I'm Brian Gesuale, for the eighth time today. Still him, 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's 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, and increase the multiple over time. So we think it's a really good time to, to get to know the company. We have the company's Chief Executive Officer, John Heller, here. We're gonna do a fireside chat. If you happen to have any questions, please just raise your hand and we'll, 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.
Hey, John, why don't you level set everybody on exactly who Amentum is? You're new enough to the investor base that take a few minutes on that.
Sure. I think it's a great story in the industry. You know, it starts out, Amentum was a PE-backed spin-out from AECOM about five years ago today, and the private equity firms, Lindsay Goldberg and 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, the 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, you know, 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.
You started, you know, spinning out about 4 billion over the course of two 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. 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 advisors about if there was something from a monetization opportunity of an $8 billion company in our industry. Going public was gonna be very difficult, and we just had too much debt, typical PE-backed situation.
To go public would've taken probably at least five more years to get the debt down. We were all focused strategically on doing that. The PE firms, very long-focused PE firms. We had our eye across the industry. Jacobs Engineering, longstanding business, you know, international business, had a government services business. They called it CMS, Critical Mission Solutions. They had another division called C&I, Cyber and Intelligence. They were looking to spin out the Critical Mission Solutions business, CMS, and spin it out to be a standalone public company. It's very similar to what Amentum did, only they were planning to just create a new public company. They got approached by PE firms and us and other strategics looking to potentially acquire the business. In our case, we proposed an RMT.
Via that, we really argued that this could be a path to greater shareholder value than a standalone private company or a PE sale. It was real competition, went right down to the wire, and really brought that argument to the board that if you looked at these two 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 two companies together with significant addressable market, but an opportunity to create white space. I'll get into that in a second of where we saw that white space and also create synergies.
Yep.
That synergy would create immediate, you know, over the near-term value. We convinced the board that this was a better opportunity for the shareholders. You know, we won that competition. This was in November of 2023. The interesting thing about an RMT is you sign the 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, Amentum's board, that this was a tremendous opportunity as to work on the integration plan and get a lot of that accomplished prior to close. We set up an integration management office, 50 Amentum people, 50 Jacobs people, integration leadership, also 50/50.
And the focus was on three main areas: on culture, how are we gonna put the two cultures together so that on day one, 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, what 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 close the deal, we're hitting the ground running, reducing the length it's gonna take for us to fully integrate the business from a back office standpoint, but most importantly, we said, we don't want two different companies. That the best way to take advantage of what we're doing is we're bringing these two firms together to leverage the combined capability of these two 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.
How would we do business development as one organization, one enterprise organization? And then, what the leadership would be. So we did all that planning so that almost two 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 gonna 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 one, we closed the deal on September 30th. On October 1st, 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 1st has been about the new Amentum, and it really gave us a head start to 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 exposures, you know, really fairly favorable compared to everyone else in the group and could be more opportunities at risk, but I'd like to hear your thoughts.
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 at who Amentum is. We're a mission-focused business and really focused on critical missions that are required to operate government, 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 a less risk in our portfolio.
You know, 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. 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. That is absolute critical work to the communities, the local population, the governors, the mayors, you know, local parents that live in those communities. You know, that's the 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 administration's coming in and they have plans to try to find government efficiency, which I'm all for. And I think, you know, probably after 250 years of being a country, our government, you know, probably has a little fat, right? That could be, you know, 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, you know, really important critical work to the existence of government. And then, you know, a key part of our story is that, and, you know, DOGE exposure is we're a little different than our peers. Only 80% of our revenue comes from the U.S. government. Very different, you know, where our peers are 90%-100%. And of that 80%, we're really excited about the growth prospects, both, you know, foreign government customers, especially in Europe right now when you see what's happening where there, there's commitments to step up their national security spending, which aligns really well with where we are. And then commercial, where we serve, you know, Fortune 500 companies in infrastructure modernization and organizations like John Deere, Mercedes-Benz.
We support telecom industry and 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, you know, hopefully gonna 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 wanna 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.
Yeah. Yeah. No, we're perplexed by the same numbers, but I do think, just talking about the budget for a second, when I step back, I don't think they're in conflict. I think 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 gonna find cuts because they're there, there's opportunities.
Sure.
I wanna go find them. But I think it's gonna be in areas that aren't directly related to the support of the, you know, the ability of our existing military to deliver the power that they need. And there are opportunities there. I think there are weapon systems that are pet projects that everyone knows aren't, you know, even four-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, you know, the Air Force has 120-some bases in the world. They've even said, we, you know, we don't need anywhere near that number.
Right.
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, Congress, and senators to go with some of these changes that maybe in the past were really difficult politically.
Yeah.
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 longstanding commitment. He showed it in his first administration, and I think he's, you know, 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, say in 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?
We say, well, we have something for intercontinental ballistic missiles, but other than that, we really don't have a defense, right? He said, well, why don't we? 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, you know, to any type of attack, then I think it would deter an adversary from investing.
Right.
Right? So I think missile defense, our focus on missile defense. I was with the Commander of Missile Defense Agency just three weeks ago in Huntsville. We create the environment that the digital engineering environment that all development 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 expand, you know, 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 in Iraq and Afghanistan, now in Ukraine.
I think it's 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, you know, underlying that is a, an economy that even fossil fuel development cannot meet their demands of, you know, 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 as from an engineering standpoint. And I think as that progresses here in the U.S., small modular reactors bringing large multi-gigawatt reactors back online or expanding that investment, Amentum, that's a huge growth opportunity for Amentum.
Agree. I wanna maybe pull back on a thread that you talked about earlier, the ways that the absolute synergies of the two 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.
Yeah. Yeah. First I'll just, I wanna get to the revenue synergies, but just I don't wanna forget, and you know, the combination is going to give us great opportunity for cost synergies.
That's next too.
Yeah. Yeah. And we've stated that, you know, the midpoint, 60 million net, for our cost synergies. We're well on our way. We had that planning. We're hitting our timeline 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 synergy is a bigger opportunity. And the first thing that's happening across Amentum is we're bringing these two companies together is 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 team from 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, you know, almost a 100-yard corridor at a conference center. We set up stations so that those leaders could see all of the technology solutions that we have. I can't wait. We're gonna have an investor day. Maybe you, we should have a conversation, but we're gonna do an investor day to bring everybody in to show them these solutions that we're developing. 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 gonna embed these technology capabilities into every bid we're doing going forward so that 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 'em are 700 million.
Yeah.
But some of are 5 billion. But any mega, 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 gonna be delivered to those opportunities so that we take advantage of this merger in the greatest way possible, improve P win on our bids, propose a more, I would say, technology-enhanced solution because it's done at the enterprise level, not down somewhere, well, $14 billion. If you let the silo do that, you think they're gonna 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 gonna 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.
Yeah. I definitely, as part of our strategy, as you know, we, you and I have talked, our focus has been at the front end of the acquisition lifecycle: science, research, development, engineering, and at the backend of the acquisition lifecycle: supply chain management, MRO, logistics. And they're long contracts. They're mission critical, but they're typically lower margin. They take advanced expertise, oftentimes cost-plus.
Yeah.
65% of our business cost-plus. Our opportunity in bringing these two 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 lifecycle around integration systems, development, software development, enterprise IT that we weren't bidding before, frankly.
Yeah.
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 things 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. And if things that fall to the floor and no one screams, they're gonna scrape it away as savings.
Yeah.
Right? But in terms of what we do, they're not gonna touch what we do today because it's keeping things going. But, you know, there's a lot of things that happen in the middle of the acquisition lifecycle that you can pause.
Right.
Right? And that hasn't been our focus. It's where we wanna, you know, grow to get margins up. The other thing I would say is even synergies are going to create margin improvement opportunities. 'Cause the cost plus work we're doing today will be rebid using a lower cost, overhead structure.
Even our cost-plus contracts, if nothing changed, no, our contract mix didn't change. We are gonna 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 is, this'll be the last one as we're brushing up against time here, is your free cash flow growth is gonna be fantastic relative to the peer group.
Yeah.
High single digits, low double digits, kind of almost irrespective of your top line growth.
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 this 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.
Yep.
Product requires capital investment, and that's not a bad thing. It's just a different business model.
Right.
But our capital light business model means that we're only spending about 0.31% on an annual basis on those costs, so that means most of our, you know, free cash is going straight to the bank. Right?
Absolutely.
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. You know, as we pay down debt, our debt rate now as a result of the merger is four times, not a bad level. I remember, you know, companies five, 10 years ago would lever up to four and a half, five times.
Even six.
Because we are cash machines.
Yeah.
Quickly delever and do it again. Our focus first two years of this new Amentum is to pay down debt to get the three times levered. We are laser focused on that. No question, no gray area. That's what we're gonna do. But as we pay down that debt, as you know, we're gonna have our cash flow's gonna grow. We're looking at 10% growth on an annual basis of our free cash flow, which is gonna create some opportunity for us to do a lot of different things in the future as we get that debt down to three times. 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 can pave out a model that shows great value creation over the next couple of 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.
All right.