Greetings. And welcome to Cubic Corporation's Second Quarter Fiscal Year 2017 Earnings Conference Call. At this all time, all participants are in a listen-only mode. Today's webcast includes a slide presentation as part of the formal presentation followed by question-answer session. You can advance the slide deck by using the left and right arrows located in the upper right hand corner of your window. [Operator Instructions].As a reminder, this conference is being recorded. Now I'd like to turn the call over to Diane Dyer. Cubic's Director of Investor Relations. Thank you. You may begin.

Hello, everyone and welcome. Just after market closed today, we reported our second quarter fiscal year 2017 results. We encourage you to refer to the Company's press release and the most recent reports filed with the SEC as well as today's presentation slides. You can access these documents on the Investor Relations tab of Cubic's website at www.cubic.com, or on the SEC's website. The speakers on today's call are Brad Feldmann, Cubic's President and CEO, and Jay Thomas, Executive Vice President and CFO. Also in the room with us for the Q&A session is Mark Harrison, Senior Vice President and Corporate Controller. Before we begin formal remarks, please note that certain information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. I caution listeners that during this call, Cubic management will be making forward looking statements about future events or Cubic's future financial and operating performance. Actual results could differ materially from those stated or implied by these forward looking statements due to risks and uncertainties associated with the Company's business. These forward looking statements should be considered in conjunction with and are qualified by the cautionary statements contained in Cubic's earnings press release and SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. This conference call contains time sensitive information that is accurate only as of the date of this broadcast, May 8, 2017. Cubic undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of this conference call. This conference call also includes a discussion of non-GAAP financial measures as that term is defined in Regulation G. Cubic believes this information is useful to investors because it provides a basis for measuring the Company's available capital resources, the actual and forecasted operating performance of the Company's business, and the Company's cash flows. Any discussion of non-GAAP measures is not intended to detract from the importance of comparable GAAP measures. Having that said, I'll turn the call over to Brad Feldmann, our President and CEO.

Thank you, Diane. Thank you everyone for joining us on the call. Today, I'll begin with highlights of the first half of the year followed by an update on our business environment and progress on our strategy. After that Jay will walk through our financial results in greater detail and provide updated financial guidance due to a tax related impact and timing uncertainties primarily related to the United States government budget process. Starting with Slide 3, sales for the first half was $678.4 million, which was relatively flat, compared to last year despite currency exchange headwinds of $14.9 million and the delayed FY17 US government budget? Adjusted EBITDA was $36.9 million, compared to $41.6 million last year, net of $2.3 million foreign currency exchange headwinds and a $12.3 million increase in R&D compared to last year. In the second quarter, we increased R&D investments to develop technologies that will help accelerate the growth of the company. These investments are focused on shifting our transportation business from a program centric to a new generation product centric company, thereby providing greater value to our customers at reduced risk. Various transportation innovations including NextBus 2.0 are enhanced middle market solution, as well as advanced mobile, open payment and cloud technologies in southern New York City pre contract engineering efforts. In defense training, live virtual and constructive training solutions and in mission solutions next generation communications and networking technologies. We are pleased that our gross margin has increased by 1.8% reflecting continuing growth in our Cubic mission solutions business which enjoys higher gross margins. During the quarter, we reached agreement on $8 million equitable contract adjustments on our Littoral Combat Ship Virtual Training contract with the United States Navy. This adjustment will be funded in the near term and then will be recognized in…

Thanks Brad. Please turn to Slide 6, and I will discuss our consolidated operating highlights. Sales for the first six months totaled $678.4 million which were virtually flat from last year. First half sales increased in the defense system segment and were slightly down in the transportation and defense services segment. Sales were impacted by FX headwinds year-to-date totaling $14.9 million primarily in our transportation segment due to unfavorable comparisons to the British pound. Consolidated adjusted EBITDA year-to-date was $36.9 million, down from $41.6 million last year. FX headwinds negatively impacted our profits by $2.3 million primarily in transportation. The year-to-date we've invested $12.3 million more in R&D than last year. And I'll discuss the higher R&D spend when I discuss the defense systems and transportation segment operating results. Our consolidated gross margins improved by 180 basis points this year reflecting increased sales of higher margin C4ISR products and our defense systems business. SG&A expenses as a percentage of sales improved from last year. The expense last year included significant charges related to stock based compensation on the GATR and TeraLogics acquisition. Cost included an SG&A related to our new IT system totaled $14.6 million year-to-date compared to $15.9 million last year. As Brad noted, we are tracking to complete our new ERP system implementation by calendar year end. Year-to-date, we had an operating loss of $6.2 million which was a 77% improvement from last year's $17.2 million loss. Last year's loss included significant acquisition related expense on GATR and TeraLogics transactions. For the quarter ended March 31, we had lower effective tax rate than last year because last year's provision include a partial release of our deferred tax valuation allowance. However, we did recognize the tax benefit in the second quarter this year due to our expectations of generating…

Now turning to Slide 12. In summary, our strategy remains sound and we believe the increased R&D investment will help accelerate the growth of the company. With an improved FY17 budget, we expect increased order intake and improved financial performance going forward. We continue to expect solid organic growth in FY18 with the anticipated New York City Fare Payment System win further expansion in the Fare collection market with our OneAccount technology advantage and with the transition of the T2C2 program to full rate production. We are also pleased with the speed and effectiveness with which recent acquisitions including Vocality, DTECH and TeraLogics have integrated with the Cubic family. We are thankful for the proposed increase in the FY18 defense spending and continue to believe that the administration's plans will be favorable to our business. We are happy with our progress towards achieving goal 2020. Despite the challenges, our implementation of ERP continues on schedule. We remain confident that we'll further improve the effectiveness and efficiency of Cubic operations in FY19 to the benefit of all our stakeholders. I'd like to express my appreciation to my colleagues across the company for their hard work and dedication to increasing shareholder value and to the investor community for their ongoing partnership as we grow Cubic. Now let's proceed to the Q&A session.

[Operator Instructions] Our first question comes from the line of Julian Mitchell with Credit Suisse. Please go ahead

Thanks. Good afternoon. Just my first question would be around the revised revenue guidance. So it looks if the midpoint -- you are looking for about 4% sales growth for the year. First half sale were flattish with the couple of points of currency headwinds so the second half you are assuming will grow about 7% or 8% year-over-year. I just wondered if you could give any more detail as to what's driving that uplift. And how much of that might be just currency headwinds reversing? How much is organic and what's really driving that organic surge?

Yes. Julian, this is Brad. We expect organic growth in the second half in our defense systems business, there are number of shipments in backlog, in our ground training and air combat training businesses. We also have shipments scheduled for both GATR as well as DTECH. We have some of those orders inhouse already and some of them we expect to get very soon with passing of the FY17 budget last Friday.

Okay. But something like transportation you are expecting is sort of fairly stable or slight growth year-over-year in the second half then?

Fairly stable. I mean they do have some shipments of some product in the third and fourth quarter. They can move their numbers from a little bit -- their numbers are lot more stable.

Thank you. And then my second question would just be on R&D spending. As you said, that increased about $12 million. What should we expect the increase for the full year is? Maybe give any color you can how quickly we should see the payback on that R&D investment.

Yes. I think probably for the year when we set our guidance early in the year, I think we were talking the number in the mid to high 40s maybe as much as $50 million for the year. In terms of payback on that, I'd say the biggest thing that we are focused on is there is a bunch of R&D and transportation for a number of technologies that relate to New York, Boston and what we kind of call the cloud and mobile. So those are bunch of bids in the pipeline that relate to that. On the defense side, probably the incremental R&D there it relates to an advance antenna technology that we are working on that would tie end with our datalinks business. Those would be big things.

In the short term, of course we expect to be awarded the New York contract this summer. We are also as we mentioned moving our transportation business to much more of product centric business and we would expect that to allow us and help us to have better margins going forward in that business. So we are work on the very, very short term sort of in the mid term, we expect payback on all of the rest of those R&D investments.

Thank you. Our next question comes from the line of Ken Herbert from Canaccord. Please go ahead.

Hi. Just adjusted EBITDA guidance, the $15 million change there. Can you parse out how much of that you specifically put to delays on the DoD side relative to the -- sounds like timing and incremental investments on the potential transportation contract? How do those split out?

Yes. I'd say transportation is probably 40% and 60% would be defense.

Okay. And I guess with the commentary around the strong bookings in sales and organic growth you expect to see in the second half specifically in the defense business and now that budget released at least for fiscal 2017 has been in place and it sounds like we could get a fiscal 2018 towards the end of May ideally here. Do you think -- I guess it sounds like with the revenue step up there is not much on the EBITDA like it sort of -- or the guidance the GAAP that gets pulled in this year but is this a timing issue or should we think about this just slipping to 2018 or is this representative of maybe of just lower margin on mix and some other contracts.

No. It's not a lower margin mix issue. It's a timing issue exclusively. As you know, we finally got our budget in the United States on Friday and so the question of how quickly those orders can be placed. And so the government has a big bow wave of orders they need to be placed. The worse case is that EBITDA will slide to next year. That just -- we went through the budget. I don't know if you read it, its 372 pages. It kind of where we kind of see areas for us and again that's really is a timing thing. But on training and readiness, we could see some extra activity at the joint readiness training center. But that's scheduling, that boils down to schedule. They've talked about procuring more the Littoral Combat Ship so that helps us on our immersive training. Again, that's timing. On JSF, they are scaling to buy more aircraft. There is added money in the SOCOM, which has -- that has impact in the C4ISR and they are talking about an in-strength size increase for the army and the marine corp. That's timing, that's probably all likelihood would have show up in 2018.

What was difficult for us to predict is how quick contracting officers would get us new awards.

Okay. No, I can appreciate that. I guess I'd say in the last month or so you didn't see even before the fiscal 2017 budget was finalized, you didn't see any inflection in terms of contracting officers once they got closer to the expected budget. You haven't seen any of that change in spend or attitude or openness yet have you?

No, I mean because we've been under -- by the way this is longest CR that we've ever had in recent times. And under the CR they were restricted to spend at levels that had authorized for 2016. So until they got this increase through they were really spending at last year's level so there might be a little bit a catch-up now in the third and fourth quarter in O&M but the RDT&E stuff is going to push into 2018.

Okay. All right. That's helpful. And then just finally on the T2C2 contract. You commented that you are still expecting a full rate decision this year. Can you just remind us timing on that again now that the budget is in place, what are you expecting and the financial impact that it has on 2017 and potentially in 2018?

Yes. So the decision is going to get made this summer. And that's what we've expected all along. The uptick next year there will be an uptick of tens of millions a dollars to that line within Cubic Defense Systems but the overall by is the government is interested in about 800 terminals over the next three years. So we expect to put a good uptick. We also expect that that antenna will be used for other satellite communications needs and so we expect the T2C2 program to grow. So overall we expect over the next end number of years for to be a substantial increase to Cubic on the order of tens of millions a dollars per year.

Thank you. Our next question comes from the line of Brian Ruttenbur from Drexel Hamilton. Please go ahead.

Yes. Thank you very much. First of all, I'll ask housekeeping in terms of R&D levels and going forward beyond 2017. Do you expect in 2018 and beyond that the R&D will decrease with time or will grow from this kind of mid to high 40s level?

We expect it to decrease between levels we've had in the past and this higher level. We as you know we need to get that New York contract and so we are working on engineering activities as we speak. We'll have the New York contract and we won't be spending on R&D for that. And also I mentioned moving CTS from sort of program to more of product centricity. We have lot of R&D going this year to kind of kick that off and so that will go down to more normal levels.

Okay. So then my second question was just trying to understand the reason for the reduction in guidance. It was a combination both New York City not hitting exactly on time as well as the DoD delay, is that the combination or was it primarily the DoD and not really the New York City situation?

It's really both. The problem on New York is it's really timing right. So if it happens-- we typically we make a decision and when that happens it's really hard for us to pinpoint whether that's June or July or August. So that's why we are really modifying for that. And on the DoD it's just really the fact we've got short period of time left here in the fiscal year. And so we've got a number of our book and ship businesses that need to get orders to flow and order we can drive and build the ship. So it's really being conservative around that short time period.

Okay. So the guidance has then assumed that New York City still hit but only a very small amount in the fourth quarter and you only get a small ramp in -- or at least the small benefit on the defense side in the second half of the year. Is that correct?

Correct.

Okay. And then last question on the ERP. Are we still on track? And how was the spending in the first half of the year so far?

So the first half of the year we've been about where we were kind of expected, we expect a little heavy expense in the second half. So at the beginning of the year we've given sort of range of expenses and I'd say we are going to probably come in towards the high side of that range. And that's our best guess we sit here today.

We made good progress on the ERP implementation. Our next phase is on 1 July and then we'll have a release on 1 October and the last bid of the company in December and we had always committed to early FY18 and are on track to get that done.

Thank you. Our next question comes from the line of Jim Ricchiuti from Needham. Please go ahead.

Thank you. Good afternoon. So just for the clear you are expecting organic growth in the defense business in the back half of the year?

Yes. We are. Hi, Jim, this is Brad.

Hi, Brad. So we are getting close to the midpoint of the June quarter. Is this a case where the pickup -- you are expecting in the business in the defense business is going to be more heavily weighted towards the September quarter?

It will be more weighted in the fourth quarter in terms of the shipments. We expect and have received some orders; we expect that to speed up between here and August timeframe. There are lots of orders and contracting officers' hands if you will, and the shipments cycle is two to three months. So we expect orders to come in and us to ship those things between now and the end of September.

And Jim in my earlier comment, as you has seen an increase in inventories. So we've a lot of task order type contracts in sort of ground training and then on the air combat side. So that showing up an inventory and that will ship out and then that translates into sales. So short cycle stuff would be in our C4ISR business.

Okay. And that has higher margins as well.

Yes. The highest margins, correct.

Okay. And then looking at the New York contract. So it's shifted a bit in terms of the timing. I am just wondering has the scope of the program changed meaningfully or/and to what extend could that impact the business in the early part of fiscal 2018? In other words, should we be aware of any potential higher expenses associated with it? Anything we need to keep in mind as it relates to New York City whether the scope of the award changing that is could change - do you see the complexion of the contract in the early stages?

This is Brad. The MTA is contemplating adding long island railroad and metro north. We've not seen an RFP for that yet. But we were told we are supposed to see an RFP for that on very shortly. So a contract scope appears to be increasing. When we get that contract of course, the design- and-build portion is the first three and half years or so and then it moves into steady state O&M portion. So it's pretty front end loaded so we'd expect good revenue growth next year for sure.

Okay. And Brad I may have missed it. I just had jumped off the call for a few moments. Did you comment at all about the Boston contract? And when that could potentially be awarded? And if there is anyway to maybe size that opportunity?

Yes, this is Jay. So Boston it's a bid process at this point in time. That -- those bids will go in later in the fiscal year. So we don't expect that contract decision until sometime in fiscal year 2018. And I guess for competitive purposes we won't comment on the relative size.

Okay, fair enough.

There are larger transit agencies in North America.

And then final question for me. You talked a little bit about the international business to defense side, potentially seeing a pickup there as more pressures applied on some of our allies to pickup spending. Are you seeing any signs of that Brad? And so what extent do you feel comfortable that that's going to materialize in fiscal 2018?

Yes. We are seeing increase signs around the world of increased international spend. There is already but as you know there is always a delay between increasing budgets and procurements. So I'd expect we might see some of that in 2018, but we'll see more in 2019 and beyond.

Thank you. Our next question comes from the line of Ken Herbert from Cannacord. Please go ahead.

Hi, Jay. Just wanted to ask a quick follow up and for you Brad, now that obviously the budget is out and I know you probably haven't - you gone through with that -- maybe don't have a firm thoughts but can you just provide an update on your thinking around M&A and maybe areas of priority and now that we obviously have all the more certainty around fiscal 2017 and likely 2018 and beyond on the defense side, maybe how are you thinking about growth and opportunities and areas you like to invest from an organic standpoint has changed or evolved?

Yes. This is Brad. Our priorities remain similar. We are very interested in NextCity so we would be looking for niche capabilities that we could add. As you know, we've done number of acquisitions in C4ISR. We continually are looking there. And there might be some niche in training that we are looking at. Having said that, we are working at reducing our debt levels and I'd expect us to do that the next end number of months before we get acquisitive again.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to Mr. Brad Feldmann, President and CEO for closing comments.

Thank you for joining us on the call today. We remain very optimistic about Cubic's future. Thank you very much for your support of our great company.