Q2 2024 Leonardo DRS Inc Earnings Call
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Operator: Hello. Thank you for standing by. Welcome to Leonardo DRS's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode.
Speaker Change: Hello. Thank you for standing by. Welcome to Leonardo DRS second quarter 2024 earnings call.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised.
Speaker Change: At this time, all participants are on a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.
Operator: To withdraw your question, please press star 11 again. I would now like to hand the call over to Steve Vather. Sir, you may begin. 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 Dippold, 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.
Speaker Change: To withdraw your question, please press star 11 again.
Speaker Change: I would now like to hand the call over to Steve Vather. Sir, you may begin.
Stephen Vather: Management may also make forward-looking statements during the call regarding future events, 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 other FCC filings.
Speaker Change: 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 Dippold, our CFO . They will discuss our strategy, operational highlights, financial results, and forward outlook.
Speaker Change: 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.
Speaker Change: Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company.
Speaker Change: 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.
Speaker Change: 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. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors.
Stephen Vather: We undertake no obligation to update any of the forward-looking statements made on this call. Remus Coal 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.
Speaker Change: These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures.
Stephen Vather: You can find the reconciliation and the non-GAAP measures discussed on this call in our earnings release. At this time, I will turn the call over to Bill. Bill?
Speaker Change: You can find the reconciliation and the non-GAAP measures discussed on this call in our earnings release.
William J. Lynn: Thanks, Steve, and thank you all for joining us. DRS continues to perform well, as evidenced by the impressive quarterly results we are releasing this morning. We are experiencing steady customer demand across our diverse portfolio of differentiated technology. As a result, we posted another consecutive quarter of 1.2 book-to-bill.
Speaker Change: At this time, I will turn the call over to Bill. Bill?
Bill: Thanks, Steve, and thank you all for joining us.
Bill: DRS continues to perform well, as evidenced by the impressive quarterly results we are releasing this morning.
Bill: We are experiencing steady customer demand across our diverse portfolio of differentiated technologies.
Bill: As a result, we posted another consecutive quarter of 1.2 book-to-bill. In Q2, there was particular strength for our capabilities in advanced infrared sensing, electric power and propulsion, network computing, and ground systems integration.
William J. Lynn: In Q2, there was particular strength in our capabilities in advanced infrared sensing, electric power and propulsion, network computing, and ground systems integration. Additionally, our total backlog ascended to new company records and now stands over $7.9 billion, which is up 82% year-over-year and also up sequentially. The robust demand we continue to experience, coupled with the easing of supply chain constraints, unlocked another quarter of 20% year-over-year organic revenue growth. We also grew our adjusted EBITDA by 32% and delivered margin expansion of 100 basis points in the quarter. Adjusted net earnings and adjusted diluted EPS increased by 21% and 20% compared to last, thanks to solid operations. I want to take a moment to thank the broader DRS team for driving such marvelous results.
Bill: Additionally, our total backlog ascended to new company records and now stands over $7.9 billion, which is up 82% year-over-year and also up sequentially.
Bill: The robust demand we continue to experience, coupled with the easing of supply chain constraints, unlocked another quarter of 20% year-over-year organic revenue growth.
Bill: We also grew our adjusted EBITDA by 32% and delivered margin expansion of 100 basis points in the quarter.
Bill: Adjusted net earnings and adjusted diluted EPS increased by 21% and 20% compared to last year, thanks to solid operational execution.
Speaker Change: I want to take a moment to thank the broader DRS team for driving such marvelous results. The team's steadfast focus and our exceptional performance in the first half is prompting us to adjust our outlook for the full year.
William J. Lynn: The team's steadfast focus and our exceptional performance in the first half is prompting us to adjust our outlook for the full year. Mike will walk through the detail of our increased guidance a little bit later on the call. Some thoughts on the macro environment. Congress has made preliminary progress on FY 25 appropriations.
Bill: Mike will walk through the detail of our increased guidance a little bit later on the call.
Michael D. Dippold: Here are some thoughts on the macro environment. Congress has made preliminary progress on FY25 appropriations.
William J. Lynn: However, consistent with prior years, we expect to enter the fiscal year under a continuing resolution. Looking beyond the near term, we believe that the elevated global threat environment will remain the single most important factor driving defense investment by the U.S. and its allies. Technology advancements are changing the nature of warfare, and our national security strategy remains consistently focused on deterring and, if necessary, contesting near peer adversaries. Both of these factors reinforce the imperative to modernize.
Michael D. Dippold: However, consistent with prior years, we expect to enter the fiscal year under a continuing resolution.
Michael D. Dippold: Looking beyond the near term, we believe that the elevated global threat environment will remain as the single most important factor driving defense investment by the U.S. and its allies.
Michael D. Dippold: Technology advancements are changing the nature of warfare and our national security strategy remains consistently focused on deterring and, if necessary, contesting near peer adversaries.
William J. Lynn: DRS is well-positioned to continue supporting our customers as they enhance their capabilities to address new mission complexities. Shifting to the supply chain, I may briefly mention that improvements on this front are partially responsible for unlocking incremental revenue. We have seen a steady and gradual recovery across most, but not all, of our supply chain in year-to-date 2024. Additionally, our steadfast and proactive management of the supply chain, coupled with the broader improvement, is resulting in better predictability and delivery timelines, increased component material availability, as well as improved consistency and quality.
Michael D. Dippold: Both of these factors reinforce the imperative to modernize.
Speaker Change: DRS is well positioned to continue supporting our customers if they enhance their capabilities to address new mission complexities.
Speaker Change: Shifting to supply chain, I made brief mention that improvements on this front are partially responsible for unlocking incremental revenue growth.
Speaker Change: We have seen a steady and gradual recovery across most, but not all, of our supply chain in year-to-date 2024.
Speaker Change: Additionally, our steadfast and proactive management of the supply chain coupled with the broader improvement are resulting in better predictability and delivery timelines, increased component material availability, as well as improved consistency and quality.
William J. Lynn: Overall, these positive developments are accelerating the pace of revenue for the company. However, the revenue step-up from the supply chain recovery is expected to be contained to this year, with future growth to be more in line with our previous projections in the mid-single-digit growth range. We believe that we are close to a new steady state with respect to lead times and input prices, which, of course, are both significantly higher than pre-2020.
Speaker Change: Overall, these positive developments are accelerating the pacing of revenue for the year.
Speaker Change: That said, the revenue step-up from the supply chain recovery is expected to be contained to this year with future growth to be more in line with our previous projections in the mid-single-digit growth range.
Speaker Change: We believe that we are close to a new steady state with respect to lead times and input pricing, which of course are both significantly higher than pre-2020.
William J. Lynn: While inflation has been a lessening factor for us in 2024, there are still some stubborn pockets within our business where we are still absorbing higher input prices. Shifting to our operations, let me highlight a couple of items. As I mentioned earlier, we are continuing to see strong demand across our broad and differentiated portfolio. In our sensing business, our technologies continue to be well-recognized as the go-to standard.
Speaker Change: While inflation has been a lessening factor for us in 2024, there are still some stubborn pockets within our business, where we are still absorbing higher input pricing.
Speaker Change: Shifting to our operations, let me highlight a couple of items this quarter.
Speaker Change: As I mentioned earlier, we are continuing to see strong demand across our broad and differentiated portfolio. In our sensing business, our technologies continue to be well recognized as the go-to standard.
William J. Lynn: This is evident in our outstanding quarterly bookings as well as the clear long-term opportunity set bolstered by our customers' modernization push for next-generation technology. We are also advancing our leading market positions by partnering with commercial players to jointly develop cutting-edge capabilities that meet emerging customer requirements. As an example, we are actively working to integrate edge AI processing into sensors.
Speaker Change: This is evident in our outstanding quarterly bookings, as well as the clear long-term opportunity set bolstered by our customers' modernization push for next generation technologies.
Speaker Change: We are also advancing our leading market positions by partnering with commercial players to jointly develop cutting-edge capabilities that meet emerging customer requirements.
Speaker Change: As an example, we are actively working to integrate edge AI processing into sensors.
William J. Lynn: At the same time, our agility and commitment to excellence make us a partner of choice across the defense ecosystem. We were recently recognized with a Partner to Win Award from our customer VAE Systems for best-in-class performance in delivering exceptional capability, quality, and on-time delivery. This award, among many others received over the years, embodies our culture and commitment to ensuring our customers have the very best technology to execute their mission. Our innovation continues to be matched with healthy customers, which validates the close alignment of our R&D strategy to future mission needs. You may recall that earlier this year, we unveiled a new family of lasers that cover a wider spectrum of light. These lasers were specifically designed for quantum information science applications.
Speaker Change: At the same time, our agility and commitment to excellence makes us a partner of choice across the defense ecosystem.
Speaker Change: We were recently recognized with a Partner-to-Win Award from our customer BAE Systems for best-in-class performance in delivering exceptional capability, quality, and on-time delivery.
Speaker Change: This award, among many others received over the years, embodies our culture and commitment to ensuring our customers have the very best technology to execute their missions.
Speaker Change: Our innovation continues to be matched with healthy customer interest, which validates the close alignment of our R&D strategy to future mission needs.
Speaker Change: You may recall that earlier this year, we unveiled a new family of lasers that cover a wider spectrum of light.
Speaker Change: These lasers were specifically designed for quantum information science applications.
William J. Lynn: I am pleased to report that we have already secured several orders and continue to receive demand for our state-of-the-art capability in this domain. Additionally, we are seeing considerable domestic and international customer appetite for our multi-domain force protection solution. Against UAF, force protection capabilities remain critical to survivability and operating effectively in today's battlefield.
Speaker Change: I am pleased to report that we have already secured several orders and continue to gather demand for our state-of-the-art capability in this domain.
Speaker Change: Additionally, we are seeing considerable domestic and international customer appetite for our multi-domain force protection solutions.
Speaker Change: Counter UAS and force protection capabilities remain critical to survivability and operating effectively in today's battlefield.
William J. Lynn: Our tactical radars, advanced sensing and active protection technologies, as well as our systems integration expertise, continue to be key enablers. I want to briefly mention that in this quarter, we also secured a $417 million contract to provide critical electronic combat control and sonar systems across U.S. and allied Navy submarines. We are pleased that we will be continuing to support the Navy on this important network computing contract for many years to come.
Speaker Change: Our tactical radars, advanced sensing, and active protection technologies, as well as our systems integration expertise, continue to be key enablers.
Speaker Change: I want to briefly mention that in this quarter we also secured a 417 million dollar contract to provide critical electronic combat control and sonar systems across U.S. and Allied Navy submarines.
William J. Lynn: This win also provides us with increased visibility into the year as it clears our largest re-compete for 2024. Moving to a quick update on our facility expansion efforts in Charleston, South Carolina. We continue to make steady progress, as demonstrated by the ramp-up of CapEx in the quarter. As planned, CAPEX will continue to tick up in the second half. Lastly, I want to commend our team in Danbury, Connecticut, for their superb commitment to industrial security. This year, DRS was one of 14 recipients of the Cogswell Award, out of more than 12,500 eligible cleared facilities. This honor now marks our 22nd award, which demonstrates our continued and unwavering company-wide commitment to security.
Speaker Change: This win also provides us with increased visibility into the year as it clears our largest re-compete for 2024.
Speaker Change: This year DRS was one of 14 recipients of the Cogswell Award out of more than 12,500 eligible cleared facilities.
Speaker Change: This honor now marks our 22nd award, which demonstrates our continued and unwavering company-wide commitment to security.
William J. Lynn: Overall, there is a lot to be proud of, and I am pleased with our outstanding year-to-date results. That said, I am most proud of the team's continued focus on delivering the very best technology to our warfighters. Our talented people, sound strategy, and leading market positions are generating spectacular outcomes for both customers and shareholders. We remain focused on driving sustainable growth, execution consistency, and prudent investment, all of which are critical components to our long-term value creation formula. Let me now turn the call over to Mike, who will walk you through our second quarter results and revised 2024 guidance in greater detail. Thanks, Bill.
Speaker Change: Our talented people, sound strategy, and leading market positions are generating spectacular outcomes for both customers and shareholders.
Speaker Change: We remain focused on driving sustainable growth, execution consistency, and prudent investment, all of which are critical components to our long-term value creation formula.
Speaker Change: Let me now turn the call over to Mike, who will walk you through our second quarter results and revised 2024 guidance in greater detail.
Michael D. Dippold: I'm pleased with our strong continued momentum. I also want to extend my thanks to the team for executing another great course. As Bill mentioned earlier, impressive customer demand and a continued supply chain recovery are driving revenue growth well above our prior expectations. A sizable portion of the growth stemmed from increases in our advanced infrared sensing, electric power propulsion, as well as our tactical radar program. Moving to the segment view, ASC segment revenue was up 22% due to growth in programs related to advanced infrared sensing and tactical radar. IMS segment revenue was up 18% year-over-year, with solid performance evident across the segment. Now to the Adjusted Evita.
Michael D. Dippold: Thanks, Bill. I'm pleased with our strong, continued momentum. I also want to extend my thanks to the team for executing another great quarter.
Michael D. Dippold: As Bill mentioned earlier, impressive customer demand and a continued supply chain recovery is driving revenue growth well above our prior expectations.
Michael D. Dippold: A sizable portion of the growth stemmed from increases in our advanced infrared sensing, electric power propulsion, as well as our tactical radar programs.
Michael D. Dippold: Adjusted EBITDA in the quarter was $82 million, representing 32% growth from last year; increased volume was the primary catalyst for the 100 basis points of margin expansion in the quarter. However, at the segment level, quarterly adjusted EBITDA and margin performance continues to be fairly low. The trending is clearer when extrapolated to an annual view. That said, for the quarter, ASC segment adjusted EBITDA increased by 53%, with a margin of 230 basis points due to favorable program mix, higher volume, and improved program execution. IMS segment adjusted EBITDA was up 4%, but margin contracted by 130 basis points due to an unfavorable program mix and less efficient execution related to a ground surveillance integration program.
Michael D. Dippold: Now to Adjusted EBITDA.
Speaker Change: Adjusted EBITDA in the quarter with $82 million, representing 32% growth from last year.
Speaker Change: Increased volume was the primary catalyst for the 100 basis points of margin expansion in the quarter. At the segment level, quarterly adjusted EBITDA and margin performance continues to be fairly lumpy.
Speaker Change: IMS segment adjusted EBITDA was up 4%, but margin contracted by 130 basis points due to unfavorable program mix and less efficient execution related to a ground surveillance integration program.
Michael D. Dippold: It is important to note that our Columbia-class program continues to trend positively with improved year-over-year profitability. This is evident in the first half comparison, where segment-adjusted EBITDA is up 47% with 140 basis points of margin expansion over last year. Moving to the bottom line, second quarter net earnings were $38 million, and diluted EPS was $0.14 a share, up 9% and 8%, respectively.
Speaker Change: It is important to note that our Columbia-class program continues to trend positively with improved year-over-year profitability.
Speaker Change: This is evident in the first half compare, where segment-adjusted EBITDA is up 47%, with 140 basis points of margin expansion over last year.
Michael D. Dippold: Our adjusted net earnings of $47 million and adjusted diluted EPS of $0.18 a share were up 21% and 20%, respectively. Strong operational execution outweighed the headwind from increased taxes and a higher relative tax rate in the year-over-year comparison. Moving to free cash flow, cash collections were slightly better than last year with a small free cash generation in the quarter.
Speaker Change: Moving to the bottom line metrics.
Speaker Change: Strong operational execution outweighed the headwind from increased taxes and a higher relative tax rate in the year-over-year compare.
Speaker Change: Moving to free cash flow, cash collections were slightly better than last year with a small free cash generation in the quarter. A great outcome driven by higher net profitability and better working capital efficiency, which more than offset the increased year-over-year CapEx investment.
Michael D. Dippold: A great outcome driven by higher net profitability and better working capital efficiency, which more than offset the increased year-over-year CapEx investment. Now, let me shift to a discussion of our updated guidance. Based on the remarkable first half performance, we are increasing our guidance across all key metrics. We are now expecting a higher revenue range between $3.075 and $3.175 billion, which represents a 9% to 12% year-over-year growth, all of which is still organic. We have solid visibility for the year as we recently secured recompetes and continue to execute from our sizable backlog. However, our revenue output will largely depend on the timing of material receipts, the progress of labor input, as well as the level and pacing of customer orders.
Speaker Change: Let me shift to a discussion on our updated guidance.
Speaker Change: Based on the remarkable first half performance, we are increasing our guidance across all key metrics.
Speaker Change: We are now expecting a higher revenue range between $3.075 and $3.175 billion, which represents a 9% to 12% year-over-year growth, all of which is still organic.
Speaker Change: We have solid visibility for the year as we recently secured re-competes and continue to execute from our sizable backlog position.
Speaker Change: However, our revenue output will largely depend on the timing of material receipts, progress of labor input, as well as the level and pacing of customer orders.
Michael D. Dippold: We're just at EBITDA. The range has also increased and is now between $375 and $395 million. We are still expecting healthy margin improvement year over year, primarily from the Columbia class transition to production, as well as some operational leveraging from higher volume. However, the implied margin improvement is a little lower than our prior guide due to less favorable program composition from the increased revenue output, some discreet, less efficient program execution, as well as the lingering impact of inflation in pockets of the business. Overall, we expect both our ASC and IMS segments to contribute to our revenue growth and annual margin improvement. The adjusted diluted EPS range was increased to between $0.82 and $0.88 a share.
Speaker Change: We're just at EBITDA. The range has also increased and is now between $375 and $395 million.
Speaker Change: We are still expecting healthy margin improvement year over year, primarily from the Columbia-class transition to production, as well as some operational leveraging from higher volume.
Speaker Change: The implied margin improvement is a little lower than our prior guide due to less favorable program composition from the increased revenue output, some discreet, less efficient program execution, as well as the lingering impact of inflation in pockets of the business.
Speaker Change: Overall, we expect both our ASC and IMS segments to contribute to our revenue growth and annual margin improvement.
Speaker Change: The adjusted diluted EPS range was increased to between $0.82 and $0.88 a share. Embedded in this range are lower expected tax rate of 20.5%, but our fully diluted share count remains consistent with our prior guide at 268 million shares.
Michael D. Dippold: Embedded in this range is a lower expected tax rate of 20.5%, but our fully diluted share count remains consistent with our prior guide at 268 million shares. Lastly, we are still targeting an 80% free cash flow conversion of adjusted net earnings for the year. When we think about the likely cadence of the second half, consistent with prior years, it is our expectation that the fourth quarter will contribute strongly to the financial performance of the year.
Speaker Change: Lastly, we are still targeting 80% free cash flow conversion of adjusted net earnings for the year.
Speaker Change: When we think about the likely cadence of the second half, consistent with prior years, it is our expectation that the fourth quarter will contribute strongly to the financial performance of the year.
Michael D. Dippold: Obviously, a significant portion of the guidance increase is coming from the outperformance in the second quarter. The balance of the increase will manifest primarily in the fourth quarter. As a result, we are anticipating a small step up in Q3 from Q2, translating to revenue around $775 million with an adjusted EBITDA margin in the low to mid 11% range. Our revised 2024 guidance does not change our three-year financial targets.
Speaker Change: Obviously a significant portion of the guidance increase is coming from the outperformance in the second quarter.
Speaker Change: The balance of the increase will manifest primarily in the fourth quarter. As a result, we are anticipating a small step up in Q3 from Q2, translating to revenue around $775 million, with adjusted EBITDA margin in the low to mid 11% range.
Operator: We remain committed to driving mid-single-digit revenue growth annually, albeit from a higher revenue base, while driving towards approximately 14% adjusted EBITDA margin by 2026. Let me wrap up with a few quick closing thoughts. We are pleased with our performance to date and applaud the broader team for achieving these results. That said, we are maintaining a steadfast focus on driving execution to meet our commitments to our customers and shareholders. With that, we are ready to take your questions. Thank you. Ladies and gentlemen, as a reminder to ask the questions, please press star 1-1 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again.
Speaker Change: Our revised 2024 guidance does not change our three-year financial targets. We remain committed to driving mid-single-digit revenue growth annually, albeit from a higher revenue base, while driving towards approximately 14% adjusted EBITDA margin by 2026.
Speaker Change: Let me wrap up with a few quick closing thoughts. We are pleased with our performance to date and applaud the broader team in achieving these results. That said, we are maintaining a steadfast focus on driving execution to meet our commitments to our customers and shareholders.
Speaker Change: With that, we are ready to take your questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone and then wait to hear your name announced.
Operator: Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Stallard with Vertical Research. Your line is open. Thanks so much. Good morning. All right, we're out. And I've got a couple for you. First of all, I was wondering if you could elaborate on what you call the efficiency issues in the IMS division during the quarter and whether you're expecting them to continue going forward. Mike, why don't you go ahead?
Speaker Change: To withdraw your question, please press star 11 again.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Robert Stallard with Vertical Research. Your line is open.
Robert Alan Stallard: Thanks so much. Good morning.
Robert Alan Stallard: What do you have?
Robert Alan Stallard: And I've got a couple for you. First of all, I was wondering if you could elaborate on these, what you call efficiency issues in the IMS division in the quarter, and whether you're expecting them to continue going forward.
Michael D. Dippold: Sure. Yeah. So, Rob, this is a program.
Michael D. Dippold: It's a land integration program that we have within the IMS segment. It's a program that's a handful of years old, and we had to anticipate kind of closing it out this year. We've had some delays in the program testing and completion of the program, which has extended it out a bit. And that's really what the headwind is. We believe that this is, you know, at the ten yard line; we can see the light at the end of the tunnel here. It's just taken us a little longer and a little more money to complete than we had previously anticipated. So I believe it's contained in 24.
Robert Alan Stallard: Mike, why don't you go ahead?
Michael D. Dippold: Sure, yeah, so Rob, this is a program, it's a land integration program that we have within the IMS segment. It's a program that's a handful of years old and we had to anticipate kind of closing it out this year. We've had some delays that we've had in the program testing and completion of the program which has extended it out a bit.
Speaker Change: And that's really what the headwind is. We believe that this is, you know, at the 10-yard line, we can see the light at the end of the tunnel here. It's just taking us a little longer and a little more cost to complete than we had previously anticipated. So, I believe it's contained at 24. I don't think it will impact anything in the long term, but it is a headwind we're dealing with for the current year.
Michael D. Dippold: I don't think it will impact anything in the long term, but it is a headwind we're dealing with for the current year. Okay, that is a follow-up. It sounds like the overall supply chain situation is getting better, but I was wondering if you could sort of contrast where it's got better the most, perhaps, and where there is still some work to do. Yeah, as I said in the opening comments, Rob, we are seeing a better environment, both in terms of the supply chain and the market itself. Lead times have come down, and availabilities are up. We are not, though, back to or anywhere close to, really, particularly in things like electronic components, to the pre-2020, pre-COVID time frame.
Speaker Change: Okay, that is a follow-up. It sounds like the overall supply chain situation is getting better, but I was wondering if you could sort of contrast where it's got better the most perhaps and where there is still some work to do.
Speaker Change: Yeah, as I said in the opening comments, Rob, we are seeing a better environment, both
Speaker Change: In terms of the supply chain, the market itself, lead times have come down.
Speaker Change: Availabilities are up.
William J. Lynn: The other factor in this is that we are much more heavily managing the supply chain than we did in the past. Obviously, like everyone else, we've moved away from just-in-time delivery and are looking at resilience in the supply chain. And I think part of the improvement we saw this year was that proactive management. And then just a final one for me, one for Bill probably, looking at the sort of funding outlook for the DoD and, obviously, the political uncertainty we have later this year, I was wondering what sort of risk DRS might have if the Ukrainian supplemental were to be zeroed and what sort of offset perhaps there could be from European demand.
Speaker Change: We are not, though, back to, or anywhere close, really, particularly in things like electronic components to the, you know, pre-2020, pre-COVID.
Speaker Change: timeframe. The other factor in this is we are much more heavily managing the supply chain than we did in the past. Obviously like everyone else we've moved away from just-in-time delivery and are looking at resilience in the supply chain and I think part of the the improvement we saw this year was that that proactive management.
Speaker Change: Okay and then just a final one for me, one for Bill probably, looking on the sort of funding outlook for the DoD and obviously the political uncertainty we have later on this year, I was wondering on what sort of risk DRS might have if the Ukrainian supplemental were to be zeroed and what sort of offset perhaps there could be from European demand? Thank you.
William J. Lynn: Yeah, I mean, Rob, overall, I think the change in administration, either to Harris or Trump-led, is going to have a modest impact on the defense budget because the threat they're dealing with is the same. The pacing threat is still China and the Pacific, and the immediate threat is still Putin in Ukraine. I do think you highlight the biggest difference between a Democratic and Republican White House would be how they've talked about Ukraine.
William J. Lynn: Yeah, I mean, I think, Rob, overall, I think the change in administration, either to Harris or Trump-led,
Rob: is going to have a modest impact on the defense budget because the threat they're dealing with is the same, you know, the pacing threat.
Rob: is still China in the Pacific. The immediate threat is still Putin in Ukraine. I do think you highlight the biggest difference between a Democratic and Republican White House would be how they've talked about Ukraine.
William J. Lynn: I wouldn't, I'd be a little surprised if you saw an abrupt ending of Ukraine spending and most of its backfill for US equipment at this point, rather than direct transfers to Ukraine. So I think you probably would see less of that under a Republican White House than you would under a Democratic one, but I think it would be a gradual change.
Rob: I'd be a little surprised if you saw an abrupt ending of Ukraine spending, most of its backfill for U.S. equipment.
Rob: At this point, rather than direct transfers to Ukraine, so I think you'd probably see, you know, less of that under a Republican White House than you would under a Democratic, but I think it would be a gradual change.
William J. Lynn: That's great. Thanks so much. Thank you. Please stand by for our next question. Our next question comes from the line of Seth Seifman with J.P. Morgan. Your line is open. Yes, good morning, Bill, Mike, and Steve. This is actually Alex Ladd on for Seth today.
Speaker Change: That's great. Thanks so much.
Speaker Change: Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Seth Seifman with J.P. Morgan. Your line is open.
Alex Ladd: Yes, good morning, Bill, Mike, and Steve. This is actually Alex Ladd on for Seth today. First, kind of wanted to dig more into, you know, the change in the outlook that we saw for adjusted EBITDA margins. You know, I think if you take the midpoint of the sales and adjusted EBITDA guides.
Operator: First, I kind of wanted to dig more into the change in the outlook that we saw for adjusted EBITDA margins. You know, I think if you take the midpoint of the sales and adjusted EBITDA guides, it implies a step down to 12.3 margins for the year. And, you know, certainly understand that there's a stronger sales outlook, but, you know, it seems like the release and kind of your prepared marks earlier imply that, you know, there's a bit of a less, a bit of less drop through and less favorable mix and some program execution headwinds are kind of driving this.
Speaker Change: It implies a step down to 12.3 margins for the year and you know certainly get that there's a stronger
Speaker Change: Sales Outlook, but, you know, it seems like the release and kind of your prepared marks earlier imply that, you know, there's a bit of a less, a bit of less drop through and less favorable mix and some program execution headwinds are kind of driving this.
Operator: So, you know, I was wondering if you could kind of provide more color on this. You know, I'd assume given the margin improvement that you're expecting from Columbia in the second half, it's not related to that, but maybe if you could kind of, you know, highlight more specifically what types of programs we should be driving this. Yeah, let me open it and then turn to Mike for some more details.
Speaker Change: So, you know, I was wondering if you could kind of provide more color on this, you know, I'd assume given the margin improvement that you're expecting from Columbia and the second half, you know, it's not related to that, but maybe if you could kind of, you know, highlight more specifically, you know, what types of programs we should, should be driving this.
Michael D. Dippold: You're right. We're now projecting about an 80 basis point improvement year over year from 23 to 24. That's still a substantial improvement. It is strongly driven by the Columbia program, and the contract transition is that each year we get a better contract mix with better profit margins, and that continues to happen. The headwinds that we identified are the program, the surveillance program that we're closing out this year more slowly than we had expected. In addition, the revenue increase, and the mix of the revenue increases towards the lower end of our margin portfolio. So there's a mixing issue.
Speaker Change: Yeah, let me open and then turn to Mike for some more detail.
Michael D. Dippold: You're right, we're now projecting about an 80 basis point improvement year over year.
Michael D. Dippold: from 23 to 24.
Speaker Change: That's still a substantial improvement. It is strongly driven.
Michael D. Dippold: by the Columbia Program, and the contract transition is each year we get a better...
Michael D. Dippold: contract mix and with better profit margins and that continues.
Michael D. Dippold: to happen. The headwinds that we identified are the program...
Michael D. Dippold: The Surveillance Program, we're closing out this year more slowly than we had expected. In addition, the revenue increase, the mix of the revenue increase is towards the lower end of our margin portfolio. So there's a mix issue. And then we are still seeing some pockets.
William J. Lynn: And then we are still seeing some pockets of inflation. Still, about a third of our contracts are priced under over inflation assumptions. And so we're still carrying some of that. We expect this to be the last year of that. Mike, why don't you go ahead?
Michael D. Dippold: of inflation, still about a third of our contracts.
Michael D. Dippold: are priced under older inflation assumptions, and so we're still carrying some of that. We expect this to be the last year.
Michael D. Dippold: I think you covered it pretty well. I'll just answer the latter part of your question, which was on the kind of H2 outlook. So we do expect to see a little tick up in profitability in the second half to drive us to the guide range that we just put out. And that's going to be driven by Columbia.
Michael D. Dippold: of that. Mike, why don't you go ahead. I think you covered it pretty well. I'll just answer the latter part of your question, which was on the kind of H2 outlook. So we do expect to see a little tick up in the profitability in the second half.
Michael D. Dippold: to drive us to the guide range that we just put out. And that's going to be driven by the Columbia. And as Bill mentioned, as we start to execute on the later ship sets, they will come with a higher margin. And you're going to see even an in-year shift as we execute that program in the second half of the year.
Michael D. Dippold: And as Bill mentioned, as we start to execute on the later ship sets, they will come with a higher margin. And you're going to see an in-year shift as we execute that program in the second half of the year. Great, thanks, that's helpful.
Michael D. Dippold: And then, you know, maybe as a follow-up, obviously, sales growth is pretty strong in the first half at about 20%. But I appreciate, you know, the sales guy being up more towards the double digits. But I think, you know, and I think you also pointed to Q3 being up a little bit year over year. So that kind of implies, you know, a pretty decent decline in the fourth quarter.
Speaker Change: Great, thanks. That's helpful. And then, you know, maybe as a follow-up, you know, obviously, you know, sales growth is pretty strong in the first half at about 20%. I appreciate, you know, the sales guide being up more towards the double digits.
Speaker Change: But I think, you know, and I think you also pointed to Q3 being up a little bit year over year, so that kind of implies, you know, a pretty decent decline in the fourth quarter. You know, just thinking about the company, you know, having a book to build above one, you know, the growth you guys are seeing in the backlog and the general strength we're seeing in the demand environment, you know.
Michael D. Dippold: You know, just thinking about the company, having a book to bill ratio above one, the growth you guys are seeing in the backlog, and the general strength we're seeing in the demand environment, it seems like there could be some opportunity for upside. So I'm curious if you can kind of level set us on this and, you know, how we should think about that progression, maybe in Q4 a little bit more too.
Speaker Change: It seems like there could be some opportunity for upside, so I'm curious if you could kind of level set us on this and how we should think about that progression maybe in Q4 a little bit more too.
Michael D. Dippold: Yeah, I think the one factor you missed there, Alex, is the improved linearity that we're experiencing this year. This has been a driver we've had. So when you're looking at year-over-year comps, the easier ones are in the front end of the year, and the tougher ones are in the back end because of the math of the increased linearity of 24 versus 23.
Speaker Change: I think the one factor you missed there, Alex, is the improved linearity.
Speaker Change: that we're experiencing this year. This has been a drive we've had. So when you're looking at year-over-year comps, the easier ones are in the front end of the year, and the tougher ones are in the back end because of the math of the increased linearity of 24 versus
Speaker Change: It is still driving to that 9-12% year-over-year increase, which we do think is a strong year.
Michael D. Dippold: It is still driving that nine to 12% year-over-year increase, which we do think is a strong year. Okay, thank you. That's very helpful.
Operator: That's all from me. Thank you. Our next question comes from the line of Andre Madrid with VTIG. Your line is open. Bill, Mike, Steve, good morning. Thanks for the question. I, uh...
Speaker Change: Okay, thank you. That's very helpful. That's all from me.
Speaker Change: Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Andre Madrid with BTIG. Your line is open.
Andre Madrid: Bill, Mike, Steve, good morning, thanks for the question.
Operator: I wanted to start off talking a bit more about the South Carolina facility. I mean, have you guys already started thinking? I mean, when you look more broadly just at the naval supply chain, skilled labor has been really hard to come by. You see this across some of your SMITCAT peers as well.
Andre Madrid: I wanted to start off...
Andre Madrid: Talking a bit more about the South Carolina facility, I mean, have you guys already started thinking, I mean, when you look more broadly just at the naval supply chain, skilled labor has been really hard to come by. You see this across some of your SMITCAT peers as well.
William J. Lynn: I mean, have you guys started to consider what recruiting will look like for this eventual facility once it's actually rolled out? Yes, we have. And in fact, the placement in South Carolina was intentional, in that we think we have a strong pool of potential employees there. And importantly, it's out of the catchment area of the two big yards, the two nuclear yards, Newport News, and an electric boat.
Speaker Change: Have you guys started to consider what recruiting will look like for this eventual facility once it's actually rolled out?
Speaker Change: Yes, we have, and in fact,
Speaker Change: The placement in South Carolina was intentional, in that we think we have a strong pool of potential employees there. And importantly, it's out of the catchment area of the two big yards, the two nuclear yards, Newport News.
William J. Lynn: In terms of broadening the submarine industrial base, that is one of the things we wanted to do. The Navy is supportive of this, to broaden the geography of that submarine industrial base. So, we think we have a strong pool of employees, and we are starting, we've obviously broken ground, and we're about, I think, about a quarter of the way through the build cycle for Charleston. And as we ramp up, we'll, and we get closer, we'll start even stronger recruiting efforts to bring in a talented workforce. understood, and understood.
Speaker Change: and an electric boat. In terms of broadening the submarine industrial base, that is one of the things we wanted to do. The Navy is supportive of this, is to broaden the geography.
Speaker Change: of that submarine industrial base. So we think we have a strong pool of employees and we are starting, we've obviously broken ground.
Speaker Change: We're about, I think, about a quarter of the way through the build cycle for Charleston. And as we ramp up and we get closer, we'll start even stronger recruiting efforts to bring in a talented workforce.
William J. Lynn: And if I could follow that up, still on the naval front, I mean, we look at Columbia class, the ramp there is pretty well underway. I mean, what other opportunities for power and propulsion do you think are available moving forward? I know DDGX was supposed to see supplier down selection earlier this year, but I think that got pushed out. Is there any other color there?
Speaker Change: Understood. Understood. Thank you. And if I could follow that up still on the
Speaker Change: Naval fraud. I mean
Speaker Change: We look at Columbia Class, the ramp there is pretty well underway. I mean, what other opportunities for power and propulsion do you think are available moving forward? I know DDGX was...
Speaker Change: Supposed to see supplier down selection earlier this year, but I think that got pushed out. Is there any other color there?
William J. Lynn: Yeah, I mean, Andre, the, you ought to think of, over kind of the mid to long term, think of three buckets of opportunities for DRS in the propulsion area. One is DDGX, you mentioned, but even more broadly, other classes of ships. DDGX, SSNX are the two most prominent. We do think there's a very strong case to put electric power technology on those new classes of ships, both because operationally it's quieter, which is important in a warfighting sense, and it is cheaper in terms of operating costs because of the lower fuel costs.
Speaker Change: Yeah, I mean, I think the, Andre, the...
Speaker Change: You ought to think of over kind of the mid to long term, think of three buckets of opportunities for DRS and the propulsion.
Andre Madrid: One is DDGX, you mentioned, but even more broadly, other classes of ships.
Speaker Change: DDGX, SSNX are the two most prominent. We do think there's a very strong case to put the electric power technology on those new classes of ships.
Speaker Change: both because operationally it's quieter, which is important in a warfighting sense. It is cheaper in terms of the operating cost because of the lower fuel costs.
William J. Lynn: And probably most importantly, the power demands of ships going forward are going to increase by several multiples, and that will be very difficult. And that's driven not just by the propulsion system but by the sensor suites, which are taking increasing amounts of power. And ultimately, when you're looking at 30 to 50 year lives for these ships, you're looking at directed energy being part of the equation, and the power requirements for directed energy are substantial.
Speaker Change: And probably most importantly, the power demands of ships going forward are going to increase by several multiples.
Speaker Change: And it will be very difficult, and that's driven by not just the propulsion system but by the sensor suites which are taking increasing amounts of power. And ultimately, when you're looking at 30- to 50-year lives for these ships, you're looking at direct energy.
William J. Lynn: All of that drives you towards electric power as the choice here for power propulsion, so we think that there's a strong case in the mid to long term for those. The second basket is international opportunities. We've talked about the Korean one.
Speaker Change: being part of the equation, and the power requirements for directed energy are substantial. All of that drives you towards electric power as the choice here on power propulsion. So we think that there's a strong case in the mid to long term for those.
William J. Lynn: No, we don't have a decision on that yet, but we do think that that's just the cutting edge of international opportunities. The International Navy, just like the U.S. Navy, is looking strongly towards electric power. And then the third basket of opportunities is for us to get increased content on existing programs as we look at expanding the submarine industrial base and realigning the work between the yards, who will be dedicated to producing more submarines faster, and the supplier base, which will be looking to do more of the content on each submarine to allow that increased throughput. So we think there's strong potential in this in this market area coming from those three baskets. That's very helpful, Collar. If I could squeeze in one more, what would some of that content look like?
Speaker Change: The second basket is international opportunities, we've talked about the Korean one, no we don't have a decision on that yet. But we do think that that's just the leading edge of international opportunities. International navies, just like the U.S. Navy, is looking strongly towards electric power.
Speaker Change: And then the third basket of opportunities is for us to get increased content on
Speaker Change: existing programs as we look at expanding the submarine industrial base and realigning the work between the yards, who will be dedicated to producing more submarines faster, and the supplier base, which will be looking to do more of the content on each submarine to allow that increase.
Speaker Change: throughput. So we think there's strong potential in this in this market area coming from those three baskets.
Collar: That's very helpful, Collar. If I could just squeeze in one more, what would some of that content look like? I mean, are you able to break that down or is that a little too granular?
William J. Lynn: I mean, are you able to break that down, or is that a little too granular? It's probably a little too granular at this point because we're in negotiation. We've talked about the way we set up the Charleston facility so that it's the initial phase; the business case is justified just based on the contracts we now have for Columbia that go all the way through the 2030s. That visibility gave us the business case to invest in greater efficiency and capacity to execute that work in a better way.
Collar: It's probably a little too granular at this point because we're, you know, under negotiation that we've talked about the way we've set the Charleston facility up.
Collar: is that it's the initial phase is the business case is justified just based on the contracts we now have for Columbia that go all the way through the the 2030s. That visibility gave us the
William J. Lynn: But there's a second phase where we could bring work of a number of types into that facility with investment from the Navy, in this case, to expand that submarine industrial base. But I can't really give you much specifics in terms of the exact content of that.
Collar: the business case to invest in greater efficiency and capacity to execute that work.
Collar: in a better way.
Collar: But there's a second phase that we could bring work in.
Collar: A number of types into that facility with investment from the Navy in this case to expand that submarine industrial base, but I can't really give you much specifics in terms of the exact content of that expansion.
William J. Lynn: That's what we're discussing now with both the shipyards and the Navy. Very helpful. I'll jump back into the queue.
Collar: That's what we're discussing now with both the shipyards and the Navy.
Operator: Thanks. Thank you. Thank you.
Speaker Change: Very helpful. I'll jump back into the queue. Thanks.
Operator: Please stand by for our next question. Our next question comes from the line of Mariana Perez-Mora with Bank of America. Your line is open. Thank you. Good morning, everyone.
Speaker Change: Thank you.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Mariana Perez-Mora with Bank of America. Your line is open.
Operator: What an important, So you mentioned in the prepared remarks a lot of developments to actually implement AI, quantum, and cybersecurity to the edge. Could you please describe your investments there? How much of those are like customer R&D versus your own R&D, and which specific arenas are you seeing opportunities for this? It's like the traditional Navy and Army, or you actually have a way to get into unmanned air or space.
Mariana Perez Mora: Thank you. Good morning, everyone.
Collar: What an honor.
Speaker Change: So you mentioned in the prepared remarks a lot of developments to actually implement AI, quantum, and cyber security to the edge.
Speaker Change: Could you please describe how are your investments there, how much of those are, like,
Speaker Change: customer R&D versus your own R&D and which specific arenas you're seeing the opportunities for this. It's like the traditional Navy and Army or you actually have a way to get into unmanned air or space.
William J. Lynn: Yeah, there's a lot there, Mariana. On the AI front, the focus of the investment is, "How do you bring better processing to the edge and then basically improve the capability of our sensors?" And by sensors, I mean both our ground-based vehicle sensors, as well as our space-based sensors.
Speaker Change: There's a lot there, Mariana. On the AI front, the focus of the investment is...
Speaker Change: How do you bring better processing to the edge and then basically improve the capability of our sensors and by sensors here I mean both our ground-based vehicle sensors as well as our space-based sensors?
William J. Lynn: We use AI processing, and you push it to the edge, and that, we think, will improve performance. And the investment there is a mix between us. It's teaming with some commercial companies. As you know, a lot of AI expertise lies on the commercial side of the industrial base, and we have found some partners there. With quantum computing and sensing, our entry point into quantum is really through lasers. You need a photonics engine to be able to do quantum computing and sensing, and we have some of the best laser capability in the world at Daylight Solution.
Speaker Change: We use AI processing and you push it to the edge and that we think will improve performance.
Speaker Change: And the investment there is a mix of us, it's teaming with some commercial companies, as you know, a lot of the AI expertise lies on the commercial side of the industrial base, and we found some partners there.
Speaker Change: With quantum, our entry point into quantum is really through lasers.
Speaker Change: You need a photonics engine to be able to do quantum computing and sensing, and we have some of the best laser capability in the world at Daylight Solutions.
William J. Lynn: And so we've been doing some IRAD to develop that capability, and now we're getting some co-investment from customers, and we're getting some initial orders and contracts that are starting to help finance it. We're still in the early stages of quantum, but we're also in the early stages of our participation in quantum, but we think that the photonics engine has enormous potential. Thank you.
Speaker Change: And so we've been doing some IRAD to develop that capability and now we're getting some co-investment from customers and we're getting some initial orders and contracts that are starting to help finance. We're still in the early stages of quantum, but we're also in the early stages of our participation.
Speaker Change: in quantum, but we think that photonics engine has enormous potential.
Michael D. Dippold: In their earnings call, General Dynamics mentioned that they were seeing some progress in the shipyards. I'm curious if you're seeing some of that progress spill over into your work, or and then, what are the key milestones that we should be looking at as outsiders to see if the progress towards production is progressing? Yeah, I think the important thing for us to realize with DRS is that we did get the entirety of the contract let to us last year for all 12 ships to maintain continuous production. So we're a little disconnected from any comments that GD makes there because we are executing on the existing standalone contract.
Speaker Change: Thank you. And the other one is about Columbia. In their earnings call, General Dynamics mentioned that they are seeing some progress in the shipyards. I'm curious if you are seeing something of that progress to spill over your work, and then, what are the key milestones that we should be looking at as outsiders to see if the progress towards production?
Speaker Change: Yeah, I think the important thing for us to realize with DRS is that we did get the entirety of the contract let to us last year for all 12 ships to maintain the continuous production.
Michael D. Dippold: We continue to progress well there. And maybe, because of my financial seat, I think the indicator is going to be the continued margin expansion as you see that we're continuing to hit those milestones and execute effectively. Thank you very much.
Speaker Change: So we're a little disconnected from any comments that GD makes there because we are executing on the existing stand-alone contract. We continue to progress well there, and I think maybe because of my financial seat, I think the indicator is going to be the continued margin expansion, as you see, that we're continuing to hit those milestones and execute effectively.
Speaker Change: Thank you very much.
Operator: Thank you. Thanks, Barb. Please stand by for our next question. Our next question comes from the line of Sam Struhsaker with George Security. Your line is open. Hi, good morning. Can you guys hear me all right?
Barb: Thank you. Thanks, Barb.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Sam Struhsaker with George Security. Your line is open.
Operator: Dippin' Dermot, on for much more this morning. I was wondering if you guys could maybe give a little bit more detail on the upper revision for, potentially break that out, kind of, maybe if the drivers are between the two, and the other is the IMS and ACS. In addition to that, looking at the mild margin pressure for the year, how should we think about the trajectory of margin pressure? Why don't you take that?
Samuel Pope Struhsaker: Hi, good morning. Can you guys hear me all right?
Samuel Pope Struhsaker: Hippodrome.
Archimalda: On for Mike Ciarmoli this morning. Thanks for taking the question.
Speaker Change: I was wondering if you guys could maybe give a little bit more detail on the upper revision for revenue.
Speaker Change: Could you potentially break that out, kind of, maybe if the drivers...
Speaker Change: where the drivers are between the two segments, IMS and ACS. And then in addition to that, looking at the mild margin pressure for the year, how should we think about kind of the trajectory of margins in the second half?
Michael D. Dippold: Yeah, so let me start with the first half on the revenue side and on the top line side. We are seeing a pretty robust demand push across both segments. So we're feeling good about our backlog position and, therefore, our ability to deliver revenue growth out of both segments. And I think you're going to see a similar trend as we end up with both segments contributing fairly equally to the revenue growth for DRS for the year.
Speaker Change: Why don't you take that? Yeah. So let me start with the first half on the revenue side and on the top line side. We are seeing a pretty holistic demand push across both segments. So we're feeling good about our backlog position and therefore our ability to deliver revenue growth.
Speaker Change: out of both segments, and I think you're going to see a similar trend as we end up that both segments will contribute fairly equally to the revenue growth.
Michael D. Dippold: On the margin side, I would also say that both segments are executing in a similar fashion, which will both contribute to our margin expansion year over year. And that's kind of the expectation we walked into the year with, and it's still kind of what we're holding even with the higher revenue output. Okay, that's great. And then, so I guess it's just that one program, really, that you guys are seeing kind of some pressure on. Is there anywhere else that you're seeing any issues, or is that really just kind of isolated to that one?
Speaker Change: for DRS for the year.
Speaker Change: On the margin side, I would also say that both segments are executing in a similar fashion in which they will both contribute to our margin expansion year-over-year.
Speaker Change: And that's kind of the expectation we walked into the year with, and it's still kind of what we're holding, even with the higher revenue output.
Speaker Change: Okay, that's great. And then, so I guess it's just that one program, really, that you guys are seeing kind of some pressure on. Is there anywhere else that you're seeing any issues, or is that really just kind of isolated to that one program?
Michael D. Dippold: Yeah, we're 85% firm fixed price, so there's always some opportunities that there may be some risk. But I think what we've done well as a management team is to make sure that we're identifying risk early, understanding the mitigation of those risks, and maybe equally as important, identifying opportunities. So as we look forward, yes, we have some fixed price development efforts, but we also have an incredible balance between our risks and our opportunities.
Speaker Change: Yeah, we're 85% firm fixed price, so there's always some opportunities that there may be some risk. I think what we've done well as a management team is to make sure that we're identifying risk early, understanding the mitigation of those risks, and maybe equally as important, identifying opportunities. So as we look forward, yes, we have some fixed price development efforts, but we also have an incredible balance between our risks and our opportunities.
Michael D. Dippold: And that's really what underpins our confidence that we're going to be able to execute effectively and then deliver on our EBITDA margin commitments all the way through 2026. Great, and then just one final follow-up, if I could.
Speaker Change: and that's really what underpins our confidence that we're going to be able to execute effectively and then deliver on our EBITDA margin commitments all the way through 2026.
Michael D. Dippold: On the CAPEX for the South Carolina facility, should we expect a pretty steady increase or ramp on that, or is there kind of a peak and then ramp back down with that? For the remainder of the year, I would expect to see kind of the CapEx commitments looking pretty similar to Q2 with a slight ramp up as we get into the latter part of Q3 and into Q4, so I think you'd see a gradual step up, and that's the expectation that we have in terms of the cadence of the execution of the South Carolina facility for the remainder of the year. Great
Speaker Change: Okay, great. And then just one final follow-up if I could. On the CAPEX for the South Carolina facility, should we expect a pretty steady increase or ramp on that or is there kind of a peak and then ramp back down with that trajectory that we could think about?
Speaker Change: For the remainder of the year I would expect to see, you know, kind of the CapEx commitments looking pretty similar to Q2 with a slight ramp up as we get into the latter Q3 and into Q4. So I think you'd see a gradual step up and that's the expectation that we have in terms of the cadence of the execution of the South Carolina facility for the remainder of the year.
Michael D. Dippold: Thank you very much, guys. Thank you. Please stand by for our next question. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open. Hi, good morning.
Speaker Change: Great. Thank you very much, guys.
Speaker Change: Thank you.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open.
Operator: Thanks for the questions and great quarter and outlook. I was wondering if you could talk a little bit more about the long-term expectations for defense spending, maybe split between domestic and international and kind of X the Ukraine supplementals.
John Tomwantik: Hi, good morning. Thanks for the questions and great quarter and outlook.
John Tomwantik: I was wondering if you could talk a little bit more about the long-term expectations for defense spending, maybe split between domestic and international, and kind of x the Ukraine supplementals.
William J. Lynn: It seems like there's been a push to, you know, grow defense spending at the DOD at a higher percentage than it's been in the past. Broadly, you're seeing that among allied nations as well. How does that factor into your long-term growth expectations? If it's any different from what you've presented at the. Thanks, Sean. I don't think it's different than what we presented at Investor Day, but there we did talk about that at this point, the international environment, broadly speaking, is growing faster than the U.S. defense budget, and we are seeing that in our revenue mix.
Speaker Change: It seems like there's been a push to, you know, grow defense spending at the DOD, you know, at a higher percentage than it's been in the past.
Speaker Change: Broadly you're seeing that among allied nations as well. How does that factor into your long-term growth?
Speaker Change: Expectations, if it's any different from what you've presented at the in-person or before.
Speaker Change: Thanks, John . I don't think it's different than what we presented at the Investor Day, but there we did talk about
Speaker Change: At this point, the international environment, broadly speaking, is growing faster than the U.S.
Speaker Change: defense budget and we are seeing
William J. Lynn: You know, we've doubled to about 10 percent our international revenue over the last three or four years, and we're still on that trajectory of increase. We do think we'll see an increase this year in our international revenue and projecting forward. So we think that environment that you talked about where, you know, Europe is increasing and going for that too, and now, you know, the UK is talking about two and a half percent of GDP. And similarly, in Asia, you're seeing strong increases in Australia and Japan, and that gives us, I think, an opportunity to further increase the international content of our revenue base. Okay, great.
Speaker Change: that in our revenue mix, you know, we've doubled to about 10 percent.
Speaker Change: our international revenue over the last three or four years, and we're still on that trajectory of increase. We do think we'll see an increase this year in our international and projecting.
Speaker Change: forward. So we think that that environment that you talked about where you know Europe
Speaker Change: is increasing and going for that too and now you know UK is talking about two and a half percent.
Speaker Change: of GDP. And similarly, in Asia, you're seeing, you know, strong increases in Australia and Japan. And that gives us, I think, opportunity to further increase the international content of our revenue base.
William J. Lynn: Thank you. Any updates on capital allocation and, specifically, M&A? We've seen some really attractive assets go.
Speaker Change: Okay, great. Thank you. Any updates on capital allocation and specifically M&A? We've seen some really attractive assets go for, you know, reasonable to high multiples, and I'm wondering if that, you know, if you're getting a look at those deals or if you see more opportunities.
William J. Lynn: You know, reasonable to high multiples, and I'm wondering if that, you know, if you're getting a look at those deals, or if you see more. We have been seeing more opportunities. We've been quite active in due diligence over the past six months. We don't have anything to announce, but we continue to see opportunities in the four core markets that are our strategic framework and where we would want to do any kind of M&A. We continue to have strict financial criteria, and we evaluate them against this.
Speaker Change: We have been seeing more opportunities.
Speaker Change: The past six months, we don't have anything to announce, but we continue to see opportunities in the four core markets that are our strategic framework and where we would want to go.
Speaker Change: do any kind of M&A.
William J. Lynn: But, as I said, we are seeing opportunities. We're prudent, but we do think we will be able to execute on an M&A strategy over the near to midterm. Okay, and if I could squeeze one more in, any update on just what your parent, LDO, Leonardo's doing, you know, they've been active in M&A marketing. We can, you know, on our M&A, we have a shareholder agreement where we consult closely with them, and we're aligned in that, you know, they're a 70% shareholder, so any increase in value drops directly into their share price So we're aligned on what we're looking for, and we participate with them. Okay, thank you.
Speaker Change: We continue to have the strict financial criteria, and we evaluate them against this. But as I said, we are seeing opportunities. We're prudent, but we do think we will be able to execute on an M&A strategy over the near-to-midterm.
Speaker Change: Okay, and if I could squeeze one more in, any update on just what your parent, LDO's, Leonardo's doing? You know, they've been active in M&A markets as well.
Speaker Change: We can, you know, on our M&A, we have a shareholder agreement where we consult closely with them and we're aligned in that, you know, they're a 70% shareholder, so any increase in value drops directly into.
Speaker Change: into their share price. So we're aligned on what we're looking for and we participate with them.
Speaker Change: Okay, thank you.
Speaker Change: Thank you.
Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Jan Franz Engelbrecht with Baird. Your line is open.
Speaker Change: Please stand by for our next question.
Speaker Change: Our next question comes from the line of Jan Franz Engelbrecht with Baird. Your line is open.
William J. Lynn: Good morning, Bill, Mike, and Steve. I just had a question on force protection. It is clearly seeing significant demand, though, and especially, I would imagine, in the Middle East. I was wondering if you could just highlight the 2024 growth outlook for that specific end market and if there's any milestones or programs that we should look out for later in 2024, heading into 2025, in force protection specifically. Yeah, no, I think you've got the underlying market dynamics right.
Speaker Change: Good morning, Bill, Mike, and Steve. I just had a question on force protection. It's clearly seeing significant demand tailwinds, especially I would imagine in the Middle East. I was wondering if you could just highlight the 2024 growth outlook for that specific area.
Speaker Change: and Markit and if there's any milestones or programs that we should look out for late in 2024 heading into 2025 in forest protection specifically.
William J. Lynn: The conflicts in Ukraine and Israel have highlighted the importance of organic force protection, that we've returned to a world where there are air threats, and that those air threats have been exacerbated by the advent of drone technology, which extends even to the lower end of military capabilities. They're still able to put drone threats in the air.
Speaker Change: Yeah, no, I mean, I think you're, you're...
Speaker Change: You've got the underlying market dynamics right, the conflicts in Ukraine and Israel have highlighted the importance of organic forest protection.
Speaker Change: that, you know, we've returned to a world where there are air threats and that those air air threats have been exacerbated by the advent of drone technology, which
Speaker Change: extends even to the lower end of military capabilities. They're still able to put drone threats in the air. That all has made our decision to invest in the Army Short-Range Air Defense, the Counter-UAS.
William J. Lynn: That all has made our decision to invest in the Army's short-range air defense, the counter-UAS, and active protection. We're seeing growth in all of those. I think we mentioned it on an earlier call, but the Army has doubled the force structure this year that they've dedicated to short-range air defense. They went from four to nine battalions. That's even as they shrunk the force structure.
Speaker Change: The active protection, we're seeing growth in all of those.
Speaker Change: I think we mentioned it on an earlier call, but the Army.
Speaker Change: has doubled the force structure that they've, this year, that they've dedicated to short-range air defense. They got one from four to nine.
William J. Lynn: So they have fewer assets, but they're devoting a higher proportion to the mission of short-range air defense. And we're also starting to see international demand. We were able, I think, to enable and help that demand by developing a single vehicle solution for the counter-UAS, which makes it more operationally efficient and lowers the price point, making it more competitive in the international markets. So, I mean, overall, I think in this area, the trends are very positive. Thanks, Paul; that's really helpful.
Speaker Change: battalions that's even as they shrunk the force structure so they have
Speaker Change: Fewer assets, but they're devoting a higher proportion.
Speaker Change: to the mission of short-range air defense.
Speaker Change: We are also starting to see international demand.
Speaker Change #100: We were able, I think, to enable, help that demand by developing a single vehicle solution for the counter UAS, which makes it more operationally efficient and lowers the price point, make it more competitive in the international markets.
Speaker Change #100: So, I mean, overall, I think in this area, the trends are very positive.
William J. Lynn: Just a quick follow-up, I guess, also sort of high level, but we've seen this growing trend, or call, I guess, from the industry for the need for interoperability between the US, NATO, allied nations, in terms of weapon platforms. Is there any opportunity that you guys are targeting? I know it's early days, but maybe I would think the top of mind would be sensors or anything like that. Anything that you can comment on, maybe on the longer term, there? Yeah, I mean, that, you know, Frankly, that's always been there. I mean, I mean, the NATO Alliance just celebrated its 75th anniversary.
Speaker Change #101: Thanks, Paul. That's really helpful. Just a quick follow-up, I guess also sort of high-level, but...
Speaker Change #102: We've seen this growing trend, or call, I guess, from the industry for the need for interoperability between the U.S.
Speaker Change #103: NATO, Allied Nations, in terms of weapon platforms, is there any opportunity that you guys are targeting? I know it's early days, but maybe I would think top of mind would be sensors or anything like that. Anything that you can comment maybe on the longer term there?
William J. Lynn: So the, and then we have close alliances in, you know, Asia as well. So that's always been there. I think you're right. It's been reemphasized with some of the conflicts we face and with the threat of China. Where we see it, sensing is one area where we see people.
Speaker Change #104: Yeah, I mean, you know, frankly, that's always been there. I mean, you know, NATO alliance is what just celebrated its 75th anniversary, and then we have close alliances.
Speaker Change #104: in Asia as well. So that's always been there. I think you're right. It's been re-emphasized with some of the conflicts we face and with the threat of China.
Speaker Change #105: Sensing is one area where we see people. I would say even more you see it on computing and communications.
William J. Lynn: I would say even more, you see it in computing and communication. And we do battlefield computing for the U.S. military, and we do see international opportunities for that. We already sell it to the U.K. It is part of some of the foreign military sales of vehicles to Eastern Europe.
Speaker Change #106: And we do the battlefield computing for the U.S. military.
Speaker Change #106: And we do see international opportunities for that. We already sell it to the U.K.
Speaker Change #106: It is part of some of the foreign military sales of vehicles to Eastern Europe .
William J. Lynn: So there's a dynamic there that, you know, basically if you're, particularly if you're buying U.S.-sourced vehicles, there's certainly an incentive to put the same network computing, one, because it's integral to the vehicle, but two, that does give you that interoperability that you suggested. All right. Thanks, Bill. Congratulations and a good quote. I'll jump back in the queue.
Speaker Change #106: So there's a dynamic there that, you know, basically if you're, particularly if you're buying
Speaker Change #106: U.S.-sourced vehicles, there's certainly an incentive to put
Speaker Change #106: the same network computing, one, because it's integral to the vehicle, but two, that does give you that interoperability that you suggested.
Speaker Change #106: Thanks, Bill. Congrats on a good quote. I'll jump back in the queue. Thanks.
Operator: Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Christine Lee-Wagg with Morgan Stanley. Your line is open. Hi, this is Justin on behalf of Christine. Thanks for taking the question. Hey, Jonathan.
William J. Lynn: Thank you.
Speaker Change #107: Please stand by for our next question.
Speaker Change #107: Our next question comes from the line of Christine LeWag with Morgan Stanley . Your line is open.
Operator: I think, you know, a lot's been covered already, but maybe just a quick one on ASC. I think last quarter you mentioned that mix was shifting from development to production over the course of the year. I wonder how much of that shift manifested itself in 2Q results, and is it still fair to expect further tilt towards production-type work in the back half for the segment? Thanks. Yeah, I think you're spot on with your assessment.
Speaker Change #107: Hi, this is Justin on for Christine. Thanks for taking the question.
Justin: Hey, Jonathan. I think, you know, a lot's been covered already, but maybe just a quick one on ASC. I think last quarter you mentioned mix was shifting from development to production over the course of the year.
Speaker Change #109: I guess, how much of that shift manifested here in 2Q Results, and is it still fair expectations for further tilt towards production-type work in the back half for the segment? Thanks.
Speaker Change #110: Yeah, I think you're spot-on with your assessment. We are starting to see some of those development programs move into production and the production efficiency is improving on those programs.
Speaker Change #110: which has certainly helped in both the revenue growth as well as the margin. So I would expect to see that trend continue into the second half of the year.
Speaker Change #111: Good. I'll stick to one. Thanks.
Speaker Change #112: Thank you. Thank you.
Speaker Change #113: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Steve for closing remarks.
Stephen Vather: Thank you all for your time this morning and your interest in the company. Of course, if you have follow-up questions, please don't hesitate to call or email me. Look forward to speaking with all of you again soon. Enjoy the rest of your day.
Speaker Change #115: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change #115: [inaudible]
Speaker Change #115: [inaudible]
Michael D. Dippold: We are starting to see some of those development programs move into production, and production efficiency is improving on those programs, which has certainly helped in both revenue growth as well as margin. So I would expect to see that trend continue into the second half of the year. Okay, I'll stick to one.
Speaker Change #116: Hello. Thank you for standing by. Welcome to Leonardo DRS second quarter 2024 earnings call.
Speaker Change #117: At this time, all participants are on a listen-only mode.
Speaker Change #118: After the speaker's presentation, there will be a question and answer session.
Speaker Change #118: To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Operator: Thanks. Thank you. Thank you.
Speaker Change #118: To withdraw your question, please press star 11 again.
Speaker Change #118: I would now like to hand the call over to Steve Vather. Sir, you may begin.
Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Steve for closing remarks. Thank you all for your time this morning and for your interest in the company. 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. Enjoy the rest of your day.
Stephen Vather: 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 Dippold, our CFO . They will discuss our strategy, operational highlights, financial results, and forward outlook.
Speaker Change #119: 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.
Speaker Change #119: Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company.
Speaker Change #120: 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.
Speaker Change #120: 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. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors.
Speaker Change #120: These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures.
Stephen Vather: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? [inaudible] Hello.
Speaker Change #120: You can find the reconciliation and the non-GAAP measures discussed on this call in our earnings release.
Operator: Thank you for standing by. Welcome to Leonardo DRS's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode.
Speaker Change #120: At this time, I will turn the call over to Bill. Bill?
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again.
William J. Lynn: Thanks, Steve, and thank you all for joining us.
William J. Lynn: DRS continues to perform well, as evidenced by the impressive quarterly results we are releasing this morning.
Stephen Vather: I would now like to hand the call over to Steve Vather. Sir, you may begin. 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 Dippold, our CFO. They'll discuss our strategy, operational highlights, financial results, and look forward. 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.
William J. Lynn: We are experiencing steady customer demand across our diverse portfolio of differentiated technologies.
William J. Lynn: As a result, we posted another consecutive quarter of 1.2 book-to-bill. In Q2, there was particular strength for our capabilities in advanced infrared sensing, electric power and propulsion, network computing, and ground systems integration.
William J. Lynn: Additionally, our total backlog ascended to new company records and now stands over $7.9 billion, which is up 82% year-over-year and also up sequentially.
William J. Lynn: The robust demand we continue to experience, coupled with the easing of supply chain constraints, unlocked another quarter of 20% year-over-year organic revenue growth.
William J. Lynn: We also grew our adjusted EBITDA by 32% and delivered margin expansion of 100 basis points in the quarter.
Stephen Vather: Management may also make forward-looking statements during the call regarding future events, 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 other SEC filings.
William J. Lynn: Adjusted net earnings and adjusted diluted EPS increased by 21% and 20% compared to last year, thanks to solid operational execution.
Stephen Vather: We undertake no obligation to update any of the forward-looking statements made on this call. Remus 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.
Stephen Vather: You can find the reconciliation and the non-GAAP measures discussed on this call in our earnings release. At this time, I will turn the call over to Bill. Bill?
William J. Lynn: I want to take a moment to thank the broader DRS team for driving such marvelous results. The team's steadfast focus and our exceptional performance in the first half is prompting us to adjust our outlook for the full year.
William J. Lynn: Thanks, Steve, and thank you all for joining us. DRS continues to perform well, as evidenced by the impressive quarterly results we are releasing this morning. We are experiencing steady customer demand across our diverse portfolio of differentiated technology. As a result, we posted another consecutive quarter of 1.2 book-to-bill.
Speaker Change #121: Mike will walk through the detail of our increased guidance a little bit later on the call.
Michael D. Dippold: Here are some thoughts on the macro environment. Congress has made preliminary progress on FY25 appropriations.
Michael D. Dippold: However, consistent with prior years, we expect to enter the fiscal year under a continuing resolution.
Michael D. Dippold: Looking beyond the near term, we believe that the elevated global threat environment will remain as the single most important factor driving defense investment by the U.S. and its allies.
Michael D. Dippold: Technology advancements are changing the nature of warfare and our national security strategy remains consistently focused on deterring and, if necessary, contesting near peer adversaries.
William J. Lynn: In Q2, there was particular strength in our capabilities in advanced infrared sensing, electric power and propulsion, network computing, and ground systems integration. Additionally, our total backlog ascended to new company records and now stands over $7.9 billion, which is up 82% year over year and also up sequentially. The robust demand we continue to experience, coupled with the easing of supply chain constraints, unlocked another quarter of 20% year-over-year organic revenue growth. We also grew our adjusted EBITDA by 32% and delivered margin expansion of 100 basis points in the quarter. Adjusted net earnings and adjusted diluted EPS increased by 21% and 20% compared to last, thanks to solid operations. I want to take a moment to thank the broader DRS team for driving such marvelous results.
William J. Lynn: The team's steadfast focus and our exceptional performance in the first half are prompting us to adjust our outlook for the full year. Mike will walk through the details of our increased guidance a little bit later on in the call. Here's some thoughts on the macro environment. Congress has made preliminary progress on FY25 appropriations. However, consistent with prior years, we expect to enter the fiscal year under a continuing resolution. Looking beyond the near term, we believe that the elevated global threat environment will remain the single most important factor driving defense investment by the U.S. and its allies. Technology advancements are changing the nature of warfare, and our national security strategy remains consistently focused on deterring and, if necessary, contesting near-peer adversaries. Both of these factors reinforce the imperative to modernize.
Michael D. Dippold: Both of these factors reinforce the imperative to modernize.
Speaker Change #122: DRS is well positioned to continue supporting our customers as they enhance their capabilities to address new mission complexities.
William J. Lynn: DRS is well positioned to continue supporting our customers as they enhance their capabilities to address new mission complexities. Shifting to the supply chain, I may briefly mention that improvements on this front are partially responsible for unlocking incremental revenue. We have seen a steady and gradual recovery across most, but not all, of our supply chain in year-to-date 2024. Additionally, our steadfast and proactive management of the supply chain, coupled with the broader improvement, is resulting in better predictability and delivery timelines, increased component material availability, as well as improved consistency and quality. Overall, these positive developments are accelerating the pace of revenue for the company. However, that said, the revenue step-up from the supply chain recovery is expected to be contained to this year.
Speaker Change #123: Shifting to supply chain, I may brief mention that improvements on this front are partially responsible for unlocking incremental revenue growth.
Speaker Change #122: We have seen a steady and gradual recovery across most, but not all, of our supply chain in year-to-date 2024.
Speaker Change #122: Additionally, our steadfast and proactive management of the supply chain, coupled with the broader improvement, are resulting in better predictability and delivery timelines, increased component material availability, as well as improved consistency and quality.
Speaker Change #122: Overall, these positive developments are accelerating the pacing of revenue for the year.