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24-05-2025
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Q4 2025 Booz Allen Hamilton Holding Corp Earnings Call
Dustin Darensbourg; Head, Investor Relations; Booz Allen Hamilton Holding Corp Horacio Rozanski; Chairman, President & Chief Executive Officer; Booz Allen Hamilton Holding Corp Matthew Calderone; Chief Financial Officer; Booz Allen Hamilton Holding Corp Kristine Anderson; Chief Operating Officer; Booz Allen Hamilton Holding Corp Gavin Parsons; Analyst; UBS Investment Bank Colin Canfield; Analyst; Cantor Fitzgerald & Co. Sheila Kahyaoglu; Analyst; Jefferies Ronald Epstein; Analyst; Bank of America Louie Dipalma; Analyst; William Blair & Company L.L.C. Scott Mikus; Analyst; Melius Research Operator Good morning and thank you for standing by. Welcome to Booz Allen Hamilton's earnings call covering fourth quarter fiscal year 2025 results. (Operator Instructions) I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg. Dustin Darensbourg Good morning, and thank you for joining us for Booz Allen's fourth quarter fiscal year 2025 earnings call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on slide 2. With me today to talk about our business and financial results are Horacio Rozanski, our Chairman, Chief Executive Officer and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating Officer. As shown on the disclaimer on slide 3, please keep in mind that some of the items we will discuss this morning are forward-looking and may relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter fiscal year 2025 earnings release and slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on slide 4. Horacio Rozanski Thank you, Dustin. Welcome, everyone and thank you for joining the call today. Kristine, Matt and I are proud to share strong financial results for fiscal year 2025 as well as our outlook for fiscal year 2026 and beyond. And I'm happy to welcome Kristine to the Q&A portion of the earnings call. Booz Allen delivered a strong year of top line and bottom line growth in FY25. We also reached $1.315 billion of adjusted EBITDA. This exceeded the top end of our ambitious target range we set at our Investor Day in October 2021 and represents 12% compounded EBITDA growth, nearly all organic over our investment thesis period. I am incredibly proud of the people of Booz Allen for their dedication and hard work over the past three years. These results are a credit to them. Through a changing landscape, we remain focused on delivering outcomes and bringing their passion and commitment to America's most essential missions. A heartfelt thank you to our colleagues for all you do for our company and for our nation. To frame the conversation about fiscal year 2026, let me reiterate what I mentioned on the October earnings call. All presidential transitions create some degree of near-term disruption followed by opportunity. Half a year later, we now see that these dynamics are indeed in play at a rate and speed that is beyond what we originally expected. As the Trump administration focuses on reducing government spending, increasing efficiency and reimagining agency missions, Booz Allen must once again adapt and accelerate. Let me begin by describing the current environment as we experience it. The federal government is rethinking agency emissions, finding ways to accomplish those missions differently and looking for ways to reduce spending and increase efficiency. To get there, we are seeing agency reorganizations, reductions in government personnel and spending levels as well as contract reviews. These are especially acute in civilian agencies. And as a result, we are seeing a decrease in the pace of awards in civil as well as run rate changes in some of our contracts. At the same time, the government is leading initiatives to improve procurement regulations and practices such as the revision of the federal acquisitions regulation or FAS, and we expect to see more contracts move to fixed price and outcome based. We also see a focus on massively upgrading legacy systems and rapidly injecting advanced technology into revised missions. These present great opportunities for more impact and increase value to the government as well as stronger financial performance for Booz Allen. In combination, these dynamics are currently impacting Booz Allen's view of FY26. We believe that our defense and national security portfolio will continue to grow this year as we accelerate the injection of AI and commercial technology into missions. In contrast, we expect our Civil business to decline this year. Diving more into civil. Our largest contracts have been reviewed. We are proud that our solutions stood up well, and our contracts are mostly intact. The work is excellent, and the missions are critical. Having said that, the run rate on five large technology contracts has been reduced significantly in support of the administration's desire to reduce spending overall. This slowdown coincided with the ending of a large signal truck at the VA. Together, this led to a significant number of employees needing to be redeployed simultaneously. Under normal circumstances and as our history shows, the dynamism of our business typically allows us to move our highly skilled talent quickly to new opportunities. But at a time when procurements are moving much slower than normal, this has been challenging. As we proactively anticipate continued market and budget dynamics, we have made the decision to restructure and reset our Civil business. We are making targeted cost and headcount reductions to match anticipated demand. These are a combination of reductions in bench, delayering of management and adjusting our infrastructure to match. These situations are difficult, and they are not taken lightly. Our actions are very targeted, and we believe that they will preserve and enhance our ability to invest both in our business and in our people. Matt will cover all the details of our FY26 outlook in a few minutes. Now let me talk more about the opportunities on the horizon, especially those being created through our close collaboration with the General Services Administration or GSA. GSA wanted to explore ways they could transform and centralize government procurement. They began a contract review exercise, looking for efficiencies, cost savings and opportunities to bring in new tech like AI. We were in the first group of companies to take part in that exercise, which has since expanded to include many more companies in our industry. I'm proud to say that GSA and Booz Allen have built a very productive relationship. I want to highlight two specific outcomes of our efforts. First, GSA got to know us better. They now understand the value we deliver across a full range of missions. This is important because GSA and the Federal Acquisition Service or FAS will be driving an efficiency agenda across government for the foreseeable future, including the consolidation of services and acquisition processes. And second, we have a unique opportunity to offer FAS our thoughts on how to accelerate the move to outcome based procurement and bring Agentic capabilities to enable these conversions. For years, I have argued that the move to outcomes was necessary for the federal government. GSA and FAS understand this and are leading the way. We are optimistic that the process that could have taken a decade or more accelerated during this administration. We believe a more efficient government will buy differently, more commercial technology, more outcomes, streamline processes and greater speed. And looking ahead, we anticipate these procurement improvements will set a foundation for a new kind of growth. We are committed to moving fast in those directions so that we can both help these initiatives exceed and be successful ourselves. We're optimistic about the opportunities ahead across our VoLT strategy, which stands for Velocity, Leadership and Technology is aligned with the changes we are seeing across governments. We have a leading position in the major technologies that will drive mission acceleration and efficiency, especially AI. We have a track record of building successful partnerships with technology firms of all sizes, from start-ups to hyperscalers, and we have strong positions and are working nonstop to create value in the areas that matter most. From reducing duplication in costs, to increasing readiness on lethality for the war fighters defending our nation. Let me provide some color in each area. Starting with artificial intelligence. There is significant demand, and that demand is only increasing. In FY25, our AI business grew over 30% year-over-year to approximately $800 million. As AI becomes increasingly foundational to how the government operates, agencies are investing more and moving toward enterprise scale implementation. In Defense and Intelligence, AI is now embedded in mission workflows, enabling faster imagery analysis through computer vision, enhancing decision-making through tailored generative models, and delivering autonomous solutions at the tip of the spear. With more than a decade of investment, enhancement in implementation experience, Booz Allen is well positioned to lead the next phase of AI transformation across the federal enterprise. Next, we are strengthening private sector partnerships and are a proud leader in the advanced technology ecosystem. We are building on a proven track record of accelerating the adoption of technologies that produce impactful mission outcomes. We recently announced we are combining our expertise in AI and 5G and 6G with NVIDIA's transformative technologies to accelerate the delivery of edge applications. We also continue to invest in early-stage technology companies through Booz Allen Ventures. We believe that we are stronger together, which is why we will continue developing our technologies and combine our strength with others. Lastly, we are continuing to share our big ideas, working in partnership with our customers and the private sector. For example, we are talking to multiple agencies about cloud migration and consolidation. We have big ideas for transitioning thousands of data centers to a cloud-based architecture to make data more accessible. The private sector has already done this, and we've seen that it's more efficient, cheaper and more secure. All of which aligns with administration's vision. Importantly, making data more readily available is also crucial for our war fighters because it allows us to apply advanced AI tools to increase their readiness and lethality. One way we are doing this is by collaborating with the United States Army. We are building an AI-enabled tactical software system to more quickly recognize targets and generate [coal] for fire emissions. The prototype can reduce the time to respond to threats from 15 minutes to 1 minute. The bottom line is this. We understand our customers' mission needs, and we have the technical expertise to deliver solutions that not only meet those needs but also anticipate what's next. That gives me great confidence in Booz Allen's ability to maximize the opportunities ahead and provide the advanced technologies America needs to thrive. So in this period of transformation for Booz Allen and our nation, we will accelerate by focusing on the following operating priorities for FY26. We are resetting and restructuring our Civil business. So it returns to growth rapidly after an adjustment period in the coming months. We are positioning ourselves to lead the way and capture major outcome-based opportunities. This includes reimagining how we deliver our work such as using AI to accelerate software development, increase our value and reduce cost to the government. We are directing significant resources to the areas that will best position us for growth. This includes missions in INDOPACOM and space as well as critical technologies like Agentic AI, quantum and software-defined communications. We are rapidly advancing our partnerships with established technology firms and new entrants. This entails going to market together to provide novel solutions as well as becoming their scaling partner as they capture demand across their broader markets. And finally, we are continuing to create efficiencies in our own business so we can move faster, invest more and realize greater shareholder value even in a volatile environment. To wrap things up. I hope that you will take three things away from my remarks this morning. First and foremost, Booz Allen is not standing still to see what happens next. We are moving aggressively to lead the way in a changing market. Second, we are strategically advantaged. We have been investing ahead of these changes, both in our own positions and in the critical partnerships that will be required. And third, we're on the side of change. We are committed to America's priority missions and to enabling a more nimble and efficient federal government. For all these reasons and while recognizing that there are challenges ahead, the people of Booz Allen are energized and we are optimistic. We are ready to meet this moment. And with that, Matt, over to you. Matthew Calderone Thank you, Horacio. Good morning, everyone. I also want to take a moment to express my sincere appreciation for the hard work and dedication of Booz Allen's people. We are in a period of rapid change. Technology is changing, our missions are changing, and our customers are changing. Booz Allen's people continue to lean into this change. They are rising to the challenge of transforming Booz Allen and delivering the technology and mission outcomes that this country needs. I am confident that Booz Allen will continue to deliver significant value to our customers, our nation and our shareholders. We said on our most recent earnings call that we anticipated a period of short-term disruption and a slow down in the procurement environment, particularly in our Civil business, and that this would be closely followed by meaningful new growth opportunities. In his remarks, Horacio described both the disruption and the ample opportunity we are experiencing. You will see the impact of these two dynamics, which are beginning to overlap and are not playing out evenly across our markets in both our results for the fourth quarter of fiscal year 2025 and our guidance for fiscal year 2026. Before we dive into the quarter, I'd like to cover the highlights of our overall performance for fiscal year 2025. Please turn to page 5. For the full fiscal year, we delivered over 12% revenue growth, nearly all of it organic. We ran the business efficiently, enabling us to deliver another year of double-digit profit growth. Our adjusted EBITDA increased 12% to $1.315 billion. This yielded adjusted EBITDA margin of 11%. Adjusted diluted earnings per share grew over 15%, driven by increased profitability and a lower share count. We generated robust free cash flow of $911 million. We deployed a total of $1.2 billion of capital to generate shareholder value, including repurchasing about 4.3% of our shares outstanding since the beginning of the fiscal year. We did this while maintaining a net debt to adjusted EBITDA ratio of 2.4 times. And finally, as Horacio noted, with the performance, we exceeded the ambitious multiyear investment thesis targets we put out at our 2021 Investor Day. This was done almost entirely through organic performance and leaves us ample balance sheet capacity to generate incremental shareholder returns in the future. In summary, we delivered yet another excellent fiscal year. I will now turn to our fourth quarter performance. In the fourth quarter, we delivered solid results. For the quarter, top line revenue grew 7% year-over-year to $3 billion. Almost all of this was organic. Revenue excluding billable expenses was up 6% year-over-year. For the fourth quarter, growth was driven by strong performance in our Defense and Intel businesses, where revenue was up 14% and 5%, respectively, versus the prior year. Our Defense business continues to deliver cutting-edge technical and mission outcomes that are critical to the war fighter and to our nation's efforts to deter our adversaries. Our Intel business continues to gain momentum as we are solving some of the nation's most challenging, technical and intelligence problems. We anticipate that both our Defense and Intel businesses will continue its strong organic growth in fiscal year 2026. For the past few quarters, we have described a slowdown in the civil procurement and spending environment. Over the last few months, these trends accelerated. Since the beginning of April, we have seen a reduction in run rate on five of our large civil technology projects that we believe will collectively create about a 3% headwind to firm-wide revenue for fiscal year 2026. As Horacio noted, these forces have limited our ability to redeploy staff in the near term, keeping talent rolling off one of our civil contracts that ended last fiscal year, the previously disclosed recompete that we lost at the VA. The impact of this loss now represents an additional approximately 3% headwind to our consolidated top line for FY26. As a result of these factors, year-over-year revenue in Civil was flat in the fourth quarter, and we now anticipate that our Civil business will see a revenue decline in the low double digits in FY26. However, we do anticipate our Civil business will rebound as a number of big transformation and efficiency initiatives for our Civil customers are already beginning to take shape. Pivoting now to demand. Net bookings for the quarter totaled $2.1 billion, resulting in a quarterly book-to-bill of 0.71 times, in line with historical averages. This brought our trailing 12-month book-to-bill to 1.39 times above our trailing five-year average of 1.28 times. We ended the year with a record year-end backlog of $37 billion, up 15% year-over-year. Our qualified pipeline for fiscal year 2026 is $53.4 billion. This is below our record qualified pipeline for fiscal year 2025, but importantly, is higher than our pipeline for fiscal year 2024. Given market dynamics, in the short term, we anticipate that there will be more variability in converting bookings to revenue than we have seen in previous years. That said, we believe we have the backlog, the pipeline and the big ideas for customer transformation needed to support our medium and long-term growth aspirations. On the talent front, Booz Allen closed the fiscal year with nearly 36,000 employees. Our customer-facing staff grew 4.2% year-over-year. Due to the contract impacts we've described, we anticipate that we will see an approximately 7% reduction in Booz Allen staff in the first quarter. This is very heavily concentrated in our Civil business. We are moving aggressively to right size our talent base, both to match immediate contract level demand and to reshape our workforce for the future. This decision was painful. But by taking this action, we have ensured we have both the capacity to invest in growth and the right talent to deliver against future mission needs. Turning now to profitability, adjusted EBITDA grew to $316 million, up 10.5% over the prior year quarter. This translated to an adjusted EBITDA margin of 10.6%, up 30 basis points over the prior year's quarter. Working down the P&L, our net income was $193 million, 51% higher year-over-year. And adjusted net income was $203 million, up 17% from this time last fiscal year. Diluted earnings per share was $1.52 per share, a 55% increase from the prior year period. Adjusted diluted earnings per share was $1.61 per year, up 21% year-over-year. The increase in fourth quarter ADEPS was driven by our overall profitability, a reduction in share count and a gain from the close of the sale of SnapAttack. This was slightly offset by higher net interest expense. Transitioning to the balance sheet. We ended the fiscal year with $185 million of cash on hand. Net debt of $3.1 million and a net leverage ratio of 2.4 times adjusted EBITDA for the trailing 12 months. During Q4, we executed a $650 million bond issuance. This transaction was well received by the credit markets and provides us with additional liquidity and the capacity to opportunistically deploy capital. Free cash flow for the quarter was $194 million, the result of $218 million of cash from operations plus $24 million of CapEx. Moving now to capital deployment. During the quarter, we deployed a total of $403 million to generate value for shareholders. This included $310 million in share repurchases at an average price of $118.96 per share. We also made $23 million in strategic investments, including our recently announced investment in Shield AI. And finally, we paid $70 million in quarterly dividends. Today, we are pleased to announce that our Board of Directors has approved a quarterly dividend of $0.55 per share, which will be payable on June 27 to stockholders of record as of June 11. We continue to have a very strong balance sheet. This gives us flexibility in how we operate our business and the ability to deploy capital in response to the evolving environment in ways that generate additional value for shareholders. Now please turn to page 9 where we provide our outlook for fiscal year 2026. As Horacio acknowledged, today's environment is extremely dynamic. We have less visibility into the forces that will shape business than we typically have at this point in our fiscal year. Our fiscal year '26 outlook is informed by our current assessment of the many factors that will drive performance. This includes anticipated growth in our Defense and Intel businesses and a near-term reset of our Civil portfolio. Our fiscal year '26 guidance is as follows. We expect to deliver revenue between $12 billion and $12.5 billion. We expect to generate adjusted EBITDA dollars in the range of $1.315 billion to $1.37 billion. This implies a full year adjusted EBITDA margin of about 11% on par with fiscal year 2025. We expect ADEPS to be in the range of $6.20 per share to $6.55 per share. This assumes an adjusted effective tax rate between 23% and 25% as well as a marginally higher interest expense. It does not assume any impact from our venture investments. Lastly, we expect free cash flow to be between $700 million and $800 million. As we forecast our growth cadence for the full year, we anticipate that revenue and profit growth will be comparatively lower in the first half, particularly in our second quarter given the strong prior year comps and the impact of the onetime actions we have described today. We then anticipate a meaningful reacceleration in the second half. This is based on the strength of our backlog, the size of significant recent wins in our opportunity pipeline and the expectation of a meaningful uptick in hiring. In closing, we could not be prouder of how we finished fiscal year 2025, the final year of our investment thesis. Our results show our relentless focus on the mission, on operational excellence and on generating shareholder value. Booz Allen continues to transform. While cognizant of the uncertainty in our environment, excited about our strategic direction, our alignment to the government's mission priorities and our central position in the evolving technology ecosystem. We remain very optimistic about the future. With that, Operator, let's open the line for questions. Operator (Operator Instructions) Gavin Parsons, UBS. Gavin Parsons In this environment of unpredictable, I guess, descoping and cancellations, how do you get comfortable that kind of you've got your arms around the impact and there's not potentially more to come throughout the year? Horacio Rozanski Thanks for the question. Let me try and frame the entirety of what we see and try and answer your question from that perspective. I'll start by saying, very proud of the last year, very proud of the last three years and our ability to demonstrate significant shareholder value creation through what was already a changing environment. As we look at the world now, we are seeing two sets of overlapping dynamics. One set of dynamics is, as we said in the prepared remarks, our Civil business is going through this what we hope, we believe, will be a onetime reset where most of the reviews have been concluded very positively regarding our technology and our work. But we're facing this deceleration at a time where procurements are still somewhat frozen. The other side of the dynamic is continued strength in our Defense business and growing strength in our Intelligence business. So that's sort of one set of dynamics. And the other dynamic is, while we are seeing -- we have seen, especially in Civil, some of these resets which, by the way, was mostly, as we pointed out, the slowdown in spending against a few technology contracts, there have been relatively few and far between, call it, 1% of our portfolio that has been outright canceled and that really tracks to what the 1% of our portfolio that we gained was actually consulting type programs, which is really legacy work that we were doing. So -- and then the other side of it is we are -- first of all, in Defense and Intel, we're still winning work against a strong procurement environment. And even in Civil, we're beginning to see opportunities take shape that we will take advantage of. So our approach has been to take a significant restructuring in our Civil business now so that we are positioned to grow and so that we can invest across the portfolio where again, the one P&L really helps us. And because the environment in Defense and Intel is so dynamic, and there is -- the procurement activity is still strong, we're in a position to absorb things there as well and continue strong growth vector as we see it right now. And then ultimately, from a strategy standpoint, as we pointed out, we believe we are extraordinarily well aligned and well positioned against both the key missions, the key technologies and the major opportunities we see in the horizon. Operator Colin Canfield, Cantor Fitzgerald. Colin Canfield Okay. Maybe if we could talk about some of the comments you made around kind of reset and what your expectation is on the multiyear growth environment. Maybe just kind of digging into how you think about kind of Defense and Civil and kind of where we stand on the reality of FY25 sub versus FY26 request? Kind of what you're hearing from congressional folks? And then also maybe, Matt, if you could talk about kind of how you're think about repurchases and what the bogey is for the year? Horacio Rozanski So why don't I start with sort of the macro level and then maybe Kristine can talk a little bit about each one of our markets and then Matt will cover the back -- your second question, I guess. I think the way we see the environment very much matches the way we're seeing the budgetary environment, right? I mean the bill that is making its way to the Senate, as we speak, has a significant plus up for defense. And at the same time, the stated priority about reducing spending -- discretionary spending on some of the sole agencies and actions that have already taken place is what we are talking about. So our Civil business, I think, has already gone through the majority of its reviews. And in Defense and in Intel, this is what we're seeing. Doubling down on priorities around into Pacific, where, as you know, Booz Allen has a very strong footprint and a lot of growth opportunity in space, both in programs that are already underway where we have strong place and opportunities around Golden Dome, where we believe we have unique technology and capability to bring to bear. And then the defense of the Homeland, which is really around -- especially the southern border and which is the integration of not just defense, but defense, intelligence analysis and certainly the civil agencies that are primarily responsible. So -- and then what they're trying to do there is primarily inject technology, a lot of commercial technology, Agentic AI, the discussion has really moved away from whether AI was important to national security to how fast can we implement AI in national security and Booz Allen again, has a tremendous track record there. Kristine Anderson I would say, for our Civil business, in particular, while there have been some slowdowns in contracts that really reflects the administration's desire to tackle really big challenges, really advancing the tech even faster and we've been very excited about the opportunity to present our ideas. And so we have developed and are in discussions with the government on tens of big ideas, and we're getting really positive responses. It's actually pretty exciting to be asked to extend some successful event -- solutions and one mission to others. And we were ready, right? We've already been piloting both AI-assisted coding and Agentic AI, a large software program that's almost insatiable in its requirements, and we were able to lean into the call for efficiencies and move past the pilot to full production across the program. So it's a win-win-win for us, the government and the Americans that are served by that program. And then also in Defense and Intel, the business is very strong, and we are very aligned with the administration's priorities to counter China and protect the Homeland. We are anticipating that our counterterrorism expertise will position us really well against the sophisticated threat. And we have also presented very big bold ideas there as well and are in discussions around them. Matthew Calderone Gavin, I'll take your balance sheet capital deployment question. Obviously, the balance sheet continues to be a strength of ours. We deployed $1.2 billion last year and basically maintained leverage. The strength of our organic growth over the past couple of years allowed us to deploy a lot of capital to generate value for shareholders. And I think we've demonstrated our ability both to deploy capital consistently across the board, but also to be flexible inside the various modalities of capital deployment to deploy where we think we can generate the most value. We've shown that we will buy back our shares, we believe that it's good value for shareholders. We're still committed to M&A, more biased to tuck-in than ever, given how rapidly the technology market is changing and our need to continue to invest to acquire technologies that are leading edge and will advance and accelerate our strategic objectives. I do think you'll see us lean in a little bit more on the Venture side as well. We've gotten tremendous value. We're beginning to see it on the financial side, but really on the strategic side from our venture investments. It's part of our long-term commitment to be a commercial technology accelerator. I think that's one of the macro trends that Horacio and Kristine referenced, where we've really been at the forefront, and I think you'll see us accelerate that as well. But committed to deploying capital, share repurchases obviously is an important lever there. Operator Sheila Kahyaoglu, Jefferies. Sheila Kahyaoglu So maybe if we could start -- two questions for you guys. And you could hear me okay? Matthew Calderone Can you speak a little louder? It's a little quiet in the room. Sheila Kahyaoglu Oh, sorry about that. So maybe if we could talk about the low double-digit decline for Civil in fiscal '26, how do we think about the catalyst for that stability in the business, we're talking about second half improving? And [TTAM] is maybe a few points, so that -- how do we think about other program specifics that are driving it? And when do you think about the improvement in civil again? Kristine Anderson Yeah. The vast majority, as Horacio mentioned, of our Civil programs have already been reviewed. And I would remark that we weren't targeted in those reviews. What we saw was agencies and departments looking at their full portfolio with targets in mind and whether it was on or off the GSA list, this is really agency-driven, and our tech and our talent fared really well in those reviews. But there has been a short-term slowdown in the actual burn rates as they start to position for some of the transformation objectives that they have in bringing new tech in. And so our view overall is that to win in that environment, you need three things to be true. One, the tech needs to be excellent. And we have received really high marks for our technical work and the quality of our people. Second, you have to have a vision around how that will evolve in a direction that makes sense to commercial tech leaders that come from outside government. And so, for example, our cloud, our AI-assisted coating and our Agentic-AI have been recognized, and that's already leading to new opportunities. And third, you have to be willing to convert your contracts to outcome space, particularly in Civil and we've been a long-term champion of that shift because we love that agility and flexibility that you get in the tech staff and staffing. So the pivot part really comes from being able to extend those capabilities to accelerate the mission areas. Horacio Rozanski I would -- the only thing I would add to that, and I think two thoughts. First of all, I think we're -- our thought process is we wanted to do a onetime reset and restructuring of our Civil business so it can regain a growth trajectory as quickly as possible because of the -- a lot of it is happening in quarter, it may take through next quarter to work itself through the financials, but we're beginning, as Kristine said, to see the opportunities. And then the other thing is, as with any new administration, the procurement environment slowed down significantly, almost frozen a number of these agencies because the below cabinet level positions have not been filled and people were waiting to see what the specific agendas were. Now that those are beginning to get fleshed out, we're getting strong indications that our -- because our tech works and we're so positioned against the things that they're trying to do that we're going to see growth in the second half. Sheila Kahyaoglu Got it. And then maybe if we could just talk about your typical revenue algorithm is usually based on headcount and some salary composition. So how do we think about the down 7% in Q1 for headcount? I think that was total company. How do we bridge that to the revenue of flat to up low single digits? Matthew Calderone I'll start. And you're correct, 7% was total company, but very heavily concentrated in our Civil business. I think look, our business is changing. And there are three dynamics where -- or three areas where the traditional algorithm may look a little different than what we've experienced in the past. The first we referenced in the prepared remarks, we're actually winning a lot of work, right? Our book-to-bill last quarter was 0.7 times, very much in line with historical averages. And just to give you a dollar figure, that's about a little over $2 billion in what we won. And we're actually -- we've won a lot of work this quarter. Particularly in our Defense and Intel space, we anticipate that our book-to-bill this quarter will be in line, if not better than historic norms. But the first thing we referenced is the conversion of backlog and bookings to near-term revenue, I think, will be a little bit more variable than we've seen in the past just because there's less consistency in sort of in-year spending actions. That's one. The second is, we moved to outcome-based contracting. We talked about that for years. We've been very much an advocate for it. It's good for us. Good for the government. Over time, you'd expect that to be accretive to margins. And then the third is what you referenced, which is the traditional headcount math. I think you've talked about for the majority of our business that's not fixed price. Typically, the algorithm is headcount growth plus 3%. Given that the preponderance of the headcount reductions we are seeing is in our Civil business, and that is less -- it's more fixed price, it's less dependent on billing by the hour. I'm not sure you're going to see an exact -- you're just going to hold exactly to historic equations. But I think it's going to break that math a little bit, but it's still a very good predictor in our Defense and Intel business. Headcount tends to be the best predictor in the near term of what revenue looks like. But when you add it all up, particularly given the year-over-year comps from last year where we had a strong first half, we do expect our first half this year be a little bit more under pressure, but to see acceleration in the back half, particularly as hiring picks up and we get through this period of resetting and rebalancing. Kristine Anderson Yeah. I would add that we're always hiring, right? We -- every month, we're adding hundreds of employees. We do expect to have significant headcount in the second year. And we have really matured our AI-enabled advanced tech solution that we use for recruiting and deployment of staff. And so we're looking to be even more effective at that this year. Operator Ronald Epstein, Bank of America. Ronald Epstein I'm on for Mariana today. She's traveling. Maybe just a couple of things. And you alluded to it a little bit clear. If the government is looking for more commercial terms, even in defense, how do you invest in the right things to do that? How are you set up to do that? It does seem like in the defense market the government is looking at different ways of contract and there's a bigger push for commercial terms. So -- and how do you think about it? And how does that impact your business? Horacio Rozanski Ron, yeah, I'll start. The -- I think the trend that you're pointing out is one that we've been tracking for a while, and it's actually accelerating. I think this is why we have built partnerships and made investments all the way from hyperscalers to the start-ups and everything and everyone in between and we've been doing that for a while. I think it's fair to say and you'd have to ask them, but I think I'll say it that we are the preferred player in terms of helping these commercial solutions get missionized in a way that they make sense that we have created the capacity and the ability to co-create with them. I often talk about the fact that, for example, even edge cloud solutions that have been created for the commercial markets assume a degree of connectivity that doesn't happen in space and doesn't happen underwater and doesn't happen in EW challenged environments, and we have built our own tech to put on top of their stack to solve those kinds of problems and we're recognized for that. So we actually both have been a proponent and welcoming this notion. And then as Matt pointed out, more recently because we have such good relationships with many of these firms, they're coming to us more broadly to talk about help us scale. Help us think about what are all the things we need to do that will make us bigger and better. We're making investments in some of these companies like we've done directly with Shield. And our venture portfolio of start-ups is really performing very well in all of that. So when you look at all of it, this notion of commercial tech being more aggressively utilized in defense is a net positive to Booz Allen given that we're partnering with them to create those solutions. Ronald Epstein Got it. And then maybe as a follow-on, and I think Sheila was getting at this, but maybe softer, I'll be more direct. It does seem like, at least perceptional, that you guys have a branding issue. Meaning every kind of article that we saw about dose and consulting and government contractors and so on and so forth, you see picture of Booz Allen, Booz Allen pops up all over the place. Seemingly, at least from my vantage point, that seems unfair. But that being said, why do you think that's the case? And what do you do about it? About pivoting into maybe a better spotlight in the government? Horacio Rozanski I think I would say a couple of things about this. First of all, I think when you're the market leader, you're the most interesting to write about. And so we have the distinct pleasure of being written about a lot. And as you know, we tend to be relatively humble and quiet about our own communications and we've always wanted our customers to take the credit for the win because ultimately, it's certainly their decisions to make and our tech supports them. So we found ourselves in that reality. And what we do about it is we're -- we've gotten a lot better at telling our story. I think that's resonated. We -- some of it is what you see in terms of us being in the media more and having a lot more conversations and clarifying our positioning as an advanced technology company, and I think that's working. But also, the part you don't see is the number of conversations we are having with people across administration and the relationships that we're building -- and I think as Kristine pointed out, this is true certainly in our Civil business, but it's true more broadly. I think once people start to really interact with the technology that we've built, that speaks much louder than a newspaper article ever could. And so we're, I think, emerging from that transition with our brand, ultimately it's going to be strengthened as a result of all of the scrutiny. Operator Louie DiPalma, William Blair. Louie Dipalma You have several large AI contracts, including the joint Warfighter National Mission Initiative eMAPS 2.0 and Advana and it seems these programs experienced tremendous success over the years and very wide adoption. Are you still excited about the future of these programs? I think you mentioned how your AI business has grown to over $800 million. But with a lot of the scrutiny, has there been any changes to your optimism for your AI business, particularly with the Department of Defense. Horacio Rozanski I'm happy to start with that. Louie, I think the AI is a strength of Booz Allen. I think people recognize it. And it's more and more embedded, there are certain programs that early on were sort of the leaders in terms of implementing AI capabilities. But AI is now embedded in just about everything that we do. And as I mentioned before, we're not seeing AI ask a question of, well, is this good for the mission? Will it ever get adopted? Will the Department of Defense adopt AI? I think all those bridges have been crossed. The question now is how quickly how do you bring the right technologies? How do you make commercial technology, both safe, reliable and secure enough to be able to use it against some of these missions. And again, we have a track record of doing that, that is second to none. And then as we look forward, I would point you to the fact that the move to Agentic AI is going to be really transformational for the global economy, for America and certainly for our national security missions. And we have what I believe is a leading position there. And we've done some stuff on our own research side that is really breakthrough physical AI, which is sort of the key to autonomy, the key to digital twins, the key to being able to simulate and put AI into the field a lot faster. Significant upside there for Booz Allen. And then the third area that we've been talking about for a while, and I think it's starting to get recognized, is this topic of other [Serial] AI. And the reality is all of these models and all these AI capabilities are tremendous and create a potential new attack surface and we are at the leading edge of making sure we know how to defend AI models and AI infrastructure from attack. And then that will take me to the last point, which is you've tracked our cyber business for quite some time. The -- I talked before about convergence between cyber and AI and then cyber and AI in space. And again, these are areas where we are doing some really cool leading-edge stuff, we -- you probably saw that we have now upgraded our presence in AI in space by moving Space LlAMA to the research side of the International Space Station. Again, that's a research project, but it demonstrates both that it can be done and that we know how to do it. So yeah, I am extraordinarily optimistic about the future of AI and Booz Allen's role in it. Louie Dipalma Great. And I guess drilling a little deeper with Advana, do you expect to continue to be the main delivery partner with Advana and similarly with Thunderdome, you just mentioned cybersecurity and zero trust and you're partnering with several commercial vendors there. For these big programs that you are providing your own unique code and software stack on top of existing commercial offerings, do you expect to continue to add that value for DoD? Horacio Rozanski In both of those cases and in many others, frankly, I think the reason that these programs have been so successful is that we did not start from scratch, is that we took the best commercial technology and work that we've done and technology that we built to create complete solutions that really address mission needs. And I think these programs are standing the test of both the quality of what they're providing and the impact on mission. And so we are bullish about our ability to continue to work there to incorporate newer and more commercial technology into these missions so that they can run more efficiently, more effectively, more cheaply, faster and all of the above. And that's -- we don't stand still. So we're certainly working hard. Matthew Calderone And I would just add -- Thunderdome in particular, but also a number of other large technology programs, we're working actively to convert them to outcome-based because I think that -- these programs are ripe given the nature of what we do. And as you said, the fact that we are increasingly adding on our own technology, building under the tech stack of others and playing a foundational role in generating real products and solutions around these, outcome-based contracting is the future, and we look forward to continuing to work with our customers across the board to drive that across our large technology projects. Operator Scott Mikus, Melius Research. Scott Mikus Horacio, in the wake of a budget control at 2011 and sequestration, there was obviously a lot of consolidation in the industry. It seems like if the government wants to actually drive efficiencies, they probably need to consolidate a lot of contracts. So do you expect this to drive a push or another wave of consolidation among the government services providers? Horacio Rozanski I think this is -- let me start by saying, I mean, if you really look at this industry, it's actually quite fragmented. I think if you aggregate it, what's the concentration of the top number of players in totality amount of single digit of the available market. And so when there are processes like this, there are people that take share, there are people that lose share, and there's changes to the industry. I think that the significant changes that we are seeing that I spoke to before, is you have new defense tech companies coming in very strong to create and drive solutions at speed that weren't there before. And we're looking strongly to align with that. But as I think -- as I look at Booz Allen in all of this, I'll -- I guess I'll make the three points that I made earlier. We are being aggressive. The fact is we have a strong balance sheet. But more importantly, we are not standing still to continue to position and reposition ourselves and drive shareholder value. We're strategically advantaged because a lot of the things that we did under whole are really becoming essential now to delivering the mission, and we are not -- we're on the side of change and of looking for ways to add increasing value to all the missions that we support. And so when I look at all of that, I -- this current fiscal year, as we've said, it's a challenging year, especially in our Civil business. But as I look at the medium and the long term, a few quarters out, I am very optimistic that the things that are changing in the environment, will actually allow us to be extremely successful. Scott Mikus Okay. And then thinking about the nonclient-facing headcount, I think it was down 100 people quarter-over-quarter. And you called out the 7% headcount reduction in the first quarter that's largely in your Civil business, your margin guide is flat year-over-year. Is there upside to the margin or EBITDA guidance if you reduce that nonclient-facing headcount more? Do you get to keep those savings? Or do they end up being passed back to the customer? Matthew Calderone Yeah. We've been, I think, aggressively managing the totality of our cost structure. I'll remind you that historically, our solar business, because it is more fixed price in nature, has been more profitable than the average. So we're really pleased that we're able to manage our cost base in a way that we'll maintain margins even while we're resetting our Civil business, but also honestly, the capacity to invest and grow because we're continuing to invest ahead of the business both in building new technologies and bringing on exciting new technical talent and in a lot of the partnerships with commercial technology and defense technology companies that Horacio described. So we've been getting a lot leaner over the past few years and getting scale out of the business. We anticipate continuing to do so. But I would not anticipate near-term upside in the margins. We talked about long term, as we shift to outcome-based, there is potential there, but I wouldn't expect that in the near term. Operator Thank you. And this concludes our Q&A session. I will turn it back to Horacio Rozanski for final remarks. Horacio Rozanski Thank you, Carmen, and thank you all for your questions and for being here with us this morning. I hope that Matt and Kristine and I conveyed both a sense of our near-term priorities and also our optimism about what's ahead for our people, for our customers and for our investors. We are on the positive side of change, we're strategically positioned for a era of tech-driven growth. And we're doubling down on what Booz Allen does best, which is using advanced technology to keep America strong and safe. And I appreciate all of you being part of how we do that and thank you for joining us today. Operator And thank you all for participating, and you may now disconnect.
Yahoo
15-05-2025
- Business
- Yahoo
Q1 2025 TMC the metals company Inc Earnings Call
Craig Shesky; Chief Financial Officer; TMC the metals company Inc Gerard Barron; Chairman of the Board, Chief Executive Officer; TMC the metals company Inc Matthew O'Keefe; Analyst; Cantor Fitzgerald & Co Jacob Sekelsky; Analyst; Alliance Global Partners Dmitry Silverstine; Analyst; Water Tower Research LLC Operator Good day, and thank you for standing by. Welcome to the Metals Company first quarter 2025 corporate update conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Craig Shesky, Chief Financial Officer. Please go ahead, sir. Craig Shesky Thank you, Michelle. Please note that during this call, certain statements made by the company will be forward-looking and based on management's beliefs and assumptions from information available at this time. These statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. Additionally, please note that the company's actual results may differ materially from those anticipated, and except as required by law, we undertake no obligation to update any forward-looking statement. Our remarks today may also include non-GAAP financial measures, including with respect to free cash flows. And additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures can be found in our slide deck being used with this call. You're welcome to follow along with our slide deck or if joining by phone. You can access it at any time at And I'll now turn the conference call over to our Chairman and CEO, Gerard Barron. Gerard Barron Thank you, Craig. Well, usually, our first quarter conference calls are a bit quieter as they occur roughly six weeks after our year-end report but we have just experienced a six week period in which our company and this industry have taken some historic leaps forward. While the Trump executive order on Seabed Minerals had been rumored for some time in the media, the filing of our application months ahead of expectations was not. And I'd like to personally thank our team for the tremendous efforts to get these three applications over the line in an accelerated path. Given all of the derisking milestones achieved since our company's inception, we believe that the one thing previously holding back our stock price was the lack of a clear regulatory pathway. And we believe we now have it. And frankly, I don't think the market has accurately priced that in. Despite a nice run-up this year, we believe that the screen remains tightly coiled for the stock. Still, we were cognizant that another key overhang of the stock was fundraising, and we've seen short interest tick upward. And even after some incredible achievements, we did not want to drift into summer without shoring up the cash balance. So this week, we did just that through a $37 million registered direct offering from Michael Hess and Brian Paes-Braga, and an existing strategic investor in TMC. These are all parties that want to be with us for the long haul and a ready, willing and able to roll up their sleeves to help us continue to create shareholder value through significant experience and networks in the resource space, both offshore and onshore. Michael Hess from the Hess corporate family has 15 years of exploration and production experience as both an investor and operator along with deep relationships across the United States. And Brian Paes-Braga is a long-time investor in TMC, former Board member when the company was known as DeepGreen and continues to be a valuable supporter of the company and a good friend. And I'd like to take this opportunity to officially welcome our newest member of the executive team, Rutger Bosland. Rutger joins us from our partner, Allseas, and was the pioneering engineer and technical lead on the development of our nodule collection system, leading up to the successful test in 2022 and in which we lifted over 3,000 tons of nodules to the surface. And as our Chief Innovation and Offshore Technology Officer, Rutger is already playing a key role in optimizing the performance of our commercial nodule collection system. The teams at TMC and Allseas are excited about the continuity maintained on this project as we work together to drive toward commercial readiness. So here is our agenda for today. And while the milestones achieved in the last two months are historic, we are just getting warmed up. And I'm very excited about some key catalysts in the near term. Later this quarter, we expect our applications for exploration licenses and a commercial recovery permit to be deemed substantially compliant and complete respectively, by NOAA, which kicks off the next stage of technical environmental review. Also this quarter, we expect further detail from the Commerce Department and NOAA on tangible actions to expedite these review processes and look forward to providing a more definitive step-by-step permitting time line to the market soon after. We will continue to explore alternative financing sources with US government departments and agencies as directed in the executive order as well as strategic partners to prepare for commercial production. But let me be very clear. The equity round just announced is more than sufficient to get us past the expected review process on a commercial recovery permit. Finally, we are pleased to announce that our PFS will be completed next quarter for the commercial recovery area, over which we applied, allowing us to reflect new assumptions made possible by our US permitting strategy. Further, with this path to commercial production now coming into focus, we intend to provide more clarity on the potential valuation across our total estimated resource beyond NORI-D. So as most of you know, on April 28, TMC USA submitted the world's first application to the US government for a commercial recovery permit for deep sea minerals in international waters, alongside two exploration license applications under the Deep Seabed Hard Mineral Resources Act. This decision followed many months of due diligence and dialogue with the US agencies and policymakers. We engaged multiple law firms to review DSHMRA and know it's long-standing implement regulations an established framework that is legally sound, robust and enforceable. In the lead up to our application, we consulted extensively with NOAA as to the regulatory requirements that we will be asked of us and since then have had productive engagements with them as well as the White House and members of Congress, all of whom recognize the strategic importance of this industry to America's energy security and industrial base. And we believe this US-based pathway offers the greatest probability of receiving a commercial permit in a timely, transparent and legally robust manner, giving us clear line of sight to responsible commercial operations. The application area for commercial production covers over 25,000 square kilometers in the Clarion-Clipperton zone. And this is ground we've got to know very well, having conducted years of environmental research and offshore resource evaluation and where we've already defined measured and indicated resources. In parallel, we've also submitted two exploration license applications covering nearly 200,000 square kilometers. And based on our extensive data, we estimate these areas contain over 1.6 billion tons of nodules with an additional 500 million tons of exploration upside, representing approximately 15.5 million tonnes of nickel, 12.8 million tonnes of copper, 2 million tonnes of cobalt and 345 million tons of manganese. And we believe these license areas offer a shovel-ready pathway to help deliver critical mineral independence for the United States. And as noted in the recent executive order deliver over 100,000 jobs and more than $300 billion in annual GDP. So America's role as a pioneer in deep-sea mining in the high seas is often overlooked. But President Trump's recent executive order reminded the world of that legacy and robust regulatory framework already in place to support this industry. You'll notice the President Signature there in the middle of the map. And the audit directs the Secretary of Commerce to expedite permitting under the US. Deep Seabed Hard Mineral Resources Act and tasks multiple federal agencies, including defense and energy with assessing offtake opportunities and domestic processing capabilities. It further calls on key US development finance agencies, to identify tools to support the industry. And in light of our long-standing partnerships in the Pacific, we welcome the director for a joint interagency assessment alongside US allies. On the feasibility of an international seabed benefit-sharing mechanism and rest assured that we are having continuous and productive dialogues with the government of Nauru and Tonga on these points. And the signal is clear. The United States is ready to again lead this industry, backed by a transparent and enforceable legal framework. For TMC, this brings the regulatory clarity that we've been seeking for our application and supports the broader investment case for developing a strategic domestic supply chain based on deep seabed minerals. It's refreshing to work with the regulator that is not only transparent, but also supportive, flexible and even enthusiastic about the strategic importance of this industry. NOAA has publicly committed to expediting the review of applications and is dedicating the resources needed to avoid undue delays. They've already taken steps to streamline interagency coordination something we're already seeing firsthand in our early consultations. The Department of Commerce has made clear that companies like ours can apply today under existing US law, while Secretary of State Marco Rubio put it plainly, the United States, not China, will lead the world in responsibly unlocking seabed mineral resources and securing critical mineral supply chains with our partners and allies. And we're encouraged by the level of professionalism and urgency from the US agency that we've so far experienced. Some in the media are also applauding the new US-focused pathway. We have always admired the economist for quality, independent journalism and we're pleased to see the paper once again return to the topic of deep sea mining with two pieces. In its May 1 leader, the paper took stock of the executive order for government agencies to ready themselves to start issuing commercial recovery permits for deep sea nodules and acknowledged TMC's front-runner position at the head of Mr. Trump's Deep see Q. The paper also offered strong words to the ongoing regulatory delays at the International Seabed Authority warning that if the body wish to retain any influence over the development of this industry that it would do well to pay less heat to activist speculation and focus on fulfilling its legal mandate to establish regulations. And while some media remain focused on speculative studies that ignore decades of real-world data from offshore trials, it's encouraging to see the economist continue to acknowledge the need for trade-offs and that sourcing metals from deep sea nodules is far less harmful than the destruction caused by expanding mining in biodiverse rain forest. With deep sea mining firmly in the spotlight, I was honored to be invited to testify before the House Natural Resources Subcommittee on how nodules can help revitalize US industry and manufacturing. In his opening remarks, Chair Paul Gossard urged his colleagues to consider the positive economic implications of seabed mining and how the US with its legacy of technological and environmental leadership, can ensure the frontier isn't ceded to China. Echoing these sentiments, my own testimony, which is available on the committee's website and YouTube, spoke to the opportunity for the US to reclaim leadership in an industry it helped pioneer while strengthening critical mineral independence and jump starting a new era of American industrial strength. Importantly, the hearing gave space for one of the world's leading scientists on sediment [plumes] to directly counter activist speculation and reinforce what the data actually chose. Dr. Thomas Peacock, one of the world's leading experts on Deep sea sediment plume dynamics at MIT warned that, unfortunately, the latest scientific findings are not being used to guide decision-making on deep sea mining. Instead, outdated and debunked claims from activists, such as the fallacies that operations could impact carbon sequestration or spread settlement looms for thousands of miles are being amplified in the media, despite having no basis in current scientific data. But hopefully, that stale speculative narrative will continue to wear itself out in the face of increasing infield observed data. especially once we're in production. I'd now like to turn it back over to Craig to discuss the resource a little bit further. Craig Shesky Thanks, Gerard. So there's a remarkable correlation between a nodule's mineral composition and the composition of EV battery cathodes and wiring. So while lithium iron phosphate or LFP battery attractions, chemistry said gain traction, over 90% of the LFP supply chain is in China. And in the West, nickel-rich chemistries make up over 65% of EV battery cathodes sold today. And most of that are expected to be sold in the future. It was great to see yesterday, GM and LG Chemical announce their excitement over new lithium manganese rich or LMR, cathode technology. LMR offers 33% greater energy density than LFP will be comparable on cost. With sales made up of 65% manganese and 35% nickel, plus typical EVs requiring 100 to 200 pounds of copper, there is going to be a very robust demand growth market for the metals contained in nodules. Now as automakers come close to delivering full autonomy, studies suggest that this will require as much battery power for computing as it would require for the powertrain, meaning energy dense nickel batteries should continue to be in high demand. Still, many opposition groups like to say, we don't need these metals. So don't bother. Well, nobody asked you, but the US government and commodity experts globally would disagree. As a former metal analyst, myself, I am surprised at how many global NGO spokespeople also moonlight as commodity experts. But even if all of the current and future EV demand magically vanished, the demand for our products will be just fine. These four metals are all being critical by the US Department of Energy or the US Geological Survey due to their necessity in myriad applications. For nickel, that includes stainless steel, generators, turbines and power grid infrastructure for cobalt, it's aircraft engines, magnets, paints and super alloys for manganese, it includes carbon steel, alloys and build materials and for copper, it's basically everything wiring, piping, electronics, traditional cars, HVAC, long-haul transmission cables and also that includes a tremendous future power needs for the data center supporting artificial intelligence and other current and future technologies. So now that we have a better sense of the uses, we can also give you a sense of scale. What would it mean for the US to gain access to, let's say, 1 billion tons? Well, the answer is that would be transformational. And if measured by current US consumption, 1 billion tons of nodules would provide 456 years of manganese, 165 years of cobalt, 81 years of nickel and four years of copper. But it's worth remembering that it was US companies and the US government, including Noah, which pioneered the evaluation and development of this resource back in the 1970s. The US government developed a regulatory framework and conducted strategic environmental impact assessments. US companies, including Transocean, US Steel, Lockheed Martin developed and piloted nodule collection technology. So this US leadership did slow, however, when the US did not ratify the UN convention of the law of the sea or UNCLOS. The US did have the foresight, however, to enact DSHMRA so that the US citizens and entities could access seabed resources in international waters. As we've said, going back to last quarter, US entities can apply to NOAA for exploration and commercial recovery licenses. And because the US has never submitted to the jurisdiction of the ISA, this US law obviously remain a full effect. There are a few handful of nations that have bilateral agreements with the US regarding each other's activities in international waters. But beyond that, US law continues to offer freedom of activity in the high seas. Now over the last few weeks, we've gotten quite a few questions from investors and stakeholders on the legal side of this question. Many people ask about overlap between the US seabed Mining Code and the ISA, but that's not exactly the right way to think about it. The US isn't claiming any ground or territory in international waters. This is not a question of overlap. Through DSHMRA and the NOAA regulation, the US is merely regulating the free activities of its citizens in international waters in accordance with any law that would apply to with citizens under the freedom of the high seas, just as it would apply to somebody on a fishing boat. As our private subsidiary, TMC USA doesn't bear obligations under our own clauses. TMC's USA's rights are solely defined by the laws of the United States. And on cost does not apply to the US because the US never ratified it nor did it ratify the 1994 ISA implementation agreement. Getting a bit technical, but according to Article 34, the Vienna convention on the law of treaties, a treaty does not create either obligations or rights for a third state without its consent. And under Article 14 of that same document, a treaty is binding upon the state only when it is expressed its consent to be bound typically through ratification. So while the US does voluntarily abide by certain aspects of UNCLOS, the US has never contradicted its original understanding of deep sea mining as a freedom of the high seas and has steadfastly opposed Part 11's framework for the ISA led exploitation of deep seabed minerals. Turning back to our project. Focusing on the onshore side of our operations. In April of this year, TMC and PAMCO welcomed over 50 representatives including equity research analysts, commodity traders, steel makers and battery consumers and some TMC employees, including myself, to PAMCO's Hachinohe plant in Japan for a site visit. During the tour attend (technical difficulty) engineers about TMC's commercial production flow sheet and the final specification products and they were given the opportunity to view samples of the products up close. In February of 2025, as we previously announced, PAMCO successfully demonstrated the smelting of calcine at high-grade, nickel copper cobalt alloy and manganese silicate products. By using PAMCO's existing facility, TMC can eliminate the need for upfront onshore capital expenditures as part of its capital-light approach. As a reminder, our applications in NOAA are backed by one of the largest environmental data set ever compiled based on work alongside dozens of respected research institutions and well over $200 million in cumulative environmental spending. Bottom line, we believe that we, along with the research pioneers from NOAA and others before that (inaudible) answered the questions posed for our environmental impact statement, which has now been launched as part of the NOAA process. And we strongly believe that the time has come to move forward, begin production and allowed the data collection to increase exponentially and share even more evidence on the manageable impacts of Deep sea nodule collection. So now let's turn to project economics and the long anticipated pre-feasibility study or PFS. As Gerard noted upfront, we expect to release next quarter, our PFS for our first commercial production area. But on top of that, some additional detail and higher level valuation parameters on the resource beyond NORI-D which to date has been nearly all of the people have focused on for underwriting our stock, often ignoring the other 78% of the estimated resource. We often get a question, why not just release all the information now? Well, for one, we've been busy getting these applications complete but also as a NASDAQ listed and SEC regulated company, there are very specific rules on the assumptions and sign-offs required to make resource and financial projections to ensure it's all based on reality and can reasonably be relied upon by investors. Trust us, we are chopping up a bit to be able to share this thing with you. However, our period to the US earlier this year has led to some changes in long-term assumptions that do require careful consideration, accurate modeling and sign off through a handful of external qualified persons or QPs. Now that we have submitted our applications on an accelerated basis based on an all hands on deck push, our team's attention can turn back to this important work. As we've discussed for many years, our capital-light approach is made possible by partners like Allseas and PAMCO providing existing assets. On the offshore side, the US path requires some additional steps, such as the fighting of vessels. In onshore, we are looking forward to processing in the US one day. But we in the US government understand the reality is that processing will occur outside the United States for some period of time. And now on the royalty front, that's one area where the US path very significantly. There will be economic benefits for some allied countries as laid out in the executive order but it's going to be a far cry from some of the more onerous proposals being discussed at the ISA over recent years. Again, we're looking forward to sharing more in the third quarter on this important work stream to provide not only PFS level clarity on our first commercial recovery area, but also additional information on the potential read-through for the entire estimated resource. So now on to the financial results. TMC reported a net loss of approximately $20.6 million or $0.06 per share in the first quarter of 2025 compared to a net loss of $25.2 million or $0.08 per share for the same period in 2024. Exploration and evaluation expenses for the three months ended March 31, 2025, were $9.5 million compared to $18.1 million in 2024 due to lower mining, technological and process development costs as the comparative quarter included costs to transport nodules to PAMCO's facility, resource definition costs incurred during campaign eight, which was completed in the first quarter of 2024 and lower costs incurred on environmental and prefeasibility studies, partially offset by an increase in share-based comp. G&A expenses in Q1 2025 were $8.5 million compared to $6.6 million in the comparative quarter due to an increase in share-based compensation, partially offset by a decrease in legal costs in the first quarter of 2025. Q1 2025 results also include a loss of $0.5 million for the change in fair value of warrant's liability and charges of $1.1 million for foreign exchange losses and $1 million of fees and interest on our credit facilities and borrowings. Net cash used in operating activities in Q1 2025 amounted to $9.3 million compared to $11.8 million in 2024. The reduction in Q1 2025 is mainly due to higher cash outflows relating to the campaign eight last year, partially offset by higher corporate costs this year. Free cash flow for Q1 was negative $9.4 million compared to negative $12.1 million in 2024. Free cash flow is a non-GAAP measure, and I would point you to the non-GAAP reconciliation table included in the appendix of this slide deck. Now taking a step back to liquidity and capital raising tools. TMC liquidity, which is cash flows borrowing capacity, stood at about $44 million as of March 31, 2025, or $81 million pro forma following this month's registered direct offering of $37 million of gross proceeds. In March of 2025, we increased the principal amount of our unsecured [ARIS] bearing credit facility by $6 million from $38 million to $44 million. The credit facility with the affiliate of Allseas Group SA of $25 million was terminated by mutual agreement as we previously reported, as maturity was approaching and there were no amounts outstanding. However, the maturity of the $7.5 million Allseas working capital loan was extended to September of 2025 in Q1 of 2025, the company repaid $1.8 million of previously drawn amount on the (inaudible) facility and did not draw any further amount. The company also raised in the quarter, $5.7 million under the ATM facility, issuing approximately 3 million shares at an average share price in Q1 of $1.93. And one matter on corporate housekeeping. The $37 million registered direct offering and combined with the $55 million in potential future proceeds from the associated warrants at $4.50 per share, that would use up the majority of the existing S3 shelf capacity. Shelf capacity calculations do assume that future exercise of any warrants must be included at the time of issue. So this financing came from the company well beyond the key milestone of permitting for commercial production. But again, as a matter of good corporate housekeeping, TMC expects to put in place on their shelf to allow for future issuance of various securities as discussions with additional strategic investors continue and as we prepare ourselves for commericial production, even strategics do like registered transactions, whether that's debt or equity securities. So it's better to have the toolkit full before we need to use it. So now I might turn it over to the operator to open it up for any Q&A. Operator (Operator Instructions) Matthew O'Keefe, Cantor Fitzgerald. Matthew O'Keefe Thanks, operator. Gentlemen, what a busy quarter it's been and some great progress. So again, congratulations on that and I want to thank you for the invitation down to see the Bancorp facility. That was a real eye opener and the strength of partnerships that you've established is pretty impressive and very confidence building. But I did have a question around the application to NOAA. Particularly, it seems as though the ground that you've applied for, you need the exploration ground and then you need the commercial operations. But it looks like the ground is covering the existing two concessions that you had under Noah. That is -- sorry, that you had under the ISA that is what we called before the Nauru area and the Tonga area. But there's an extra like there's an extra concession there as well, and I think you referred to that as saying it has about a 500 million-ton potential. Can you give us any more color on where that is or what we might expect to see around that? This is, again, speaking to the upside that you're talking about. Gerard Barron Sure. Well, firstly, thanks, Matt, and thank you for attending the Japan events, and it was great to see several people from the analyst community attend and see firsthand just how real it all is up there. And I was sorry not to be able to join you on that day. But you're right, we haven't released a map of the exact area, yes. We will very soon. But the additional area is very complementary to some of the Nauru and Tonga ground. And it's an area that is not claimed by any other sovereign. And we feel that's important that while there is an ability to lay claim of the ground that is currently under license through the ISA by other countries. We made a deliberate plan not to do that, obviously, we have the support of Tonga and Nauru and our efforts. And we are -- sorry, can you still hear me? Matthew O'Keefe Yes, we can. Gerard Barron Yes. Great. So we have the support of Nauru and Tonga. But we wanted to make sure any additional ground that we did apply for would not have a competing claim over it. So I can't tell you specifically where that it makes a beautiful mining unit, and I can't wait to share more detail on it. And we know a lot about the ground because it's neighboring to some of our other blocks. And so we can talk with some confidence about what we think's on it. Craig Shesky Yes. And just to add one point on that, too. It also does not encompass any areas that had been set aside as areas of particular environmental interest. So look, we are very eager to share Matt, exactly where it is. But for commercial sensitivity reasons, it makes sense to get past our initial review with NOAA and then share quite a bit more detail very soon. Matthew O'Keefe Right. No, that makes sense. And I guess we're coming up on the first 30-day I guess, the end of this month will be the first 30-day where you should hear back about the status of your application. Can you expand a little bit on that process and how you see it unfolding both the 30- and 60-day processes and then beyond that? Is that we're going to get a road map at that time? Gerard Barron Look, that's our plan. Yes. I'm traveling to DC tomorrow actually. And we are in regular contact with the authority. And we -- I think it's fair to say it's been a lot of action that we've generated by our application. And I think I wouldn't be speaking out of school to say a lot of excitement inside that department as well. But I have it on good authority that we should be expecting something very soon. Operator Jake Sekelsky, Alliance Global Partners. Jacob Sekelsky Gerard and Craig. So a lot to unpack here, obviously, but just a few questions from my end. We've seen a wave of support, obviously, for the space for the last quarter. I'm just curious if you have any thoughts or insights on how this might translate over to the processing side of the equation. And if going downstream longer term is something that you've thought about? Gerard Barron Yes, sure. We I mean if we wind the clock back about two years ago, we had an application to the DoD to carry out a feasibility study on a refinery at a site we identified in Texas and since that time, we have made tremendous progress understanding how to treat the nodules with our partner PAMCO. We've engaged with potential processing partners in other nations as well, including Indonesia, which has a wide variety or wide number of options available to us. And one of the requirements though under DSHMRA is that while you can seek exemptions if there's no ability to process those nodules in the USA that they want to see those jobs and that economic activity come back to the United States. And so we are working feverously with two groups to evaluate that. We're excited about the progress that has been made. We're encouraged by the noises we're receiving from government agencies about the permitting cycle. And we've also been approached by a wide number of what I call, Patriot capital providers, people that are very interested in investing in hard assets on the ground to service the future needs of the United States. So we give it a lot of thought. We think it's a tremendous value-add opportunity. Of course, if we were to do this 20 years ago, then automation wouldn't be as advanced as it is today. And I think looking at how efficient we can make those processing plants is a high priority, and we're dealing with some of the best people imaginable on helping us on that at the moment. So yes, so it is a commitment. We like the idea of doing it in the United States. And we've certainly been -- I think in our data would be too strong a word, but we've had a lot of inbound from parties who've expressed interest in having some kind of partnership with us to put that investment into the US. Craig Shesky Indeed. And make no mistake, Jake, the key equation is going to be the same as it would be prior to the US approach, which is trying to accrete shareholder value, making sure that we're evaluating each of these downstream opportunities. On a stand-alone basis, based on IRR, based on the return on invested capital. But the point here is, until such time as we have a commercial recovery permit, the invested capital portion needs to be as small as possible. So therefore, this is just a great opportunity to continue to bring in partners with strong balance sheets and deep pockets and great connections within the US government. And this is an amazing opportunity for us, medium term, long term. But certainly, we are always keeping an eye on not getting out of our skis in terms of going too far downstream too quickly, given the fact that all of us want to see this in commercial production in its capital light way as possible. Operator Dmitry Silversteyn, Water Tower Research. Dmitry Silverstine Thank you and thank you, Gerard and Craig, I'd like to just add my comments on the trip to PAMCO facility and an excellent job that TMC and the PAMCO folks did in organizing and carrying out that trip. It was really first rate. Now to the questions. You mentioned in your remarks that you're exploring some funding opportunities within the US government framework. So what exactly are you looking to chase down here in terms of either loans or grants or any other financial assistance that the government can provide you in this scenario? Craig Shesky Yes, very much taking a -- and thank you for the questions, Dmitry, and it was a pleasure spending time with you and the rest of the team for that PAMCO site visit. It was an excellent opportunity to see that firsthand. But the answer is an all of the above approach. We want to ensure that we're not leaving any stone unturned from what is a great window of opportunity here with a very supportive government. So we can't comment on too much specifically other than I would direct you to the executive order, which pointed out the exploration of offtake arrangements or rights of first refusal, the directions that the President gave the Departments of Defense and Energy on that front as well as directives to explore financing opportunities for this new seafloor nodule industrial ecosystem that the US wants to build out, directing financial initiatives from the Development Finance Corp Exim bank. There are a lot of names as part of that executive order. And it's -- I would say, it will be easier to list the agencies and cabinets named to that order that we haven't been having active dialogues with than the other way around. We feel very confident that the time is right to take some of this from theoretical to actually signatures on a page, and we're going to push that as aggressively as possible. Dmitry Silverstine Understood. Great. Now since these executive orders have come out in rapid fire way in the last six weeks, and you guys submitted the application now. Have you seen any -- I guess the best way to ask this question is, what are you hearing from your context of ISA? I know they're in the intercessionary discussions right now. Have you picked up any sense of urgency on their part? Or is it all integration and combination at this point? Gerard Barron No, I think Dmitry -- and what we're hearing is that there is action. What we are hearing is that people understand that this has been shining a spotlight on the fact that the regulator had an obligation and hasn't met its obligation. And I think if you listen to some of the comments that have been made by the SG while they're a little bit speculative, I would suggest what they do highlight is urgency. And what we hear discretely from some of the member nations is that there seems to be momentum. Now of course, our decision is made, we are moving in this direction. But I hope for the other member nations who relied on unclass and who have been acting in good faith by turning up and carried out all of this research work to further their license ground. I hope for their sake that the regulator can agree a set of terms for the mining good and join us out there. Dmitry Silverstine Okay. Just to follow up on that a little bit and get some clarity on follow these overlapping lessons this will work. So let's assume that you get the NOAA license collection license within the next X amount of time before ISA is ready to issue theirs and you begin collections. And then I does get it back together, it does have the regulatory call in place and does evaluate and approve your application for collection in the NORI-D and TOML areas, how does that -- how will that work? How the modules that you're lifting, let's say, the revenues from them will be shared between Nauru in this case, of NORI under ISA rules versus under NOAA rules? Gerard Barron So okay, just to be clear, we are applying under the US regs and not the ISA yet to be completed rigs. So there will be. Dmitry Silverstine (multiple speakers) but I'm saying is once you -- let's say you get the license and you start collecting commercially in the areas. And then the ISA comes through with their code and issued the collection license. How does that work? Gerard Barron Well, they won't because we won't have applied. We're not applying to the ISA. We're only going to be applying to NOAA. Dmitry Silverstine Got it. So your exploration likely will still be an effect, but you're not applying for a collection license? Gerard Barron Correct. Craig Shesky Dmitry, there are some comments from some of the media or the global community, where they're kind of attempting to treat it all as one ball of wax and pierce the corporate veil. TMC USA is a private entity established 12 years ago. NORI and TOML are separate subsidiaries, and NORI and TOML will continue to do what they need to do to keep the ISA exploration contracts and compliance. But at the same time, we wouldn't want a situation where the complication of having to consider permitting over the same area from two regimes but there would be no reason for us to relinquish our rights to those exploration contracts before any commercial recovery permit of the same area is granted. Dmitry Silverstine Got it. Okay. Understood. And then one final question along similar lines. Do you foresee any issues with potential customers for your metals, for your product that are ISA member states not being able to purchase these metals from you since there will not be collected under an ISA license? Gerard Barron No, I do not. I've heard that reported in the media and -- but I don't see that as being any risk whatsoever. And once again, there's a bit of wing flapping going on around that sort of language. But the world is moving to a position where it is going to be short of these metals. And of course, we think having the United States as our sponsor, so to speak, is probably the best -- well, is the best sponsor we could possibly wish for. And so we don't think -- certainly talking to the commodity traders as we have done in recent weeks because of the renewed interest, and it seems that everyone is beating a path to our door to have a conversation to see where they can fit into this, they don't perceive issues around that either. Craig Shesky While that's occurring, Michelle, I think we'll take a couple of questions that people have written in the webcast. Michael Domanskiy asked, can we confirm the PFS release date? Yes, I had said next quarter, but to be clear, third quarter of 2025. And a question from [Kona Reader]. Can we provide an update on our path to commercialization and any milestones you expect to hit over the next 12 months regarding offtake and regulatory progress? A Great question, as Gerard had spoken to on discussions with potential commercial partners. We feel very good about where things are heading. During our site visit, the PAMCO facility, we were accompanied not just by the sell-side research community, but also battery makers, precursor producers, steelmakers. And even in the United States, you're seeing increasing headlines of some of the large automakers relying on battery technology that could benefit from additional supply of nickel or manganese. And look, keep in mind, most of these US automakers never bent to the pressure from global NGOs to exclude these materials from their supply chains. And as we get closer to commercial production, that urgency, that fear of missing out, will only increase. So in terms of the milestones, the PFS coming up, we think, will be an important one, but also a read-through to the valuation of the rest of the resource portfolio. We're very eager to -- upon having our applications deemed substantially compliant or complete, respectively, laying out a path showing step-by-step what to expect over the coming quarters on that regulatory review. So this is not going to be a black box. It's not going to be fingers crossed, I hope TMC gets permitted. There should be a very clear path on the milestones to expect. So keep an eye on this over the coming couple of months, and we can't wait to share more data on that front. There's a question from [Keith Ogrin], providing an update on the status of the hidden gem with respect to the commercial production system. So Gerard, anything we might want to say on that? It's certainly been an interesting environment from an oil price perspective over the last few months. But certainly, our team continues to be laser-focused on the right scenarios for getting the hidden gem ready for commercial production. Gerard Barron Yes. Look, we had -- the honest truth is we thought we had a bit more time because we were going to be -- as we previously announced, we were going to be getting the hidden gem ready for the higher production target, 3 million tonnes. And right now, based on the feedback we're receiving post the executive order, we're now looking at it, how quickly can we get the boat on the water. And how quickly can we get it to an economic number such that it's making money but sacrificing maybe some of the upper tonnage range for speed. And so that basically means the engineers are back working very hard. It's obviously great that we welcome Roger onto our team, who, of course, was the Project Director on the commercial trials that were very successfully completed in 2022. I can report Allseas remain super supportive. They're an amazing shareholder and an amazing engineering partner for us, and we're working through all of that now. Craig Shesky One follow-up question from Keith Ogrin, is NORI no longer planning to submit an application through the ISA in June of this year? Gerard Barron That is correct. And just so clear, the NORI license comes up for renewal next year and 2026. We will be renewing that because NORI is in full compliance. There is no legal basis upon which that license cannot be renewed. And the basis that we would the fact that we're putting an application in under our US subsidiary to NOAA has no bearing on the fact that we will be renewing that license with the International Seabed Authority. So we're covering all bases. Craig Shesky Michelle, I think we have time for one more question from the line if there's anybody in queue. Operator I am showing no further questions on the phone lines at this time. And I would like to hand the conference back over to Gerard Barron for closing remarks. Gerard Barron Thank you. Well, look, it's been an amazing 2025, firstly. And I'm very proud of what we've achieved. I'm very proud of the team, how everyone has stuck together over the last -- well certainly over the last decade. And we've been through some interesting times. We've had some highs and some lows, and the one thing we have done is stuck together as a team. We have an amazing group of committed individuals committed to the purpose, committed to doing the best environmental research committed to getting this new resource into production. And I think everyone is feeling quite proud of the fact that we are in this position where we are today. We have an amazing board who's also been a tremendous guiding hand through these last months and years. And of course, we have amazing partners, starting with our largest investor, Allseas, who remain at the ready to help us get production started. We have great partners, as many of you experienced or some of you experienced up in Japan last month. And of course, our sponsoring states. They entered into agreements with us in 2011, in the case of Nauru and 2012 in the case of Tonga. And of course, they did so in good faith under the protection of UNCLOS. Unfortunately, the commitments that they depended upon have not been fulfilled. And yet they remain tremendously supportive, and we will ensure always that their best interests are protected as we move forward. So I'd like to especially thank them for their never-ending support. And of course, our shareholders. We have -- we noticed our retail shareholder base growing substantially. I've got to tell you, I love our retail shareholders. I love how committed they are and how they're prepared to go to the mat to defend our corner and to make sure that some of the wonderful scientific results that are becoming apparent, communicated and reminded to those people who sometimes jump to the wrong conclusions. Obviously, I expect our institutional shareholder base will continue to grow. So to each and every one of you, thank you for supporting us and sticking with us. And I hope it's going to be an amazing 2025. And the decades ahead are going to be a very exciting one. So thanks for being part of our journey, and thanks for attending today. Operator This concludes today's conference call. Thank you for participating, and you may now disconnect.
