Ladies and gentlemen, good day, and welcome to the Leonardo DRS Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, there will be an opportunity to ask questions. Instructions will be given at that time. As a reminder, this event is being recorded. I would now like to turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.

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 will discuss our strategy, operational highlights, financial results, and forward outlook. Today's call is being webcast in the Investor Relations portion of the website, where you will also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings press release. At this time, I'd like to turn the call over to Bill.

Thanks, Steve, and thank you all for joining us today to discuss our fourth quarter and fiscal year 2024 results. The DRS team continues to execute impeccably. Before we get into the details of our performance, I want to express my genuine appreciation to our talented people for their steadfast focus and significant contributions that drove another strong year for our customers and our shareholders. In 2024, we delivered record bookings, mid-teens organic revenue growth, healthy adjusted EBITDA margin expansion, and steady free cash flow generation. Our business saw broad-based customer demand, which was reflected in the over $4 billion of contract awards secured throughout the year. The robust level of bookings translated to a 1.3 book-to-bill ratio for both the fourth quarter and the year. Solid execution, strong international demand, and a more normalized supply chain enabled the acceleration to 14% revenue growth, with double-digit growth evident in both segments for the year. Furthermore, we delivered 23% adjusted EBITDA growth along with 90 basis points of margin expansion in the year. More importantly, we achieved the increased profit margin while maintaining steady investments for future growth. I'm pleased to report that in 2024, we increased our investment in internal research and development and capital expenditures by approximately 25% year over year. We are committed to stepping up both R&D and CapEx investment in 2025 as we invest to unlock incremental avenues of future long-term growth. Some of these investments include the expansion of our sensing modalities, directed energy capabilities, enabling the application of AI and quantum in sensing and processing, and of course, from a CapEx standpoint, our new facility in Charleston, South Carolina. Additionally, we generated $190 million of free cash flow in line with our targeted conversion of approximately 80% of adjusted net earnings. Our crisp execution…

Thanks, Bill. I also want to commend the entire DRS team for delivering another year of exceptional financial results. As a quick note, I have structured my comments to review both our fourth quarter and full-year 2024 results by key metrics and then will discuss in detail our 2025 outlook. First, revenue was $981 million and up 6% year over year for the quarter. Our programs related to tactical radars, naval network computing, advanced infrared sensing, and electric power propulsion were key drivers to growth. On a full-year basis, revenue was $3.2 billion, representing a 14% organic growth over 2023. Similar to the quarter, we saw consistent strength in our advanced infrared sensing, tactical radars, and electric power propulsion businesses, as well as healthy growth from our force protection programs. Broad-based strength was evident across both segments. Our Advanced Sensing and Computing segment increased revenue year over year by 9% in the fourth quarter and by 16% for the full year. For our Integrated Mission Systems segment, revenue was down slightly in Q4 by 1% due to program timing but was up a healthy 11% for the full year thanks to solid growth throughout the segment. Moving to adjusted EBITDA, adjusted EBITDA was $148 million for the fourth quarter and $400 million for the full year, representing year-over-year growth of 13% and 23% respectively. Resulting margins were 15.1% for the fourth quarter and 12.4% for the full year, a year-over-year expansion of 100 basis points and 90 basis points respectively. Increased program profitability on Columbia class, improved deck program execution, favorable mix, and operational leverage from higher volume helped drive the margin expansion. Moving to the segment trends, ASC segment adjusted EBITDA increased 9% on higher volume as margin was flat year over year in Q4. For the full year,…

Again, if you have a question or comment at this time, please press star one one on your telephone. Please standby while we compile the Q&A roster. Our first question or comment comes from the line of Robert Stallard from Vertical Research. Mister Stallard, your line is open.

Thanks so much. Good morning. Morning. Couple questions from me. First of all, for Bill, more of a big picture question, I suppose. Have you seen any impact as yet from the whole Doge effort? Or is everything at this stage still being focused on the Department of Defense and has yet to flow down? And then secondly, a technical question for Mike. There were a couple of one-off items in the fourth quarter. I was wondering if you could elaborate on what those were and if you've got any further adjustments anticipated in your 2025 guidance. Thank you.

Thanks. Thanks, Rob. With regard to Doge, no, I mean, one, they haven't really reached the Department of Defense. They've really been focused on federal workforce and things like grants, which we're not part of either of those. Our focus is really on the new administration's strategic priorities and how their 2026 budget bill is looking. And so that's really where we're focused.

And, Rob, the one-off adjustments, I'm assuming that you're referring to the adjustments to the adjusted EBITDA. Is that where the question is centered?

Yeah. That's right. It's there's a in the back of the slide deck, there's a reconciliation responded what was the actual practical I see that.

Yeah. The only real change there is attributed to a currency shift that we have. So we put the FX impact to some of our balance sheet items that are adjusted in that line item. That's kind of the other non-operational events in that reconciliation. That's the only real change from what we've seen from a pacing item in prior quarters or the prior year.

Great. Thanks so much.

Thank you. Our next question or comment comes from the line of Peter Arment from RW Baird. Mister Arment, your line is open.

Yeah. Thanks. Good morning, Bill and Mike, Steve. Nice result.

Hey, Bill. Thanks.

We think about, you know, your margin targets for 2026 and we know that Columbia has a favorable impact on that. What other areas, whether you want to talk about a program or a product area with force protection, what other areas are kind of helpful in the margin progression when we think about it outside of Columbia?

Yeah. It's some of the smaller sensing and force protection programs. They're on a similar track to Columbia in that they're moving from a development phase into a production phase. So we're moving into a lower risk profile and generally a higher margin profile. And so, collectively, they're not as big as Columbia, but they're still, you know, a quarter or a third of that margin improvement.

Got it. That's helpful. And then just on the, you know, the last couple of quarters you've mentioned, you know, the investments or the beyond the horizon radar, you know, kind of investments that you're making, and you've also mentioned that you received a contract. What is the opportunity that you think about when you in that area?

Well, I mean, for us, this is a move up the food chain, and we're going from an area where we were really doing components to one where we've now gotten some prime contracts. So that's an important step. And then this whole area is becoming more important. We're still assessing or I think the administration's still assessing what this Iron Dome missile defense architecture is gonna look like, but over-the-horizon radar is certainly a candidate to be part of that. So there's, I think, some potential with the new administration and the priorities they're bringing to missile defense. For this growing area for us.

Okay. And then just lastly quickly on the you've got a high percentage of fixed price, so you seem to be set up well for, you know, this administration's focus. How do you see that evolving just with the rest of the industry? Because, you know, a large percentage of the industry is, you know, half and half. How do you see the changes being implemented?

Well, I mean, I think they're gonna have to move to where we already are, which is, you know, we operated in a fixed-price environment. I think you're referring to we're about 85% fixed price now, which means you have to have a very good risk process. You have to be very careful in how you bid. You need to understand what the development risk means for production cost. That all has to go into the pricing and the bids. I think we've become quite good at that. I think the rest of the industry is now gonna have to follow-up.

Appreciate the call. Thanks, Bill.

Thank you. Our next question or comment comes from the line of Andre Madrid from BTIG. Line is open.

Hey, everyone. Thanks for taking my question. Yeah. So looking, I guess, at the IMS level, obviously, continued strong demand there, and the Navy just released their latest renderings of what DDGX looks like. I mean, is any of this being factored into the 2025 outlook? And I guess just beyond that too, I know I feel like I've asked about this a lot, but how do things stand on KDDX, and what could we expect there, if anything?

Yeah. I started the last first, Andre. I mean, KDDX is the same as before. We're actively engaged with the Korean customer, the shipyards. We've kept our bid updated, but we don't have a decision yet from the Korean customer. And then we don't have a, you know, we think it's coming, but we do not have a timeline. With respect to DDGX, I think there is growing attention both in Congress and the Navy for the electric propulsion option. For that is meeting the growing requirements for electric power. It's no longer just driving the ship or even driving the ship in the sense are now experimenting with the directed energy weapons. All of that's gonna increase the power requirement, which drives you to electric. In terms of the timing, 2025 is a little early. The ship is really a 2030 ship. The electric power system that we think will go into it will start, I think, in the next couple of years, though.

Excellent. Thank you for the color, Bill. And if I could follow-up and maybe pivot more to raw material supply. I know back in December, China banned the export of germanium, and that's obviously a huge component or partial component into the sensing business. Although, I feel like a lot of attention has shifted more towards the supply of other materials ever since the Trump administration took hold. So I'm trying to think, are there any other materials that we might have to worry about in terms of sourcing and access?

I would say in terms of our concern with that germanium, you know, continues to be our focus point. As you alluded to, we put the safety stock up there to protect against an absence of supply. We're not tapping into that yet because the supply is still available. But what we've seen is some volatility in the pricing. From an other material perspective, right now, and what has helped us, you know, the stabilization and the predictability of the supply chain. So nothing that is jumping out as overly concerning. I think you're still in a position where lead times and such are still elongated from what we saw in a pre-pandemic environment. But the predictability remains strong. The availability remains strong. So as of now, there's not a lot outside of germanium that's keeping us up at night.

Awesome. Appreciate the color, Mike. I'll leave it there. Take care.

Thank you. Our next question or comment comes from the line of Michael Ciarmoli from Truist Securities. Your line is open.

Hey. Good morning, guys. Good results. Thanks for taking the question. Hey, Phil. Maybe not on Doge, and I know this news flow is pretty fast and furious and we've got the 8% budget cuts. But the House Armed Services Committee was also asking the Pentagon for a list of potential cuts by March 1st, and it maybe feels a little bit similar to the night court exercise back in 2019. You've got a lot more exposure to the Army. I don't know what 2024 closed out at, but do you see maybe kind of some of those Army revenues, ground systems? Could that be a headwind for you guys? And just trying to figure out how that might be contemplated, you know, if it even is an impact in 2025 or, you know, if Army does see more ground cuts or whether it's warfighter systems that are on your radar right now?

I mean, obviously, we're looking closely at what the new administration does. There's always gonna be turbulence when you have a new administration that resets the priorities, resets the whole team, and so on. We're right now, I might go about 30% Army, give or take. Over the past five or six years, we have realigned. We used to be much heavier Army, and now actually Navy is larger, but I think the key is we're more balanced. And, no, the largest program we have is Columbia, the Navy program. That's 10%. Nothing else we have even approaches that. So as we go into this kind of budget environment, there's no single decision that is gonna fundamentally change our direction. And then overall, you know, going back to your Army point, overall, we think we are, you know, we consciously targeted growth areas in all the services and particularly the Army. So think counter UAS, think artificial intelligence-supported computing, longer-range sense that you'll need in the Indo-Pakistan fight. We think all of those are growth sectors. That's why we identified them. They were growth sectors in the first Trump administration. They were growth in the Biden administration. And we think when the dust settles on the priorities of this new administration, there'll be growth sectors there too. We're not in platforms where I think we don't build platforms. I think that's the bigger vulnerability, and we're not in that area.

Got it. That's helpful. And then just one on margins. I think you called out maybe Mike the IRAD investment in 2025. Can you just give us a sense of the magnitude there? I mean, still getting some pretty good margin expansion. I mean, you had a high watermark in the fourth quarter for IMS, it, you know, just trying to get a sense, you know, kind of, yeah, what that R&D headwind investment is and, you know, if there's maybe anything preventing IMS from continuing to drive, you know, higher from here.

Yeah. A couple of things. I think you have it right. First, in that, you know, as we look at the margin expansion into 2025, IMS will be the key driver of that on the back of Columbia, and that performance continues to go very well. The investment that we're looking at is we're certainly looking at increasing the investment. We're trying to increase IRAD about 20 bps as a percentage of revenue. So I think, you know, kind of a double-digit growth on our IRAD number that exceeds the revenue growth by a pretty good margin. So we think it's gonna be important to continue that investment, especially with the new administration's kind of emphasis on agility, and, you know, kind of rapid prototyping and getting solutions in the hands of the warfighter quicker. And that's why I think we're gonna pick up the investment a little bit to be able to be that active.

Okay. Perfect. Thanks, guys. I'll jump back in the queue.

Thank you. Again, ladies and gentlemen, our next question or comment comes from the line of Ronald Epstein from Bank of America. Mister Epstein, your line is open.

Hey. Good morning, guys. Best corner around you. Are you again, given your experience, you know, running the company and then in the DOD, how are you thinking about this 8% reallocation? What could it be reallocated to and, you know, how is that impacting how you're thinking about running your business?

Well, I mean, I think they're assessing both sides of this, you know, it's a moving game so that the where the 8% is coming from is, you know, they're assembling right now, and I think where the 8% is going, they're simply assembling right now. But, you know, the indications have been, I mean, the biggest one has been the executive order on Iron Dome. I think they wanna put more money into missile defense, and it's missile defense broadly defined. When Iron Dome, you think the Israeli system, which is the lower side of this. But I think they're thinking all the way up to space and then all the way back down to counter UAS. We're in much of that. So we see opportunities. I mentioned over-the-horizon radar, you know, counter UAS is one of our core mission areas. We're demonstrating our space capabilities in space. So I think that's an opportunity. And then I think the other big muscle movement, but it's I think it's hard yet to see all the programmatic implications or the move to Indo-Pak region. You know, that's longer ranges, it's a different set, more Air Force, more Navy. Although, I would never, you know, you need an army in every conceivable scenario, so I wouldn't understate that. But I think it's, you know, one of the programmatic implications of that beyond what I mean, Biden the Biden administration was focused on Indo-Pak too. So it's kind of incrementally, what are they doing more there? I think that, I think, we're gonna see in the coming weeks.

Got it. Got it. Got it. And then have you thought about, I mean, what implications does it have for you if we end up in, you know, a continuing resolution for fiscal 2025 and maybe for a lot of the same reasons that SCR in fiscal 2026.

I don't think we know where we are. I mean, you know, it's on 2025. We, you know, there's always talk at this point in the process about a CR. We've never had one for defense. Yeah. It's always possible. It would mean, you know, I think incremental cuts to programs. That's for us, that would be probably more of a 2026 issue than a 2025. We have about 75% of our 2025 revenue is already in backlog. It's already contracted. But 2026 is where you'd start to see a CR technical.

Got it. Got it. Got it. Got it. And maybe just one last one for me. Given sort of the politics of what's going on right now, with the Ukraine and Russia and what impact do you think that could have on foreign military sales, if any? You know, NATO is gonna need more stuff, but I one would assume NATO doesn't think they can count on us anymore. So I mean, how do you think about the positives and negatives there?

Well, it's hard to say the last couple of days. I think longer term, we've, you know, we saw a tick up in Ukraine, low single digits for us in terms of our revenue. We've been assuming that that will go down in 2025, and then we think it'll taper off. Go down in 2025, and then probably down further in 2026 as we move to a negotiation phase. In terms of, you know, the Europeans, I think, are will be interested in buying American. I understand what you're saying about the, you know, kind of the transatlantic relationship. But to the extent that this causes them to think they need things more urgently, they're gonna look more to the US, many of the things that we have things like counter UAS systems that we build, we're in production on them. They're still to the extent they have them, they're still developing. So if you wanted something urgently, you would have to look this side of the Atlantic in many cases.

Got it. Got it. Thank you very much.

Thank you. Our next question or comment comes from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Most of them have already been answered, but I just wanted to touch on the investment by the Navy into Charleston. Could you talk about, you know, the opportunity there? And I know it's far out, but what exactly are you expecting in terms of market size of these steam turbines, other advanced components that are outside? You know, what you had previously envisioned. And are those at margins that are accretive, or, you know, does it come with the strength with investments?

Yeah. Let me start, Jon. I'll let Mike do a bit more of the number side here. First of all, we think this is a major move by the Navy. You know, we developed the Columbia, the Charleston facility to support the Columbia program. Basically, to in-source since we had a decade-long contract we could execute that contract more efficiently. We had an opt facilitate that facility to support the submarine industrial base expansion. And, you know, frankly, we're thrilled that the Navy's gonna win us $45 million in that initiative. And initially, as you said, it would go to steam turbine capacity and that's a critical node in terms of expanding the number of submarines that we build per year. That's a point you have to be able to build steam turbines faster to build submarines faster. So bringing us on as a source along that and investing in that we think that's a major move for the submarine industrial base. Of course, in the mid-term, you know, in a few years, that would be a major program for us.

Yeah. Let me just jump on what Bill said here. I think one of the key takeaways is we started this investment in South Carolina. We had a thesis that we can underwrite it based upon the efficiencies built into Columbia, and that's moving along well. The other piece was that it was gonna give us a seat at the table to expand the relationship with the Navy and really help from an industrial base throughput perspective. The continued kind of trusted relationship that we have with the Navy on Columbia is one to see them our commitment to the separate. And I think that certainly helped us in terms of getting that seat at the table and expanding what we can offer in South Carolina. So when we think about this, it's gonna be longer out, you know, probably beyond the next couple of years outside of some design. But this has the opportunity to be another tool in our toolbox from a scope of work perspective, contributing significantly to the revenue output as we look out, you know, five, six years.

Okay. Great. And then just to follow-up to the margin question for heading into 2026. I think at the midpoint of the guidance, you're doing just under 13% EBITDA margins this year. Could you just break down again the components of getting to that 14% in 2026, especially with the stepped-up R&D intensity?

Yeah. And I'll zoom out a little bit just from our overall 2026 commitment that we did at the Investor Day. But, obviously, a lot of puts and takes since last March when we came out. On the revenue growth side, before exceeding the expectations of that mid-single-digit growth, and I'd like to, you know, remind that what we're saying now with this 6% to 9% growth range is on a much higher base. So from a revenue perspective, we are well outpacing our commitments that we laid out. On the profit side, it's been a little less linear. But the key element of that margin expansion has always been on the back of Columbia. And Columbia continues to execute very well. So although, you know, we're a little behind a straight linear progression to that 14%, we do remain committed to achieving those targets as we look out into 2026.

Okay. Great. Thank you.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Thanks, Howard. Thank you all for your time this morning and your interest in DRS. Of course, if you have follow-up questions around, please don't hesitate to call or email me. We look forward to speaking to you all again soon. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.