Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Leonardo DRS Inc (DRS, Financial) posted a consecutive quarter of 1.2 book-to-bill ratio, indicating strong demand.
- Total backlog reached over $7.9 billion, up 82% year over year.
- Organic revenue growth of 20% year over year, driven by easing supply chain constraints.
- Adjusted EBITDA grew by 32%, with a margin expansion of 100 basis points.
- Adjusted net earnings and adjusted diluted EPS increased by 21% and 20%, respectively.
Negative Points
- IMS segment faced efficiency issues related to a land integration program, causing delays and increased costs.
- Despite improvements, supply chain constraints still exist, particularly in electronic components.
- Inflation remains a challenge, with higher input pricing in some business areas.
- Revenue growth from supply chain recovery is expected to be contained to this year, with future growth aligning with mid-single digit projections.
- IMS segment's adjusted EBITDA margin contracted by 130 basis points due to unfavorable program mix and less efficient execution.
Q & A Highlights
Q: Could you elaborate on the efficiency issues in the IMS division and whether they are expected to continue?
A: The issues are related to a land integration program within the IMS segment, which has faced delays in testing and completion. These delays have extended the program and increased costs. However, we believe the issue is contained to 2024 and should not impact the long term. (Michael Dippold, CFO)
Q: How is the overall supply chain situation improving, and where are there still challenges?
A: The supply chain environment is improving with better lead times and availability, though we are not back to pre-2020 levels, especially for electronic components. We are managing the supply chain more proactively, focusing on resilience rather than just-in-time delivery. (Michael Dippold, CFO)
Q: What is the risk to DRS if the Ukrainian supplemental funding is zeroed, and could European demand offset this?
A: The defense budget is expected to remain stable regardless of the administration due to consistent threats from China and Russia. While a Republican administration might reduce Ukraine spending, it would likely be a gradual change. (William Lynn, CEO)
Q: Can you provide more color on the change in outlook for adjusted EBITDA margins and the drivers behind it?
A: We are projecting about an 80 basis points improvement year over year, driven by the Columbia program. However, headwinds include a surveillance program closing out more slowly than expected, a mix issue with increased revenue from lower-margin portfolios, and lingering pockets of inflation. (William Lynn, CEO; Michael Dippold, CFO)
Q: What are the opportunities for power and propulsion beyond the Columbia-class program?
A: Opportunities include the DDGx and SSNx classes of ships, international markets, and increased content on existing programs. Electric power technology is favored for its operational efficiency, lower costs, and ability to meet future power demands. (Michael Dippold, CFO)
Q: How are you addressing the skilled labor challenges for the new South Carolina facility?
A: The location in South Carolina was chosen for its strong pool of potential employees and to broaden the submarine industrial base. We are about a quarter of the way through the build cycle and will ramp up recruiting efforts as we get closer to completion. (Michael Dippold, CFO)
Q: What is the outlook for force protection, especially in the Middle East?
A: The conflicts in Ukraine and Israel have highlighted the importance of force protection, leading to increased demand for short-range air defense, counter-UAS, and active protection. The Army has doubled its force structure for short-range air defense, and we are seeing international demand as well. (William Lynn, CEO)
Q: How are you addressing the need for interoperability between the US and NATO allied nations?
A: Interoperability has always been important, especially for NATO. We see opportunities in sensing, computing, and communications. Our battlefield computing solutions are already used by the UK and in foreign military sales to Eastern Europe. (William Lynn, CEO)
Q: Can you provide more detail on the upward revision to revenue and the drivers between the two segments, IMS and ACS?
A: Both segments are experiencing strong demand and will contribute equally to revenue growth. On the margin side, both segments will also contribute to year-over-year margin expansion. (Michael Dippold, CFO)
Q: What are the long-term expectations for defense spending, both domestically and internationally?
A: The international environment is growing faster than the US defense budget. We have doubled our international revenue to about 10% over the last few years and expect this trend to continue, driven by increased defense spending in Europe and Asia. (William Lynn, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
