Amentum Holdings, Inc. (AMTM) Earnings Call Transcript & Summary

I'm Brian Gensuale, for the eighth time today, still here. Excited to have Amentum here to take us through their presentation. It's one of the largest government service firms. It's also one of the newest. Execution has been crisp a couple of quarters out, and we think there's a really interesting opportunity to bring the synergies of the recently combined businesses together, pay down debt. It increased the multiple over time. So we think it's a really good time to get to know the company. We have the company's Chief Executive Officer, John Heller, here. We're going to do a fireside chat. If you happen to have any questions, please just raise your hand and we'll try to get to you as we go through. And then there will be an abbreviated breakout session after the presentation. John, welcome.

Thanks, Brian.

John, why don't you level set everybody on exactly who Amentum is. You're new enough to the investor base. Take a few minutes on that.

Sure. It's a great story in the industry. It starts out -- Amentum was a PE-backed spinout from AECOM about 5 years ago today. And the private equity firms Lindsay Goldberg, American Securities took the firm out. At the time, the business was about $4 billion, very recognized capability with the U.S. government, primarily performing services across DOE, Department of Defense Intelligence community. But with the PE backing, company really saw the opportunity, and I knew the PE firms very well, they saw the opportunity in the industry to consolidate and through that -- because the industry really needed that to -- because the customers were demanding kind of a more efficient support base. But as a result of some of the consolidation that they led, it also expanded the capabilities of the firm, expanded the reach of the company substantially. And you started spinning out about $4 billion over the course of 2 major acquisitions, brought the company in 2023 to about $8.2 billion in total revenue operations around the world, but still mostly supporting the U.S. government. Then the opportunity of -- a big opportunity presented itself and really not in the plans, the company was very focused on organic growth, paying down debt, focused on expanding addressable market that the mergers gave it the opportunity to do. But something like a Reverse Morris Trust was a conversation that we had, both internally and externally, with other advisers that if there was something from a monetization opportunity of an $8 billion company in our industry, going public was going to be very difficult. And we just had too much debt, typical PE-backed situation. And to go public, would have taken probably at least 5 more years to get the debt down. But we were all focused strategically on and the PE firm's very long focused PE firms. But we had our eye across the industry and Jacobs Engineering, long-standing business, international business, had a government services business. They called it CMS, Critical Mission Solutions. And they had another division called C&I, Cyber and Intelligence, and they were looking to spin out the Critical Mission Solutions business, CMS, and spin it out to be a stand-alone public company. It's very similar to what Amentum did, only they were planning to just create a new public company. Then they got approached by PE firms and us and other strategics looking to potentially acquire the business. And in our case, we proposed an RMT. And via that, we really argued that this could be a path to greater shareholder value than a standalone private company or a PE sale. And it was real competition, went right down to the wire and really brought that argument to the Board that if you looked at these 2 companies individually, they were really good in their respective markets. But when you put the Venn diagram together, there was very little in the middle. This really was a complementary opportunity to bring 2 companies together with significant addressable market but an opportunity to create white space, and I'll get into that in a second of where we saw that white space and also create synergies. And that synergy would create immediate over the near-term value. And we convinced the Board that this was a better opportunity for the shareholders, and we won that competition. This was in November of 2023. The interesting thing about an RMT is you sign a deal, but it takes about 10-plus months to close the deal. There's a lot of regulatory work. We knew that and we convinced our ownership, the Amentum Board, that this was a tremendous opportunity to work on the integration plan and get a lot of that accomplished prior to close. And we set up an integration management office, 50 Amentum people, 50 Jacobs people. Integration leadership, also 50-50. And the focus was on 3 main areas: On culture, how are we going to put the 2 cultures together, so that on day 1 we have a shared set of values that represent what both sets of employees believed in. So that was a huge effort of ours to make sure that the employees both felt that this was a place they wanted to work. And we're a people business. We're a service business. So that was a high priority. The second thing was, can we put the plans together to do the systems integration. We knew we couldn't actually do that effort but we could work with a third party that would help us put all the plans together to integrate financial systems, CRM systems, HR systems and so on. So that when we hit -- when we close the deal, we're hitting the ground running, reducing the length it's going to take for us to fully integrate the business from a back-office standpoint. But most importantly, we said, "We don't want 2 different companies, that the best way to take advantage of what we're doing is we're bringing these 2 firms together to leverage the combined capability of these 2 firms." So what we wanted to do is put the plans together of what that organizational structure would look like that could take advantage of those combined capabilities. What the -- how would we do business development as 1 organization, 1 enterprise organization. And then what the leadership would be. So we did all that planning so that almost 2 months before closing, we announced to all the employees what the new vision mission values would be. We announced to the employees what the org chart would look like, including the leadership team. We announced to the employees where every employee would work and report so that we could have that conversation with these employees about this change they're going to go through in a way to get them on board with that mission and that vision and get them to know their leadership so that on day 1, we closed the deal on September 30. On October 1, we rang the bell. We were going to market as one Amentum. We were selling the entire enterprise in every deal we've been working on ever since. Every conversation with every customer since October 1 has been about the new Amentum, and it really gave us a head start take advantage of what we've created.

It's great. I appreciate that, John. We're excited about the positioning of the business. Before we dig into some of the granularity of the business, let's zoom out a little bit. I want to talk about what's on everybody's mind, DOGE. Talk about the opportunities that creates, but also some of the headwinds or uncertainty it creates for you. I know your exposure is really fairly favorable compared to everyone else in the group and could be more opportunities than risk, but I'd like to hear your thoughts.

Well, I mean, everybody's kind of -- the level of uncertainty that DOGE has created is real, and it's no different for us. But based on what we've seen so far, as you mentioned, the impact to our business has been minimal. But it's really driven by kind of what we -- our thesis here and what we've talked about at Capital Markets Day, what we've talked about who Amentum is, we're a mission-focused business and really focused on critical missions that are required to operate government, that the -- if you cut the work that we do, agencies cease to operate, right? And we're focused on the agencies that are delivering great value to national security or to citizens and, therefore, have less risk in our portfolio. And talked about a few things, but a great example would be in the environment work that we do, which is helping to remediate environmental cleanup areas that were caused by the Manhattan project and subsequent nuclear weapons, research and development and actually build. It created these disasters that were impacting citizens of the United States, impacting the ability for businesses to exist in those areas, ability for people to live safely due to potential cancerous exposure to nuclear reactivity, ability for the groundwater to serve the farming communities in those areas. And that is absolute critical work to the communities, the local population, the governors, the mayors, the local parents that live in those communities. And that typifies the type of things that we do in one part of our business that's really critical. Another part would just be in terms of supporting the day-to-day operation of government. So this idea that this agent -- this administration is coming in and they have plans to try to find government efficiency, which I'm all for, and I think probably after 250 years of being a country, our government probably has a little fat that could be trimmed. And we can question their methods, but the objective is clear. But I think what they're looking for is how do they find government activity that is not delivering value to everyday citizens or value to making America's military strong, capability -- homeland security strong and so on. And what we do in terms of supporting the national security activities is just allowing our military to operate on a day-to-day basis, providing logistics, MRO, supply chain resilient support. It's on helping to deliver next-generation technology capability to advance weapon systems so that we can compete with our near peers. So it's really important, critical work to the existence of government. And then a key part of our story is that DOGE exposure is we're a little different than our peers. Only 80% of our revenue comes from the U.S. government, very different, where our peers are 90% to 100%. And of that 80%, we're really excited about the growth prospects, both foreign government customers, especially in Europe right now, when you see what's happening, where there's commitments to step up their national security spending, which aligns really well with where we are. And then commercial, where we serve Fortune 500 companies in infrastructure modernization and organizations like John Deere, Mercedes-Benz. We support telecom industry, AT&T and T-Mobile and 5G development and implementation. And then the auto industry, and we took our testing expertise where we would test aircraft for the military. We test rockets. And we delivered that advanced capability to the automotive industry to really transform what they can do and delivering product to customers. And that is, hopefully, going to be a big driver of our success going forward.

I like it. I mean, DOGE has been kind of like the GLP-1 for government spending here. But I think there's a lot of opportunity in that for those that are driving efficiency. So I want to kind of now pivot into the defense market a little bit and reconcile kind of a few things. One, the Hegseth memo that calls for defense spending declines; the house budget, which calls for increases; and then also your alignment with these government priorities that were in that Hegseth letter.

Yes, yes. No, we're perplexed by the same numbers. But I do think -- just talk about the budget for a second. When I step back, I don't think they're in conflict. I think there's -- the Secretary of Defense is basically saying that just like every other agency, there are opportunities in the defense department to find areas of spending that aren't just based on inertia and the size of our defense apparatus. There has to be opportunities where there are activities that aren't really adding value to the ability of the U.S. to defend the homeland and to fight a war. So I think that's what he's talking about, is we're going to find cuts because they're there. There's opportunities. I want to go find them. But I think it's going to be in areas that aren't directly related to the support of the ability of our existing military to deliver the power that they need, and the those opportunities are there. I think there are weapon systems that are pet projects that everyone knows aren't -- even 4-star admirals and generals say they don't need yet congressmen and senators push forward anyways. Then there's BRAC and trying to get rid of the Air Force has 120-some bases in the world. They've even said we don't need anywhere near that number, but try to get that reduced. So I think Hegseth is acknowledging that there's real opportunity and that this administration has the ability to get the congressmen and senators to go with some of these changes that maybe in the past were really difficult politically, right? So that's there. And then the increase, I think President Trump has always believed that a strong military is key to America's success as being the number one country in the world and ensuring that there's no threat to that. So I think he has a long-standing commitment. He showed it in his first administration, and I think he's backing that up with his voices there. But going back to kind of, okay, so if that all happens, what are the priorities? I think missile defense is an area that everyone sees how important that was, saying the Israeli-Gaza conflict and how valuable it was to the Israelis and how effective it was. And then President Trump looked and says, what's ours look like? And we say, well, we have something for intercontinental ballistic missiles. But other than that, we really don't have the defense, right? And you say, well, why don't we and I think that there's real room for us to not necessarily have an iron dome like Israel but for us to create the technology that could be expanded as a deterrent. If we could demonstrate that we have the ability to integrate satellite ISR capability, ground stations with some type of kinetic weapon capability that could be so far advanced that we could tell people that we could make America impregnable to any type of attack, then I think it would deter an adversary from investing, right? So I think missile defense, our focus on missile defense, I was with the commander of Missile Defense Agency just 3 weeks ago in Huntsville. We create the environment that -- the digital engineering environment that all development that is done on the current missile defense program. And if that is expanded, to take on, which, by the way, the general actually said that he does believe that mission is coming to further expand their mission to deliver that type of capability, then that will only increase our support to that customer. I think counter UAV and UAV is another area that this administration is going to be investing that we have advanced UAV capability and we've shown how valuable it is, Iraq and Afghanistan, now in Ukraine. And I think pushing that forward and being the leader in developing and delivering UAV capability, I think America's prominence is really on the heavy payload, but there's a lot of room for advancement in America on smaller UAVs, creating those swarms and creating the technology systems that connect them so that ground-based people can use it in an effective way to both fight and deter aggression. The last thing I would mention is energy. The President has been very clear that energy independence and our energy dominance is really important. Now he's talked about fossil fuels. And I think everyone agrees, we have a lot of that, but underlying that is an economy that even fossil fuel development cannot meet their demands. Think Meta, Microsoft, Google and so on. That nuclear energy is going to be an option. It is in Europe. It is in China. It's going to be in other countries that are developing rapidly. And I think that we're very much engaged in Europe at being a leader in nuclear power from an engineering standpoint. And I think as that progresses here in the U.S. small modular reactors and bringing large multi-gigawatt reactors back online or expanding that investment. Amentum -- that's a huge growth opportunity for Amentum.

I agree. I want to maybe pull back on a thread that you talked about earlier, the white -- or the absolute synergies of the 2 businesses coming together. Talk about the revenue synergies and maybe give some examples, whether it's scale in intel or whatever some of your top areas where you just see opportunities to really take advantage of the union.

Yes. Yes. First, I just -- I want to get to the revenue synergies, but just I don't want to forget, and the combination is going to give us great opportunity for cost synergies.

That's next, too.

Yes. And we've stated that the midpoint $60 million net for cost synergies, we're well on our way. We had that planning. We're hitting our time line this year in terms of delivering that. And that alone will deliver great value to shareholders as we deliver that over the next 18 months. Obviously, long term, revenue synergies, bigger opportunity. And the first thing that's happening across Amentum is we've -- bringing these 2 companies together has expanded our engineering and technology solution that we have existing in the business, and it's getting access to those solutions to the entire enterprise. So that we can deliver those capabilities to existing companies, so whether it's a former Jacobs and former Amentum. And so what we're -- first of all, we hired a Chief Technology Officer that is helping lead that effort. We're identifying and productizing all of the technology solutions across the business. We're bringing all of that up to an enterprise level from a visibility standpoint. Matter of fact, just last week, in Northern Virginia, we had a technology showcase. We had the top 200 leaders come and we had stations set up down almost 100-yard corridor at a conference center. And we set up stations so that those leaders could see all of the technology solutions that we have. And I can't wait, we're going to have Investor Day. Maybe we should have a conversation, but we're going to do an Investor Day to bring everybody in to show them these solutions that we're developing. And they exist today, but we're productizing them so that they're available across the enterprise. So we can bring them to existing customers today, that's the cross-sell opportunity. Hopefully, enhance that relationship with our current customers, improve our ability to win business going forward with them, but also demonstrate great value delivery to them today. Then we're also going to embed these technology capabilities in every bid we're doing going forward. So we're taking advantage of the combined entity in a very meaningful way and not existing in silos. How do we do that? We've created an enterprise business development capability. We're calling mega deals, so any bid opportunity that is plus or minus $1 billion. Some of them are $700 million, but some of them are $5 billion. But any major bid opportunity is now going to be run from a capture standpoint at the corporate level. That doesn't mean the business doesn't own it. They still own it, they still support it but the visibility, the access to the full enterprise capability, the access to the best resources across the company are going to be delivered to those opportunities so that we take advantage of this merger in the greatest way, improve Pwin on our bids, propose a more, I would say, technology-enhanced solution because it's done at the enterprise level, not down somewhere $14 billion. If you let the silo do that, you think they're going to spend the time to come up and look down across all the other businesses and kind of pull up capability. No, you have to change how you do this if you want to deliver the best possible solution to the customer, and that's what we're doing.

I was going to say, in addition to the win rates, it's -- what you're describing to me also sounds like higher gross margin backlog in the future.

Yes. I mean, definitely, as part of our strategy, as you and I have talked, our focus has been at the front end of the acquisition life cycle, science, research and development, engineering, and at the back end of the acquisition life cycle, supply chain management, MRO, logistics, and they are long contracts. They're mission-critical but they're typically lower margin. They take advanced expertise, oftentimes cost plus. 65% of our business cost plus. Our opportunity in bringing these 2 companies together is now we have a relationship with the customer that is as good as anyone else in the industry. We have a profile. They know us. They trust us. And we have the capabilities to bid work that is more in the middle of the acquisition life cycle around integration, systems development, software development, enterprise IT that we weren't bidding before. Like we just didn't have the confidence but our strategy was not focused there either. So now we have a strategy that's focused on that. The only comment I would make is, given uncertainty, DOGE, all this, our starting point where we are today is not a bad place to be, right?

Absolutely not.

Because if the government does think short term, which I think they're running a playbook just to test the system, right? So they're trying to see if anything breaks. Or if things that follow the floor and no one screams, they're going to scrape it away as savings, right? But in terms of what we do, they're not going to touch what we do today because it's keeping things go. But there's a lot of things that happen in the middle of the acquisition life cycle that you can pause, right, and that hasn't been our focus. It's where we want to grow to get margins up. The other thing I would say is even synergies are going to create margin improvement opportunities because the cost-plus work we're doing today will be rebid using a lower cost overhead structure. So even on our cost-plus contracts, if nothing changed. No, our contracts mix didn't change. We are going to see margin improvement from our synergies, and we are going to see margin improvement on our cost-plus and fixed-price contracts as we rebid them, and we can bid the same price but have a higher margin.

What I really like, and this will be the last one is we're brushing up against time here, is your free cash flow growth is going to be fantastic relative to the peer group, high single digits, low double digits, kind of almost irrespective of your top line growth in whatever happens there. Could you just maybe talk a little bit about your free cash flow is above my number, this most recent print. Really happy to see that. Talk about your leverage, your goals on delevering and what that does to free cash.

No, it's a great part of the story. I'm glad you touched on it that -- different than our peers. Amentum is a pure-play service business, meaning we don't have focus on product. Product requires capital investment and that's not a bad thing. It's just a different business model. But our capital-light business model means that we're only spending about 0.31% on an annual basis on those costs that -- so that means most of our free cash is going straight to the bank.

Absolutely.

And we said this year, our target was $500 million at midpoint to generate free cash flow. We're well on our way with a good Q1. We're -- as we pay down debt, our debt rate now as a result of the merger is 4x. Not a bad level. I remember companies 5, 10 years ago would lever up to 4.5x, 5x. We are cash machines and quickly delever and do it again. Our focus -- first 2 years of this new Amentum is to pay down debt to get to 3x levered. We are laser focused on that. No question, no gray area, that's what we're going to do. But as we pay down that debt, as you know, we're going to have -- our cash flow is going to grow. We're looking at 10% growth on an annual basis of our free cash flow, which is going to create some opportunity for us to do a lot of different things in the future as we get that debt down to 3x. And we'll look at those options when that time comes. But this is a very well-run company, lean cost structure, high free cash flow and low CapEx that, that alone, you could at a model that shows great value creation over the next couple years.

Absolutely. Exciting times. John, thank you so much for sharing the Amentum story. We will be adjourning to the breakout. Thank you, everyone, for joining us.

Thanks for having me, Brian. Appreciate it.