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

Good morning, everybody, Wednesday, the long durable folks are still here. We're really excited that you're here. We have Amentum here to take us through their story. This is one of the few buy-rated government service stocks that I have in my coverage. We think there's a lot of opportunity to grow free cash flow and that there's some underappreciated growth markets in the name. So I think your time is well spent this morning. We're going to do a fireside chat format with the company's Chief Executive Officer, John Heller; and CFO, Travis Johnson here to go through the story. Gentlemen, welcome.

Great to be here.

John, maybe level set everybody to the story, just give them a sense for what Amentum does? The market served and our right to win and how you go to market.

Sure. Thanks for being here this morning to hear the Amentum story. Quick story, $14 billion company, 50,000 employees around the world. A big part of our story is our diversification, about 80% of our work is for the U.S. government, 20%, nothing to do with U.S. government, working commercial industries and foreign governments in the U.K., in particular, over 6,000 employees supporting U.K. government, Australia another big customer. A key part of our business is really around our strategy and that we have about $10 billion of our business in our core growth markets, around defense and areas that we think, intelligence that we've been doing for decades, long contracts, average contract length, 7 to 8 years, really blending engineering and technology to deliver services for our customers, mid-single-digit to high single-digit margins, low to mid-single-digit growth rate in those core growth markets. And then we have about $4 billion of our business in what we're calling accelerating growth markets around critical digital infrastructure, space systems and technology and global nuclear energy. Those 3 areas, probably you've certainly understood what's happening just kind of good timing for us that we are leaders, about $4 billion in our business are in those 3 markets, and we are leaders in those areas, but they have tremendous growth potential in the marketplace today. We talked publicly high single-digit growth in those markets, double-digit margins. We're prioritizing our strategy in those areas, and see significant tailwinds in areas that are supported by AI, supported by the goal to expand what we can do in space and also the need for expanded electricity and developing nuclear power capability from small module reactors to large gigawatt size plants, designing and building and operating those plants to provide the electricity we need for the AI economy.

John, let's double-click on the nuclear market. I want to go through each of these growth vectors and give the audience an appreciation for what you're doing. You went into a little bit on the design side. I think you've talked about nuclear being about 20% of the portfolio. Maybe take us through the service offerings and this seems like a secular spending increase in nuclear energy, not something that's cyclical. So maybe just address your thoughts overall on that.

Yes. I mean we believe these accelerating growth markets, including global nuclear energy is generational market demand that we're going to see for decades, just the need to -- not just AI, but robotics in manufacturing and human demand for electricity, it's just generational shift. And nuclear is a clean and available option today, doesn't need new research and development that's going to take 10, 20 years. The United States has not had a really a nuclear energy vibrant market where Europe, China, Russia have been racing to expand their capacity on nuclear. And we believe that, that demand for nuclear power generation and creation is happening in the U.S. today. We are a leader in Europe in developing nuclear energy capability. As a matter of fact, in the U.K., we've been involved in every nuclear power plant that's ever been built in the United Kingdom. We're big partners with EDF, Westinghouse, other companies. And we're seeing that happen in the U.S. where to kind of win the AI race, we need electricity. And the U.S. has understood that this administration understands that electricity is a national security issue. It's to develop AI capacity, but also for our economy to survive and be the leader in the world, we need that additional electricity. And we are seeing significant demand happening on SMR, Small Modular Reactors, companies like Oklo, NuScale, Westinghouse, Rolls-Royce are racing to develop that capability and the U.S. government is partnering to help greenlight those types of projects in the U.S. and then building new gigawatt plants, the Trump administration and put out an executive order. They want to see 10 additional gigawatt size plants under construction by 2030. We're partners with Westinghouse. We expect the AP1000 be a key part of that capacity as well as extending the life of the existing -- on about 200 nuclear power plants that exist in the United States today and expanding the life of those nuclear power plants, which represent significant projects.

So as we think about it, how does your business fit between the new builds versus extending the life? Because I've seen some statistics that suggest that in the U.S. nuclear power we're running at about 92% utilization of the existing inventory. So how do you think about that and where you're at across the entire life cycle

Yes. What we understand, and this comes from third-party analysts of the existing nuclear power capability of the United States that of the about 200 plants, about 100 have the potential to have the life extended, which represents the potential for 100 projects that Amentum could be involved in. And these could extend the life of these plants 10 to 20 years, which think about it in the like we need that electricity now. We can't see these plants be decommissioned. We have to see the -- and the U.S. government understands that. They are supportive of that and industry sees that. The consumers of electricity sees that. So we see big demand on extending the life of these plants and that can represent some real demand for us.

Outstanding. Let's pivot and talk about space. we're big believers in the strategic industrialization of low earth orbit. Talk about your space business, size of that market, maybe discuss some of the contracts that you're prominent on and how people should think of you within the overall space ecosystem that they're investing in.

Yes, Space is another one of our accelerating growth markets. We are the leading engineer to support NASA and developing next-generation space capability that can take humans to deep space. So it's a big difference between near space where we put basically our satellite capability in deep space, and Amentum is very unique in our ability to help develop next-generation deep space capability. And what we see the space market in 3 major areas. One is putting satellites into space so launching assets into space that enable commercial capability, but also enable military capability and intelligence capability. And the expectation, at least from the U.S. government launch cadence is, right now, we have the space range contract, Space Force Range contracts operated by Space Force Range. We just won that contract, $4 billion over 10 years. That's the ceiling. But right now, it's running at about $225 million a year supporting about 100 launches. The expectation is that we're going to do the need for more assets in space to support military and intelligence capability. I think Golden Dome, those types of assets to build out that capability that the expectation is we will see that launch cadence grow to 300 to 500 launches a year, which would propel what we do further. So launch capability is one area that we are key provider for the U.S. government. The second area is missile defense capability. So developing next-generation capability to support missile defense with hypersonic capability being developed rapidly. Our missile defense capability is not extensive enough to really handle the defense against these hypersonic capabilities. So the administration understands that. They announced a program called Golden Dome to really create and not just kind of develop that capability, but actually put that capability out into practice. So think of us in the United States having assets deployed that could detect and destroy hypersonic missiles coming to the U.S. and helping Space Force Missile Defense Agency develop that technology. We have the IRES contract today with Missile Defense Agency, where we've been developing next-generation missile defense technology for the past decade and expect that as the U.S. government defines exactly what they want to do under the Golden Dome program, where they've allocated just thus far over 3 years, $170 billion, we're well positioned to win some of that work and help the U.S. government develop that. And then the third part I talked about earlier is really deep space. And you think about developing AI data centers in space, we -- that's just one example, putting medical research and space, developing the human capacity to live and work in space and put assets in deep space. That's a capability that we expect will accelerate over the next decade. And that's something we've been doing for NASA. So if NASA expands its role, which we are hearing with Secretary Isaacman wants the Artemis program to accelerate, which we are the lead integrating engineer for the Artemis program, but more importantly, is what SpaceX might do or Blue Origin might do, expanding our ability to extend what we do in deep space will only increase the work that Amentum can support as commercial space enters the deep space market.

Maybe just quick follow-up on that space market. Two things. One, can you expand a little bit more on where you fit in on Golden Dome? And then secondly, there's been a lot of talk of recent weeks about accelerating the reconciliation spending towards those endeavors? Are you seeing any uptick in activity?

Yes. First of all, we have been, as I mentioned, under the Missile Defense Agency, a key supporter of creating the digital environment and working with OEMs to engineer next-generation capability. We've done this on the space-based interceptor capability, just think about it, just over the last 5 years, we're having to develop the capacity and technology to detect and intercept hypersonic missiles. So this is all new technology that is being developed and our contract, the IRES contract has been key in helping develop the architecture to detect hypersonic missiles in space. And then the Golden Dome, of course, will extend that capability to actually put the hardware in space. So we'd have ground systems that -- and sea-based systems, ground systems, air-based systems and space-based systems that help triangulate the detection of those missiles and then have some kinetic capability to disrupt the hypersonic missiles. And that's something that we are very capable of being part of that team to develop that technology. So we're excited about where that might go. In terms of the spending, the Space Force has the lead under General Guetlein line to develop that capability. And we have not seen a lot of that spending start yet they had to develop the architecture. They had to define what's the timeline for develop? What's their goal? Is it do they want something in 2 years, 4 years, 6 years? And then what do they want it to do? What do they want it to be capable of doing? And that's where they are right now in developing the goals in the architecture for the Golden Dome, at least first generation, let's say, Golden Dome. We believe they're near concluding that. And our expectation is the second half of our FY '26, we will see RFPs coming out that will push that work forward.

Tiding times in that marketplace for sure. Maybe pivot to something that I think is a core part of the story and talk about free cash flow. You're generating close to $550 million or so a year we think you can underwrite high single-digit, low double-digit growth over time. You've been delevering -- in a state of delevering here, maybe explain to people your target net leverage, but as you generate this much cash, there's going to be a pivot where delevering may not be the best use of capital. Maybe talk about your future plans on capital deployment.

Yes, sure. I think you hit it, Brian, and that's one of the core financial profile strength and momentum is our ability to generate free cash flow. And it starts with the core growth areas that John mentioned in the long-term, stable, predictable nature of that as well as our business model, which is a capital-light business model. We just only spent 0.3% of our revenue on capital expenditures, so really high free cash flow conversion. And we have been focused on prioritizing this past year that free cash flow to pay down debt. When we had our merger at the start, we were leveraged just at 4.1x. We were able to reduce that all the way to 3.2x just in our first year. So we expect that trajectory to continue to meet our objective of being levered less than 3x by the end of this fiscal year, so just 7 months away. And longer term, we've set out an objective to grow free cash flow by 10% or more between now and FY '28. So really good potential there, which will ultimately get us to a point by the end of this year to open up capital deployment on a more opportunistic basis. And obviously, it will depend on the situation at that time. But our goal will be to make capital deployment decisions that are most accretive from a free cash flow per share perspective and maximize return for shareholders.

Just maybe a quick follow-up there. Are there opportunities -- you had a really successful divestiture within the last year or so? Are there opportunities for more portfolio optimization? Or are you pretty happy with what you have here?

Yes. So last year, Brian is mentioning, when we came together, we quickly analyzed the portfolio just to make sure that all the pieces were consistent with our strategy and where we were headed. And there were a couple of pieces that were clearly not. So we took decisive action on that, and it actually did help toward the deleveraging that I talked about a minute ago. So right now, obviously, we continue to evaluate the portfolio strategically. But we feel we have all of the capability inside the portfolio that we need to deliver on the strategy that John just articulated. So I would say nothing imminent that we feel like is holding us back from achieving our strategic objectives.

Fair enough. Maybe talk a little bit. I want people to appreciate the revenue growth in the story. In your guidance here, there's some onetime kind of unique things that kind of impair that number just a little bit or hold it back as a headwind. Can you talk about some of those onetime things? And we certainly think there's an opportunity to see that revenue accelerate on an organic basis?

Yes. So the midpoint of our guidance implies 3% underlying organic growth. Obviously, we had the impact of the government shutdown in the first quarter. So if you normalize for that, it's right at 4%. And I think the key message is that's right where we expected to be at this point in our life cycle and bringing these 2 companies together to ultimately achieve our longer-term growth target of 4% to 6%. And this year, specifically, there were a couple of things that played into that. First and foremost, obviously, the divestitures that we just talked about playing an impact. Also part of our business does work, particularly in our Energy business for the Department of Energy through joint ventures. We had a few joint ventures that transitioned from consolidated to unconsolidated. Absolutely no impact to free cash flow or profitability but did impact the revenue profile. And then lastly, working day dynamic, we just did have an additional week in our fiscal year 2024 relative to what we're going to have this year.

Okay. Great. I think there's also a lot of opportunity to expand margins over time. Can you talk about your key levers on the margin front and what investors can think of in a steady state or long-term margin objective?

Yes, absolutely. I'd say, first and foremost, the quarter of performance that we just had really kind of highlights the trajectory that we're on from a margin perspective and is evidence of the strategy that we have in place to expand EBITDA margin. So when we merged, we were right around 7.7% EBITDA margins, a midpoint of our guide this year is 7.9% with a goal to get to 8.5% to 9% by FY '28. And in Q1, we had 8.1% margin. So we're right on that path. And it's going to come from a combination of things, not just one thing. But first and foremost, it's -- obviously, we're going to have accelerated growth in those markets that John mentioned that have double-digit margins, right? So as those fold in, it will drive the margin expansion that we're looking for. Also, we have cost synergy and benefits from the merger that will help achieve that objective as well.

One of the things that I was particularly impressed with in the most recent quarterly results was the book-to-bill. It seemed to buck some of the trends that we've seen with your peers and particularly impressive from my perspective. Can you talk about your outlook for bookings and as I think of Golden Dome and other opportunities in your growth markets coming to fruition, it seems like this is going to be a pretty good year for winning business.

Yes. I mean you point out a key thing that we're focused on is all about growth and leveraging what we put together in this $14 billion enterprise to extend our focus to areas that we couldn't go after and before, and we're expanding our pipeline in these accelerated growth markets and our growth -- core growth markets. And -- you look at what we went through in 2025 with change administration, DOJ all those things yet we were able to have a better than 1.0 book-to-bill. Then you had a government shutdown. And we still -- with the government shutdown for the longest shutdown in the history of the U.S. government, we still had a 1.0 book-to-bill. And I think what this shows is that the combination of our business is working. Like our strategy is working. Our diversity is that strength. The fact that we have access to these different markets. And we saw the 1.0 book-to-bill last quarter. LTM 1.1 book-to-bill. But you look at some of the other metrics, we bid over $35 billion last year. We said our goal was to bid greater than $35 billion this year. We're on track to do that. We have over $25 billion of bids awaiting award. And in our pipeline, we have -- actually in proposal right now a significant volume that we're working. So the metrics are supporting the growth story and supporting our strategy. And we're -- we expect to see that be the big part of our story going forward.

John, it's not known to me that in the Government Services space in general, we have -- tend to have a lot of competition. But in the areas you serve, you have this global ability to scale in this global footprint that seems very unique, and you're touching these end markets that very few of your peers do. One, can you comment on the competitive intensity of where you're at, but also maybe explain to people why Amentum is uniquely positioned for this market.

Yes. Well, I mean we -- there's a story across each of the end market. So it's hard to kind of pull that story into one. But let's just take the nuclear energy market as an example, where we have the capability in Europe that is very significant in nuclear energy. And as the U.S. market starts to expand, we're able to leverage the work we do in Europe and the people that are doing work there and the expertise that we have, the process expertise, the IP, bring that to the U.S. to support a growing market here in the U.S. So I think that's what you're talking about, the strength of having a global business. There will be markets in the U.S. that are moving faster than the rest of the world and then vice versa. There are markets elsewhere in the world that are moving faster and having that footprint around the world, we're in 70 countries. We have a very significant footprint in just about every continent, including Antarctica, which gives us an ability as markets expand around the world, we're there to deliver that capability. And we're -- we think that is a unique strength of what we have today. And Australia is another example where we -- Australia is expanding their nuclear infrastructure by -- for the first time in their history, they're going to have nuclear-powered submarines. And we have a significant base in Australia. It's been a key customer of ours. And we have that nuclear capability exactly what they need to build out the infrastructure in their country to handle nuclear power for the first time. And we're well positioned to compete and win to build out that infrastructure and then support them as they acquire these subs. But they're building that today. They're not waiting until those subs are delivered. They need to build that infrastructure out, as we speak. So they are actually, set aside, billions of dollars to build out that capability, and they know our brand, they know our capability, we can tap into the nuclear capability that we have in the U.S. and in Europe, bring that to Australia. We have this great partnership in the U.K., in America. So they're comfortable with that Amentum brand.

Makes a ton of sense to me. I'm going to end this with one unfair question, so I apologize in advance. But I've been asking all of my companies, what are your thoughts on the $1.5 trillion budget number that's been kicked around in '27?

Well, I think we're seeing a lot of the justification for that today, play out, right, that we have an advanced military capability, but we don't have the resources we need to support our standing in the world. And I think this administration has it right, that we need to increase our spending relative to GDP to really deliver on our role in the world and also to develop the technology that enables us to continue to be #1 in those capabilities. So I expect that it will be a bipartisan issue that our defense spending needs to expand. Is it $1.5 trillion? It's anyone's guess. But I think there's significant support just in what's happening that our defense spending is not at, say, $900 billion, which is the general budget, is not sufficient.

Yes, I would agree with that. I think early on, people thought maybe this would be a peak year. I think it's very clear. It's not a peak year for defense spending. With that, John, Travis, thank you so much for joining us in the audience. Thank you. We will be adjourning to the breakout session. So please join us down there for some more Q&A.

Thank you.