Bank of America Transportation and Industrials Conference

May 12, 2020

Slides

Good morning, everyone, and thank you for joining us for day two of our virtual teleconference. This morning, we have Parsons Corporation with us. On the line, we've got Chuck Harrington, Chairman and CEO George Ball, our Chief Financial Officer and Dave Spill, Vice President of Investor Relations. So without further ado, let me hand it over to Chuck. Thank you, Ron. Before I start with just a very short company overview, I'd like to make my obligatory declaration that maybe making forward looking statements in the standard forward looking statement disclosure applies. So a little bit about I guess I'll tell you three things about three things. First, the company overview. We're $4,000,000,000 in revenue. We've got a strong balance sheet, low leverage. We're about 0.6 turns, so plenty of dry powder. Strong backlog at about two years, 16,000 employees, roughly 3,200 of them are cleared, most of them highly cleared. We operate in two segments, federal solutions and critical infrastructure. And our federal solutions is broke down into four markets, cyber and intelligence, defense and C5ISR, space and geospatial solutions and engineered systems. And our critical infrastructure group is divided in two, connected communities and mobility solutions. We're focused on four core technologies that we invest in internally through R and D and externally through M and A, and that's artificial intelligence, think of primarily machine learning and associated data analytics, autonomous systems, both on land, sea, air, and space, and we include hypersonics in that area, cloud computing. Think of mission software replatforming and new software development on the cloud and in IoT, and that's mainly sensors and the associated communications and high speed processing. Looking back, last week, we reported Q1 performance. We had a good solid quarter. We exceeded our internal plan. We've reaffirmed our 2020 guidance. And I'd like to stress the agility. You know, when COVID nineteen hit, we immediately went into a defensive posture, taking care of our employees, our customers, and suppliers. But literally, in a few days, moved to an offensive posture of of how do we get out and really help help the world, help our our customers and communities. And so we started things like personal care practice of printing three d face masks for our employees and front care workers, decontamination work we're doing with Patel, decontaminating face masks, and we're also decontaminating infrastructure in many cities. Also, touchless biometrics where you saw that might have seen in our press release our Detectwise kiosk in our laboratories for health testing. And then digitalization and virtualization, mainly of security operation centers. We we virtualized our own SOX. We're doing it for customers as well, as well as traffic management centers in cyber. A little bit about the future. We're looking to get our revenues from currently about 30% tied to our four key technologies that I mentioned up to 50%. And we're focusing on continuing to grow what we call transactional revenues, which is software sales, hardware sales, software as a service, and solutions combined of software, hardware and services. And as we look at our COVID response technologies, we really think that's helping open us kind of an extent strategy moving into new markets with our touchless biometrics, physical modifications for physical distancing at things like airports and military bases and transit centers as well as our SaaS products. So that's kind of a brief overview, Ron. Okay. Great. Thanks. So just to to remind everybody in the meeting, if you want to submit question, you can do it via the the Veracast system. Or if if you'd like, feel free to email a question to myself or anybody on my team. But in the meantime, let's let's just let's kick it off. You COVID is on the front of everybody's mind. And in your remarks, you mentioned some of the interesting work that Parsons is doing. Is it possible to quantify maybe in some broad way, even if it can't be specific, on how big these opportunities could be when you look out to sort of the mid and longer term? And where I'm going with this is if you look at kind of what happened in the wake of September eleven, it was just a matter of months and the TSA was set up and there was a whole infrastructure to do scanning, if you will, on folks in terms of carrying things they shouldn't on aircraft. When when you think about where, you know, the world could be in just, you know, a matter of months, what kind of opportunities could be out there? Well, you know, I think a lot of what we're seeing, Ryan, gets down back to kind of like this like this situation you mentioned. It's about public confidence. It's about public confidence to be able to enter large places of employment, airports where, again, large numbers of people and closely confined and transit stations, sporting arenas, and the like. So I think the there are some solutions that as we enter the new normal or as many people referring to it as the new abnormal, we're we're gonna see physical distancing playing a greater role. How are TSA lines designed to go through airports as an example? Are we really gonna be standing literally a foot or so apart from three or four of our closest friends? Or are we gonna have a little more spacing? And that's gonna require physical change. And then there's all the advances in technology and how we measure temperature, respiratory rate, and cardiovascular performance, a lot of which can be done remotely now, or if it's not currently available now, soon will be. So I think those are likely to be permanent changes. You know, someone once said this is a terrible pandemic. The first in a hundred years, I doubt it'll be another hundred years before the next. Over 7,000,000,000 people on the planet highly mobile, just the chances of these things are are statistically higher. So as we look at our revenues, you know, we're we're looking right now. We are already under contract. We have several contracts signed, and I look out over the next year or so, I I could see revenues aggregating, you know, over over hundreds $100,000,000, in this work. Now will that all come to fruition? I don't know. As it goes more global, I think we're talking, you know, significantly more than that. And it's gonna be to the firms who are very agile and can respond quickly and and and probably in partnership with other companies to bring world class solutions to restore confidence to reusing the public infrastructure. Yeah. That that that makes that makes a lot of sense. Can you mean, while we're on COVID, and then we'll kinda, you know, pivot to maybe some other stuff, but it's just on top of everybody's minds. Can you discuss how COVID has impacted your core business operations, if at all? How you've been able to have your teams work remotely and while still providing, you know, the services that you do. And if you could discuss that a bit. Yeah. We had invested in our internal infrastructure, really had ramped that up a couple of years ago just with the development of what we call Fed DevOps, our ability to do classified work on our own classified network. And and just and since on the infrastructure world, designs are usually never done in one office. They're usually spread out around the country or sometimes around the world. So you have a high bandwidth capabilities. So when we decided to go, like everyone else, to work at home or we're we're told to do so, we actually went early on. Our network flexed really easily. I mean, I'm not saying there were some other things we had to do. There were. But it was amazing how easy it was, and I think other CEOs are saying the same thing. So that was immediate, and we saw really no immediate impact. Obviously, some of the intelligence comer customers have gone to blue and green teams or blue, green, yellow teams, and that has had some minor impact. But all in all, we're talking about very small numbers of of revenue impacts that were quite frankly compensated for by upticks in other parts of our business as other customers decided they need to do some things really quickly. So that combining with running a series of scrums that generated, well over a 100 ideas from our employees around the globe of things that we should evaluate that we quickly, narrowed down to four buckets of solutions to to provide to our customers is was, one, really motivated. And quite frankly, it also gave me a better, platform to talk to our employees. I do was doing three videos a week every morning and getting, you know, up to 25 or 30% of our workforce watching those videos. One, just to get everyone settled down and and and getting confident that we're gonna get through this as a company, as a world, as nations. And restoring confidence is so important and time for leaders to really step up, in my opinion. So you brought up an interesting topic. When you think about innovation at Parsons, how do you cultivate it? How do you reward it? You mentioned the scrums that you're in. I mean, what's the process for generating innovation at the company? Because I guess it's my sense that innovation is really the edge that's gonna kinda keep you guys going going forward in a market that's reasonably competitive. Yeah. So I think you hit the nail on the head, Ron. It's it's a it's all about culture. And since it's one of our six core values, you know, we really herald innovation and reward innovation. And and there's no such thing as bad innovation. You know, there are some ideas that are more successful than others, but you have to reward and inculcate that belief that everyone can contribute because they can. And then having an environment and a culture that's collaborative and and inclusive really facilitates. So we put a lot of time and energy into that because the rewards are so great. And it also requires trust when you're new to the team and you're putting out an idea. You know, the last thing you wanna see is the people look at that idea as not being, you know, in line with what everyone else is thinking. So that's really in critical to have that inclusive nature and culture in your team. And then we act on it. And that's the other thing. People put ideas in and they never hear back. Like, well, why didn't my idea go forward? So we really put a lot of energy into getting back. And then the decisions aren't made by a group of executives, all seeing, all knowing executives. We put together cross functional teams throughout the organization, and then we hit it hard and say, okay. This looks like a great idea. What's the opportunity? How are we gonna put it together? What technology needs to be developed? How we're gonna price it? What the contractual terms look like? Who are the end customers? How are we gonna reach them? What are the partners we need? And we try to do that literally measuring in hours and days versus weeks and months. And and I think that's key to an innovative culture. And and how do you think about, you know, when you're when you're looking at a new product or an innovative idea, the balance between the capital investment required to do so and the return? I mean, how do you do that balance? And over what time frame if you invest X in a new technology? When would you like to see a return for that? I mean, it a year, two years, six months? I mean, how do you think about that balance? Yeah. We we subscribe to kind of the the theory. We call it, you know, firing bullets, not missiles. How do we yeah. Some of the most innovative and largest companies in the world were, you know, quote, unquote, created in garages or dorm rooms with little to no money. And so we pride ourselves on on being really capital efficient during these phases. Now some of these things become big, and, obviously, you're gonna take millions and millions of dollars to move forward. But, personally, we don't like to do that unless we've tested the market and and absolutely assured it's meeting customer demand. And there's a large market of customers, and we have access to them. So you don't see us coming out with business to consumer or really too many business to business. We're basically a b two g company. And and some of those government customers are state and local and and, you know, county type customers. But we we know who we are. We know who our customers are. We know what the missions that we're working, and we stay true to those missions and true to those customers and then invest small and grow if the market opportunities present themselves. Maybe pivoting just a little bit to the portfolio of businesses that now is Parsons, right? You know, broadly Parsons is, growing into this, what we don't want to call it, defense services, away from just sort of the E and C roots, right? So, when we think about the portfolio shaping and how you're growing the portfolio, given the current environment, has this created opportunities? I mean, how should we expect to see the portfolio change, if any, in the next sort of short to medium term? Well, we have a longer range that we started several years ago, transformative strategy. As I said in those opening remarks, building more and more of our portfolio around those four key technologies and more and more of our portfolio around software and hardware products and weaving those products together with the services that have been our history for so long into total solutions and then providing those solutions on a different kind of basis to our customers. So, you know, I think a lot of lot of government customers think in terms of of buying headcount or or buying, you know, services through cost reimbursable t and m or lump sum contracts. And we think in terms more of a SaaS model where what you really want is not all the constituent parts. What you want is a solution. And so how do we work with our customers to better deliver a solution that that really is agile and and works with their needs? The other thing that we've benefited from that I think it has been really helpful during times like this is that innovative spirit which we find in terms of the ability to rapidly prototype and agile development. So we've invested in a lot of three d printers. Some of these are very, very sophisticated printers that can print very small parts to do special missions. And and that gives us the capability to take an idea in paper or on a on a board and go, let's go print it. Let's go see what this thing looks like. Let's see how this works. What are the operating parameters looking like? And then we have a are blessed to have a series of customers that wanna participate in that. And so whether it's OTAs or just r and d associated with some of our programs, that is that's all helping to transform this company to a company that is seeing its largest growth in cyber and intel, missile defense, and C5ISR, the space and geospatial I talked about in connected communities, where the future of communities is probably far more digital than it has been in the past. So, I mean, that same line, when you think about where Parsons could be five years from now, ten years from now, the journey that the company is taking, where do you see the end game or ultimately, when you think about the mix between Federal Solutions and the traditional businesses that Parsons was in? Mean, where do you see that ultimately ending? Well, I see the lines Just put it I see the the lines getting blurrier, Ron. Again, as the as the physical infrastructure world becomes more and more digital and infrastructure becomes smarter. You know, it detects, the aging that's taking place in the physical structures and can alert you of of pending issues or required maintenance. Or we see more and more autonomous systems, whether it's driving or flying autonomous systems and how the infrastructure of cities and counties and states and nations interface with that autonomous systems, whether it's air traffic control type scenarios or just, you know, legal bodies interfacing back and forth. And how does that work and how does it function to to help people get from point a to point b more efficiently. The solutions are gonna have to be far more network like. They're gonna have to be really robust cyber systems. So all the things that we've been investing in on the federal side going back ten years are starting to now position us to be a much different infrastructure participant going forward. So as I look out five to ten years, I see, you know, the vast majority of our revenues coming from whatever our core technologies are in ten years. You know, machine learning may be moving to deep learning. Quantum computing may be coming in. There's a lot of new technology. We're gonna always stay at the forefront of technology, and I think a lot more of our sales will be hardware, software products, and SaaS solutions. Got it. Got it. If if we maybe peel back the onion just a little bit more and think about from a contracting perspective, what do you think the optimal mix between firm fixed price style contracts versus cost plus type contracts is for Parsons? I think if if the scope is defined and the objective is clear, we much prefer fixed price contracting. It puts us in in control of the resources to deliver this solution, and we think we are the best to do so. And and it's much quicker and more efficient. There's less administrative costs in putting together massive invoices, listing every person and how many hours they have and their hourly rate and all of that. So it's much more efficient for us to bill. It's much more efficient for the customer to pay. It's much more efficient for the customer to actually oversee as long as they have trust and enough visibility into the progress being made to be assured that the solution will be delivered on time and meet the required performance requirements. It's clearly the more efficient and effective way to go. It does require a clear understanding of what's being procured and when it's due and etcetera. So I guess that's my long winded answer. Do we prefer fixed price, Ron? So just to maybe follow-up on that. When you think about in the Federal Solutions business today, and correct me if I'm wrong, it's what about two thirds cost plus type contracts and maybe a third fixed. Ultimately, would you like to see that reverse given if you have all the characteristics that you just mentioned that you can go to fixed price contracts that the company deeply understands? Yeah. I say I I I I don't see the cost reimbursable side reducing in scope. I see the fixed price growing in magnitude. The the the nice thing about reimbursable work we do for our critical customers is that's where we're doing a lot of the the software DevOps and the hardware DevOps and working in conjunction to solve problems that have never been solved before. So we pull out of that the solutions, and with the government approval, obviously, to now go use those solutions to solve other people's problems in other areas as long as they're not conflicting with the government mission. And so I see that soft that that cost reimbursable part is being critical to the engine of innovation, but it's that fixed price piece that's the future growth piece that can really outperform, in my opinion, and grow even faster than the cost reimbursable side. So, maybe even peeling back the onion a little bit more. GBSD, for those who are not familiar with the acronym, the Ground Based Strategic Defense Award, If that comes through in the August timeframe, which that's what it seems, that's what we're hearing right in the August timeframe, how should we start to see the revenue impact from that and the EBIT impact from that? And how do we think it's a big contract over a long period of time? How should we think about that when we're looking at our models and trying to figure that out? Yes. Well, obviously, there's not a lot I can say about that one. That's being the prime contracts, obviously, between the air force and Northrop Grumman. And until until that they have signed their contract, you know, we we won't be starting our work. What I can tell you is that, you know, we've been involved with, I will say almost only because there can always be one missile system. I can't remember. Every ground based intercontinental ballistic missile system ever deployed in The US and including going back on working with Wernher von Braun and how you how you bury missiles and and allow them to launch without exploding in the chute in the in the silo. Obviously, a lot of physics around getting rid of the heat and the gases and flames and everything. So our expertise is in blast resistant design, nuclear radiation shielding, shielded communication systems, cyber around controls, and the interfaces and control of those interfaces between a physical infrastructure and, you know, the missile itself and its control systems. And there's a lot of r and d that is going to have to go on with the missiles themselves. And, you know, obviously, missile technology is changing, both what's coming at us as well as what's used to defend against it. So we can ex anticipate a lot of the early days are gonna be working on design concepts and and some test plans, some pilot facilities. We can get things up and see how they're going to work and how they're gonna weather a net the next forty year or fifty year lifespan in the ground. So as we think about our work, we'll start off, you know, sometime in 2019 or 2020 is our anticipation. And they'd be doing a lot of this early work around design and studies and and and pilot plant, getting them ready, the infrastructure. And then it's gonna continue on for several years in the design phase, getting the infrastructure ready as the missiles start coming out of prototype production. And obviously, it's a twenty year program. So it's a very long program with a lot of work. A lot of parties will be involved. Much of the defense industrial complex will be involved in this program, which really is the first major missile system to be deployed since, you know, the early eighties, which was really most of that work was done in the seventies. So it's been a long time. Yeah, that sounds like it's a little bit an exciting opportunity, right? Big, big team working on it. Yes. Maybe, I guess we're starting to get towards the end of our time here, but maybe end it with a broad question. When do you think about the portfolio of businesses that you have now? Are there any new areas of interest that you'd like to push the Parsons in the direction of beyond the immediate kind of COVID-nineteen stuff that's going to happen, right? Are there any other areas that you're thinking about? Is there anything that us as kind of outsiders looking at Parsons to better understand the potential pipeline of opportunities, how that's shaping up when we think about the company? Well, I think that there are things when you have these exciting work going on and you got four technologies that are going across all your markets, you start seeing similarities and synergies between markets. And as we look at something as critical as missile defense and we start looking at hypersonics, which which we've been working in and around for six, seven years now, you start seeing that cyber is gonna play a role in that, c five ISR plays a role in that, space based satellite structures to sense and help guide counter hypersonic technologies. So all of that, I think, is kind of the new frontier is how do these things all work together and, you know, using a missile system term, defense in-depth. How do we provide a a constellation of of technologies to protect our nation and other nations and our borders, etcetera, from incursions that are unwanted. And in that, one of the areas I think is most exciting to me personally is space. I mean, that was the subject of of a lot of the work I did in college. And and now that we see private companies putting up in space, space has gone from a very lonely place to it's becoming a very crowded neighborhood with a lot of players. We all have different agendas. And I think that's an area where you're gonna see ever increasing focus by Parsons and probably other companies as well. And we've been so proud of the work that we and others have done and with this land launch manifest systems integration contract we're doing, putting up small sets, CubeSats. It's just put us in a different perspective as we view space and how it can be used to help in defense and cyber and a lot of other areas of our portfolio. Exciting. Exciting. That's exciting stuff. Well, I think with that, we're just about out of time. So I'd like to thank Chuck and his team for the presentation this morning. If you have any further questions for the Parsons team, obviously, feel free to e mail them. But e mail us too, we can forward it on to them. And I hope everybody has a good day at virtual conference. Alright. Thanks. Thanks, guys. Thank you, Ron. Thanks for the opportunity.