0.82 a share. Embedded in this guidance is a tax rate of 22.5%.

Transition of our development programs to production Lonely and Columbia class, but others as well are the primary drivers for this significant margin expansion.

Additionally, we expect stability in our G&A costs as a percentage of revenue and an easing of the inflation impacts on our portfolio.

As you May recall recall, we period expense our G&A, that's greater revenue volume typically drops to adjusted EBITDA.

Mike DePold: We are assuming a fully diluted share count of $268 million, and I would also note that we expect depreciation to trend towards 2.4% of revenue. Lastly, with respect to free cash flow conversion, we are adjusting the conversion from our previously communicated target of 90 percent to approximately 80 percent for the year. This adjustment is entirely due to the first-year costs associated with the new COPA facility project.

Given my comments on our quarterly revenue trajectory as you calibrate your models accordingly.

Now to adjusted diluted EPS, we are initiating a range between 74 and <unk> 82, a share embedded in this guidance is for the tax rate of 22, 5%.

We are assuming a fully diluted share count of $268 million and I would also note that we expect depreciation to trend towards two 4% of revenue.

Mike DePold: Our ability to generate strong cash flow remains unshaken. Additionally, while there is some optimism about the modification of Section 174 provisions, we believe it is premature to incorporate this into our outlook. Let me wrap up with a couple of thoughts before we move to questions. Our 2023 results and business momentum are evident and speak for themselves. While the macro environment remains dynamic, there is consistency in our customer demand, our backlog is growing, and we have demonstrated a clear ability to. As a team, we are focused on leveraging our strong market position to drive long-term value for our customers, for our shareholders, and employees. We look forward to seeing many of you in a few weeks at our upcoming Investor Day in New York on March 14. With that, we are ready to take your questions. Thank you. At this time, we will begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced.

Our ability to generate strong cash flow remains unchanged.

Separately, while there is some optimism optimism outlet modification of section 174 provisions, we believe it premature to incorporate this into our outlook.

Let me wrap up with a couple of thoughts before we move to questions.

As a team we are focused on leveraging our strong market position to drive long term value for our customers for our shareholders and employees.

Look forward to seeing many of you in a few weeks at our upcoming Investor Day in New York on March 14.

With that we're ready to take your questions.

Thank you at this time, we will begin the question and answer session to ask a question. Please press star one one on your telephone and wait for your name to be announced.

Operator: To withdraw your question, please press star 11 again. Please stand by, we compile the Q&A roster. Our first question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question. Good morning. I'll start with Bill. On this whole budget situation... Have you?

To withdraw your question. Please press star one again.

Please standby, we compile the Q&A roster.

Our first question comes from the line of Robert Stallard with vertical research. Please proceed with your question.

Thanks, so much good morning.

Good morning.

I'll start with Bill.

On this whole budget situation in DC.

You actually seen any impact on your business from this uncertainty as yet and what sort of contingent to the one building in case, we don't actually get a budget.

William J. Lynn: contingent on the ability, Yeah, thanks, Rob. Unfortunately, short-term CRs and even short shutdowns have become a little bit too standard so that those right now wouldn't show any impact on us. A longer-term CR we still see is unlikely. And that's because, in order, there's still strong bipartisan support for defense given the threat in Ukraine and the longer-term threat in China. So the only way you see a long-term CR is if the whole budget process fails. And we think that's unlikely.

Yes, thanks, Rob.

Unfortunately short term Crs and even short.

Cut downs it become a little bit to standard so that those right now wouldn't show an impact.

On us.

Longer term CR, we still see is unlikely.

That's because in order, there's still strong bipartisan support for defense given the the three.

Brett in Ukraine, the longer term threat in China. So the only way you see a long term <unk> of the whole budget process fails.

William J. Lynn: But in any event, the low end of our guidance range captures that downside risk. [inaudible] uh... but given the cash situation, Now, Rob, at this point, our priorities continue to be organic investment. We announced the maritime facilities are moving forward on that, and we're actively looking for M&A in our four core markets. We have a good pipeline. We do have strict financial criteria, but we are seeing opportunities that we think might be attractive.

We think thats, that's unlikely but in any event the low end of our guidance range capsule captures that downside risk.

Okay, and then secondly, you finished 2023 with a net cash on the balance sheet and you made a couple of comments about.

M&A still being something you're interested in but given the cash situation here do you think it's feasible to start thinking about paying a dividend.

William J. Lynn: We have nothing to announce at this point, but we're actively looking for M&A. And so that remains the priority, M&A and organic investment. Do you have any?

No Robert at this point, our priorities continue to be.

Organic investment we announced the maritime facilities are moving forward on that and we're actively looking for M&A in our four core markets. We have a good pipeline, we do have strict financial criteria, but we are seeing.

Mike DePold: How do you expect the, Here I'll start with the latter part of that first, which is that we are just commencing this initiative. So the spend profile will be relatively linear between where we are today through the 2026 occupancy date that Bill alluded to. So think of it kind of that way, Rob, in your model.

Opportunities that.

We think might be attractive we have nothing to announce at this point, but we're actively looking for M&A and so that remains the priority M&A and organic investment.

Okay and then just finally, one for Mike on the SaaS Carolina investment I was wondering do you have any sort of government support or contracts lineup in relation to this investment and how do you expect the capex profile on this facility to Pan out over the next couple of years.

Sure I'll start the latter part of that first which is.

We're just commencing this initiative so the spend profile will be relatively linear.

Operator: Our next question comes from the line of Seth Seifman with J.P. Morgan. Please proceed with your question. Hey, thanks very much and good morning.

Dwayne where we are today through the 2026 occupancy day that bill alluded to so think of it cut it that way Robert in your model.

In terms of this investment.

The investment is really geared towards the Columbia class and the rest of the class program and Thats really where were expected to make a return on this investment. So therefore that's.

The $120 million, we referenced is really Drs as investment what it does do though is it enables us to be part of the conversations for.

The industrial base initiatives to increase throughput prospectively and that's how we're viewing this ralph.

That's great. Thanks, so much.

Our next question comes from the line of Seth Sigman with J P. Morgan. Please proceed with your question.

Hey, thanks, very much and good morning.

Good morning.

Morning.

Wanted to I guess start off asking a little bit about the growth and kind of given the.

Given the strong results that we saw and in AST <unk>.

Mike DePold: And if so, is there, you know, is there something in particular that kind of weighs down the growth at IMS to get to that average level that you're forecasting? Thanks. I'll take that one. I wouldn't necessarily view the segment growth as being differentiated between ASC and IMS. And really, what I'm looking at when I make that comment is the bookings profile and the book to bill ratio that we had in growth and backlog. Both of those segments had a kind of proportional growth in the backlog, excluding the unfunded piece for Columbia at IMS.

In the fourth quarter, I mean, I know, there's a quarterly profile here and so we'll see that step down sequentially in Q1.

But just given the level of growth that we saw in thinking about the growth that youre looking for overall at the company I mean, it would seem that the.

The advanced sensing our computing business should grow significantly faster than the average level of company growth that youre forecasting for FERC.

For 2020 for I guess first of all is that is that a fair assumption to make.

And if so is there is there something in particular.

Mike DePold: We do expect both of the segments to contribute to the growth that we outlaid in the NN-24 guide pretty proportionally. Right. Okay. Okay.

That kind of weighs down the growth at IMS to get to that average the level that you are forecasting.

Thanks, Ed I'll take that one I wouldn't necessarily view this segment growth.

<unk> differentiated between ASC in IMS.

And really where I'm looking at there when I make that comment is is the bookings profile in the book to Bill ratio that we had and the growth in backlog both of those segments had kind of proportional.

Growth.

On the backlog, excluding the unfunded piece for Colombia at IMS, and we do expect both of the of this segment to contribute to the growth that we outlined in our 24 guide pretty proportionately.

Okay. Okay.

In terms of the then.

Is there some reason to think about it was there something really outsized about <unk> 23, and an advanced sensing and computing.

That would suggest that that kind of I understand it's not a quarterly run rate, but at least from a seasonally adjusted quarterly run rate.

Yes.

For us all to take you up to a seasonally adjusted quarterly run rate.

Yeah. Good question, I get where you're going now so I think the one of the contributing factors to the Q4 contribution from ASC.

Is that we started to see the supply chain stabilization and as we alluded to on previous calls we started setting up kind of advanced procurement and other mitigation to really stabilize our supply chain to make sure that we could have the output that we predicted before that Q4 ramp. So we knew that there was going to be a little bit about wave that created this anomaly.

Mike DePold: So I think that's adding to the disconnect in Q4. Got it. Got it. Thanks.

Mike DePold: Okay. And then maybe one more kind of top line related question is just, you know, when you think about the booking opportunities for this year and, you know, think about the potential book to bill for 2024, you know, how are you thinking about that, including, you know, the opportunities relative to what you picked up in 2023, understanding that there aren't the kind of giant Columbia contracts. Yeah, so first, I'll say from a 2023 perspective, when we do our book to bill ratio, we don't include the unfunded piece. So the book to build a whole point to book to bill in 2023 was not dominated by Columbia, it was actually a holistic, you know, demand that we saw really stemming from these evolving threats that Bill alluded to in his speech just a moment ago. We don't guide to booking, so we don't put out a number.

In Q4, because of what we've seen in the supply chain and the proactive mitigation, we took to secure our confidence in being able to deliver that ramp in Q4, I don't think youre going to see that quite as pronounced in the in the 'twenty 'twenty four for you. So I think that's adding to that the disconnect in Q4.

Got it got it thanks, Okay and.

Then.

One more kind of topline related is just when.

When you think about the bookings opportunities for this year and.

Think about the potential book to Bill for 2024.

How are you thinking about that.

Including the opportunities relative to what you picked up in 2023 understanding that there arent that kind of a giant Colombia contra.

Contracts out there.

Mike DePold: But we do kind of target to make sure that our bookings are exceeding that one to one book to bill ratio. And as we look into 24, we have confidence that we're going to be able to execute and continue to grow our backlog. Great, great. Thanks very much.

Demand that we saw from really stemming from these evolving threats.

Bill alluded to in his in his speech this a moment ago we.

Great great. Thanks, very much I'll leave it there for now.

Operator: I'll leave it there for now. Thanks. Our next question comes from the line of Peter Arment with Baird. Please proceed with your question. Yeah, good morning, Bill, Mike, and Steve.

Thanks.

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

Yes, good morning, Bill Mike Steve.

Operator: Hey, Mike, you called out Columbia as being, you know, a big piece of the Adjusted EBITDA margin expansion of 100 to 140 base points, but you said there were others. Maybe you could just give us a little more color about some of the other programs that are, you know, helping you on the expansion side. Yeah, so there's a couple of programs.

Helping you on the on the expansion side.

Yes, so there's a couple of programs I think as we kind of showed this margin expansion historically over the past couple of years, it's been as we've been moving.

These next generation programs into a larger production base, Colombia has been the highlight on that but there's been others, particularly in arcata.

<unk> ground based and dismount incentive programs, we're seeing that transition out of our ASC segment, and then you've got the Columbia piece on the IMF.

The real headlines that youre going to see move and continue to drive this positive margin occurrence that were anticipated.

Okay, and then just just circling back to the Capex.

In South Carolina.

Yes.

Peter you've got to write the business case for the facility to $120 million investment is based on that large multi year, Colombia award that gave us the assurance to go forward. This facility and it's going to drive additional capability capacity that will drive higher margins.

But it also gives us the ability.

And the capacity to go after future work on new new platforms, and that's a key part thats basically upside to the initial investment.

William J. Lynn: That's basically the upside to the initial investment, but it does position us for that kind of expansion. And then, in parallel, it positions us, as Mike was talking about, to participate in the general expansion of the submarine industrial base that Congress is funding and the Navy is pursuing. And we're in active discussions with the Navy and the Yards as to how you could align work between the Yards and the suppliers to drive that increased throughput. And the facility is a key part of that conversation. Appreciate the call; thanks, guys.

Is pursuing and we're in active discussions with the navy and the yards as to how you to align work between the yards and the suppliers too.

Drive that increase throughput and the facilities that key part of that conversation.

I appreciate the color thanks, guys.

Thank you.

Operator: Thank you. Our next question comes from the line of Ronald, sorry, Ronald Epstein with Bank of America. Please proceed with your question. Hey, good morning. Thanks for the call. This is Jordan Linus on behalf of Ron.

<unk>.

Our next question comes from the line of Ronald Ronald Epstein with Bank of America. Please proceed with your question.

Hey, good morning, Thanks for the call.

This is George your line is onto Ron could.

Operator: Could you talk about the opportunities you're seeing in space? Do you think there's an opportunity in SBA for the protracted warfighter or what those opportunities look like? Yeah, no. Thanks for the question, George.

Could you guys talk about.

The opportunities Youre seeing in space.

Do you think there is an opportunity for the <unk> War fighter and what those opportunities look like.

Yes, no. Thanks for the question.

As we've talked about spaces is a long term play for us what we're really focused on doing is try and move from what we really have now is a niche capability and move that to have really a core part of our of our.

New base, we have had early success as we talked about in weather satellites and missile defense, where your questions focused we've seen strong customer interest in our payloads.

William J. Lynn: And on missile defense, where your question's focused, we've seen strong customer interest in our payload. We have some unique capabilities in the low-earth orbit area. That did translate into a TRONS1 tracking layer award, but that's just the first step, and we need to have more awards.

We have some unique capabilities and the lower orbit area that did translate into a trance one tracking layer award.

But that's just the first step and we.

We need to have more awards.

William J. Lynn: That's a longer-term play, but we do think we have customer receptivity, and we're going to continue to pursue this over the next 18 to 24 months. Great, thank you so much. Our next question comes from the line of Michael Saramoli with Truist Securities. Please proceed with your question. Hey, good morning, guys. Thanks for taking the questions. Um, maybe just a couple of quick ones first.

Longer term play, but we do think we have customer receptivity and we're going to continue to pursue this over the next 18 to 24 months.

Great. Thank you so much.

Our next question.

Comes from the line of Michael <unk> with true Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the questions.

Maybe just a couple of quick ones first.

Operator: I guess Mike, um, in terms of bookings, do you guys think you can have, maybe I missed it, but do you think you can have a book-to-bill greater than 1 in 24? I know we've got some budget uncertainty, and it sounds like the low end of the range kind of captures that, but how are you thinking about the bookings out there? Yeah, that's, as I said earlier, I don't think we guide to bookings, but we don't guide to bookings.

I guess Mike.

In terms of bookings do you guys think you can have maybe I missed it but do you think you could have a book to bill greater than one in 'twenty four I know, we've got some budget uncertainty it sounds like the low end of the range kind of captures that but how are you thinking about the bookings outlook.

Yes.

As I said earlier I don't think we guide to bookings, where we don't guide to bookings, but I'm going to answer your question a little differently I think that the threat evolution that we're seeing.

Mike DePold: But I'm going to answer your question a little differently. I think that the threat evolution that we're seeing, and that's being highlighted by the conflicts that we're seeing around the globe, is certainly continuing to drive demand for our product set. So although we don't guide to bookings, we're confident that we can push higher than a one-to-one book-to-bill ratio for 2024. Okay, I mean, could you give us any color?

Thats being highlighted by by the conflicts that we're seeing around the globe. It's certainly continuing to drive demand to our product set so although we don't guide to bookings, we're confident that we can push higher than a one to one book to bill ratio for 2024.

Okay, I mean could you give us any color I mean are you seeing growth in your overall pipeline of opportunities across the range of capabilities as one area.

Coming stronger than others, any any kind of color you could give us there.

Yes, I think as bill kind of alluded to what we're seeing with these conflicts abroad. Although we don't have a lot of direct sales to Ukraine or or to Israel. At this point in time. They have certainly highlighted a capability that you need a more integrated and communicated battlefield and we're starting to see the demands for.

That in our advanced sensor space in particular.

That is where we're seeing a lot of those the fourth protection business the tactical radars.

Mike DePold: The force protection business, the tactical radars, that is where we're seeing a lot of demand really stemming from what became apparent with the conflict that we're seeing both in Israel and Ukraine. Got it, got it. And then you talked about international revenues. I mean, do you guys have sort of a target of where you think international revenues should go? I mean, you just said you don't have a lot invested in Ukraine or Israel, but do you kind of have a goal or a target as to where you think you can get international revenues as a percent of total? We haven't set a specific target.

That is where we're seeing a lot of demand really stemming from what became apparent with the complex that we're seeing bulk.

<unk> great.

Got it got it and then.

You talked about the.

International revenues I mean, do you guys have sort of a target of where you think international I mean, you. Just said you don't have a lot into Ukraine, or Israel, but do you kind of have a goal or a target as to where you think you can get international revenues as a percent of total.

We haven't set a specific part target as we said we've moved up to 10% that.

William J. Lynn: As we said, we've moved up to 10 percent. That, over the last five or six years, represents a doubling of proportion. And as we move programs from development to production, as we've talked about, we have a kind of a bubble of programs that are moving in both the sensing and propulsion areas from development to production. It's when those programs hit production that you see international opportunity. So we think we're going to see more international opportunities, and as we refine those, we may set a target, but right now, we're looking to have a steady increase, but we haven't named a specific target.

Over the last five or six years that represents a doubling.

A proportion.

And as we move programs from development to production as we've talked about we have a.

Kind of a.

Bubble of programs that are moving in both the sensing and propulsion area from development to production. It's one of those programs hit production as you see international opportunity.

So we think we're going to see more international opportunities as we refine those we may set a target, but right now we're <unk>.

Looking to have a steady increase but we haven't named.

A specific target.

William J. Lynn: Got it. Got it. And then last one for me, just on the Columbia program itself.

Got it got it and then last one for me just on the.

The Columbia program itself can you just give us a general update I think Youre currently working ship set too I think maybe you kind of said you were starting ship set three and.

That program was expected to be pretty positive for margins. So do we have that right or are you guys kind of sort of marching along to your stated path there.

William J. Lynn: Are you guys kind of sort of marching along to your stated path there? Basically, you have a we're actually still finishing the initial contract, which goes back to that one. We are working on a ship set that is better, with better margins. And we've just started ships that three, which still have better margins because it's part of the contract that was negotiated with the new higher inflation assumption. So with that, that stair step where as we go up each ship set, at least for the initial ones, we'll see that kind of step up in margins each year. Perfect. Thanks, guys. I'll jump back. Thank you. As a reminder, to ask a question, please press star 11 on your phone.

Basically you have right, we're actually still finishing the initial contract which goes back to that one.

We are working on.

Chipset too.

Which is better better margins and we've just started chipset three which had still better margins visit as part of the contract that was negotiated with the new higher inflation assumptions.

With that stair step as we go up each ship set at least for the initial ones.

We'll see that kind of step up in margins each year.

Got it perfect. Thanks, guys I'll jump back in the queue.

Thanks.

As a reminder to ask a question. Please press star one one on your phone.

Operator: Our next question comes from the line of John Tan-Wen Ting with CJS Securities. Please proceed with your question. Hi, good morning.

Our next question comes from the line of Jon <unk> with CJS Securities. Please proceed with your question.

Operator: Thank you for taking my question. I was wondering about the new facility you mentioned being mostly for Columbia. What does that do for your Columbia program economics on a per vote basis or a consolidated basis to the company when it comes on? Sure, John.

Hi, Good morning. Thank you for taking my questions I was wondering about the new facility.

You mentioned of mostly for the Columbia, what does that do for your Columbia program Economics on a per BOE basis on a consolidated basis to the company.

When it comes online.

Mike DePold: So yeah, this investment is really geared towards driving efficiencies, looking at complex bills on the Columbia and figuring out what we can take in inside here, and make sure with that we maximize our efficiencies and maximize our margins. And from that, with this new facility, we believe we've got a good path to increase the returns on that program as we start executing when this facility goes live. Okay, and then do you still expect to participate in Navy or government-funded expansion and the industrial base versus Dell funding in the future? That's the goal, John.

Increase the returns on the snap program.

As we start executing windows facility goes blood.

Okay, and then do you still expect to participate in Navy or government funded expansion.

In the industrial base versus self funding in the future.

That's less the Golar, John we think.

As Mike said the business case for the facilities based.

On the Columbia class.

That analysis compares well to an acquisition it would.

It would give you.

If you did it in that kind of analysis, you would have a sub 10 multiple.

Comparing it to an acquisition. So financially this was a very strong move but also it positions us as youre, suggesting to be.

Part of that submarine industrial base expansion and by extension part of the Navy investment.

In that so we would look at.

As we go forward for some Navy investment if we were to expand this facility to.

To improve the throughput at the yards by moving work to the suppliers.

Mike DePold: Got it. That's helpful. And then, Mike, if you could just talk about your cash flow in 24 and the cadence, is that expected to be normal from a seasonal basis, or are there any puts and takes versus how you've seen that flow historically versus your historical performance? Yeah, I think it's going to be kind of typically as we've seen in terms of that same quarterly trend and that seasonality skewing towards the fourth quarter. I think the linearity Is there any way you can help us ballpark where the trough level of every cash will be as you go through Q1?

Got it that's helpful and then.

Mike If you could just talk about your on your cash flow in 'twenty four and the cadence is that expected to be normal from a seasonal basis or are there any puts and takes versus how you've seen that also in historical.

Or is your historical performance.

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

I think the linearity.

Improved but I still think the large majority of the cash will reside in Q4.

Is there any way you can you can help us ballpark, where where the trough level of free cash flow as you go through Q1.

Youll see that proppant tick up and with that profit will come to working capital liquidation to cash so.

Start modeling out the revenue you kind of look at that to be the impetus to really drive the cash into the Q4.

Operator: Got it. Thank you. At this time, I will turn the floor back to Steve Bather for closing remarks. Thank you all for your time this morning and your interest in DRS. Of course, if you have follow-up questions, please don't hesitate to call or email me. I look forward to speaking with you again soon. Have a great day. Thank you. This concludes today's conference. You may disconnect now. Thank you all for participating.

Ramp if you will.

Got it thank you.

At this time I will turn the floor back to Steve <unk> for closing remarks.

Have a great day.

Thank you. This concludes today's conference you may disconnect now thank you all for participating.

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