Thank you for joining us for the Vectrus Fourth Quarter and Full Year 2018 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Jane and I'll be the operator for today's call. [Operator Instructions] And now, I'll pass the call over to your host, Mike Smith, Vice President of Investor Relations and Corporate Development at Vectrus.

Thank you. Good afternoon, everyone. Welcome to the Vectrus Fourth Quarter and Full Year 2018 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Matt Klein, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on our Investor Relations website, investors.vectrus.com. Please turn to slide 2. During today's presentation, management will be making forward-looking statements pursuant to the Safe Harbor provisions of the federal securities laws. Please review our Safe Harbor statements in our press release and presentation materials for a description of some of the factors that may cause actual results to differ materially from the results contemplated by these forward-looking statements. We assume no obligation to update our forward-looking statements. At this time, I would like to turn the call over to Chuck Prow.

Thank you, Mike. Good afternoon, everyone. Thank you for joining us on the call today. Please turn to slide 3. We had a solid year in 2018 reaching several important public company milestones. Importantly, we remain on track to achieve our five year goals of $2.5 billion in revenue with 7% EBITDA margins. From a financial perspective, we had a strong end of the year with fourth quarter results that showed double digit year-over-year improvements in both revenue and adjusted diluted earnings per share. Additionally, expanded EBITDA margin 50 basis points year-over-year, all phasing in several new business wins. For the full year, we reached several milestones to the public company, with record revenue, operating margin and adjusted diluted earnings per share. With revenue for the full year increased 15% compared to 2017 and adjusted diluted earnings per share increased 35%. We continue to focus on expanding our margin profile and increased EBITDA margin by 30 basis points. I am especially pleased with our ability to expand EBITDA margin given our team's focus on phasing in approximately $350 million of new business that was won throughout 2018. A major positive financial attribute of Vectrus is our ability to generate strong, predictable cash flow. In 2018, our team continues to emphasis cash generation and grew net cash from operations 13% year-over-year which represents 114% cash conversion compared to net income. We ended 2018 in the strong financial position with $9 million in net debt, which will afford us the flexibility to execute our long-term strategy. We have spent considerable time establishing a solid foundation for Vectrus and strengthening our core. This is demonstrative in our portfolio diversification strategy which continues to show momentum in 2018 as our revenue with the Air Force increased almost 50% year-over-year. Additionally, the acquisition of SENTEL…

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 10. We reported strong fourth quarter and full year 2018 results. In the fourth quarter of 2018 revenue was $330 million, up $34 million or 11% compared to the fourth quarter of 2017. Operating margin in the fourth quarter of 2018 was 3.8%. EBITDA margin was 4.2% and diluted earnings per share were strong at $0.89. For the full year 2018, revenue was $1,279 million, an increase of $165 million or 15% as compared to 2017. Operating margin for 2018 was 3.8%. EBITDA margin was 4.1% and diluted earnings per share were $3.10. Importantly, as you can see in the chart on the upper right-hand side of the slide, our historical revenue demonstrates the predictable nature of our business. Additionally, our EBITDA margins are expanding versus historical levels and are expected to accelerate with Enterprise Vectrus initiatives and scale. Our growth related initiatives during the year resulted in approximately $1.4 billion in contract bookings, with $350 million representing new business to Vectrus. These efforts help propel our total backlog to $3 billion. As Chuck mentioned, with a significant new business pipeline and increased win rates, we are confident in our ability to continue to achieve additional new contract wins in 2019. We realized strong cash flow from operations in 2018 finishing the year at $40.1 million, up 13% year-over-year which translates into 114% cash conversion compared to net income. As you can see on the chart on the bottom right hand side of slide 10, our ability to generate strong cash flow is an important characteristic of our business. We expect to continue generating over 100% cash conversion compared to net income in 2019 and beyond. Through our strong cash generation in 2018, we're able to acquire and completely pay…

Thank you, Matt. To summarize, Vectrus is on track to achieve our five-year goal of $2.5 billion in revenue and 7% EBITDA margin. In 2018, we had solid performance which included double-digit revenue and diluted EPS growth, strong cash flow generation and we had a $350 million of new contract awards to the backlog. Additionally, we maintained strong strategic execution and we have momentum within our business to include continued activities to enhance our foundation. We have sufficient pipeline to continue growing and diversifying our revenue portfolio. And we are adding value to enterprise Vectrus and through solutions. We are well positioned for LOGCAP V and finally, our 2019 guidance is supported by a solid backlog and opportunity pipeline. With that I'll turn it back for questions.

[Operator Instructions] Our first question comes from the line of David Williams with Drexel Hamilton. Please proceed with your question.

Hey, good afternoon. And thanks for allow me last couple of questions. First congrats on the quarter and the progress you guys are certainly moving right along .So that's very nice to see and congrats there. I wanted to see if you could talk a little bit about the ongoing discussion to reduce the overseas contingency footprint. And how that may impact your business thinking kind of maybe a little longer term. How does that affect your base offering in the Middle East and in overall the K-BOSSS contract?

That's right. How are you doing and thanks for calling in today, it is good to talk to you again. So in general the bases that we support throughout the Middle East and Turkey for that matter are enduring basis. So we are seeing a bit we'll call it up tempo declines particularly in Turkey at Incirlik, but in general I expect to see a stable revenue base, and it's that revenue base is reflected in the guidance that Matt just described.

Yes. Just to give you an anchor on Turkey, Spain we have an AOR operation inherent resolve contract mod that averaged about $30 million a year. We don't expect that to change dramatically in 2019 but that that would be something outside of the normal base operations on in select.

And Matt I think on the last calls you have mentioned you can see organic growth in the -- option ranges is came off kind of remain at the current level through the year. Is that still kind of the right way to think about it if it's nothing changes in that contract if we're at a steady state?

Sure. So let me kind of walk you forward to 2019 expectations, if you use the 2018 results of [1289 or 79] the first change that we're working with is change in scope on contract, existing contracts or contract close outs. In the discussion around Turkey is one of the things that we're seeing some headwinds from a revenue perspective. The other item we had an IT contract closeout in mid-part of next last year that's also putting some pressure in our year-over-year change. And that that de -scopes and our scope changes in contract close outs contribute a negative about $75 million year-over-year. On the positive side, we have our significant contract wins that we won in 2018 phased in at different times during 2018. They will contribute about $60 million incremental in 2019 and then lastly, we're expecting about 50 or so million dollar related to contracts we have in the pipeline now. We expect to win an earn revenue in 2019. And just to kind of give you some reference on that number, we won about $100 million or we earned about a $100 million of new contracts in 2018 that were either won in 2017 or won in 2018 and that's the same estimate that we have going into 2019.

Thanks for the color. And then maybe think about the M&A front, what level of comfort in terms of leverage do you think you're willing to take at this point just thinking about opportunities for M&A transactions and just kind of how you see that? Is there -- are there any holes you need to fill any gaps you would be wanting to step out and maybe expand that leverage a bit just in order to get a better handle on a specific point of the business.

Well, we are very actively looking at M&A opportunities, again as I stated many times we're not going to acquire for scale sake, we're going to acquire based upon our strategy; to enhance our capability then to grow client set. We've said on several occasions that a debt to EBITDA is 3 to 3.5 ranges is about as much as we would go and as you can see from our net debt right now we have a lot of flexibility, and we're continuing to look at several opportunities in the marketplace. And that will continue to do so.

Yes. Let me add some color too, our current covenants are at 3x. We do have an acquisition holiday that gives us another quarter turn that would give us some flexibility. I think the SENTEL type acquisitions that we encountered in 2018 kind of fit perfectly within that. We would potentially buy an asset to what Chuck said that aligns with our strategy and then quickly pay it down. So if we in our current covenant, if we reach 3x that won't be there for very long. Now larger deals we have to consider outside of the covenant would just be a different financing attribute.

Okay, right, very good, appreciate that. And then maybe lastly for me as you kind of think about the labor pool, are you having any issues I guess filling the position that you may have open? Is that a constraint at this point or you not seeing any issues there?

With the labor market is tightening, remembers, though that a good deal of our revenue is overseas revenue. I continue to be very pleased with the retention of our existing workforce and our ability to backfill in the open position. So it is true that the labor market is tightening but I feel very confident with our ability to keep our contract staff at their maximum level.

Our next question comes from the line of Joe DeNardi with Stifel. Please proceed with your question.

Hey, guys. This is John on for Joe. First question is pretty easy for you all, you may have already said it, and it's just kind of curious what's the organic growth in the quarter?

So the organic growth in the quarter is a little under 1%, but for the full year is 4.7% and organic is defined by less SENTEL. The overall growth was 15% in total in full year.

Okay. So you guys have reiterated your long-term guidance and for that $2.5 billion but growth here looks to be a little bit more moderate than what we were thinking going into the quarter. Can you kind of give us your thoughts around Vectrus' long-term growth? I mean is this growth that you're seeing in the pipeline right now or is there something you can point to that's going to be driving that long-term growth after 2019 and 2020 that you can kind of talk about.

We feel very strong about not only our pipeline but the campaigns we're executing within that pipeline. I continue to see positive results from a win rate perspective. So we're going to continue grow that pipeline organically. We're going to look for very targeted M&A opportunities and that's the path John and I feel that the marketplace is receiving our strategy well again as evidenced by or win rates.

And I would also say, John, we -our teams have really been focused on LOGCAP and re-procuring that. So the last 18 --12 months or so that has been our focus and once that's behind us and we expect an award in April. That gives us some more capacity to do some other things.

Okay. I also think at the time I keep on asking questions, if you don't mind I think the one thing that's really been on some investors minds have been the up-tempo color that we're seeing coming out of CENTCOM. When you look at how the Pentagon is framing their footprint there in CENTCOM how should investors think about that opportunity of winning LOGCAP V? Is this a growth opportunity or is it basically going to be steady as it goes if you can retain that work on LOGCAP V?

You can never predict the future which is the essence of contingency contract like LOGCAP. I will say that LOGCAP V is very different than its predecessor contracts. And that LOGCAP V includes the enduring base footprint. So I'm very pleased to say that we have the largest enduring base footprint in the region that by the very nature of those bases being enduring, they are there in sustainment mode even when individual operations may begin to curtail. So again you can't predict the future, but the enduring base footprint is a very important way to look at a presence in the CENTCOM AOR.

Okay. And lastly and then I'll jump back in the queue. Can give me an update on the AMDX walk-up? How we should think of the timing of this award and if you could give us any color on the past performance that would be fantastic. Thank you.

Yes. First of all, our past performance remains very strong. We are very pleased with our client relationship and our mission performance first and foremost. The procurement is underway and we expect an award by the end of this year, although it's still so early in the procurement and things can tend to slip to the right a bit. So performance remains very high. Our client intimacy remains very strong and again we remain very confident with regard to our prospect for the recompete.

Our next question comes from the line of Joe Gomes with NOBLE Capital. Please proceed with your question.

Good afternoon, guys. You talked a little bit a couple times about improvements in win rates and I was just wondering if you could provide a little bit more color or detail there? Where you were in the past and where you guys are today and where you think you might be able to go in the future?

Yes, okay. I can start, so I think our campaigns, focus campaigns around certain clients is really important to understand each-- but each client has a different buying pattern and attributes that are important to them for performing facilities and logistics and IT work for the agency. So our Air Force effort in the last year or so as we said in our prepared remarks has been really, I would say outstanding. So we're real pleased with that effort. Our Navy campaign is also advancing in a very positive way and we expect some better --some improved results in the next couple years. Beyond that I think it takes a little bit of time to mature these processes and really to work through our strategies and our pricing and I think our results on the last couple of years have been great.

Okay, thanks on that. I just wondered if you might be able to provide a little more color detail on some of the work you guys are doing in the intelligence community as much as you can. And how big of a business is that to you guys now and fast is it growing and how big you think you can get to?

So it's, first it's under 3% of our business. We don't break out individual clients in detail if you will, but I will tell you that the work we do in the intelligence community is very complimentary to the work that we provide to the military. It's a very large addressable market. We are in our infancy of attacking the intelligence community campaign, but I feel highly confident given our past performance with the DoD that we are going to be a kind of market share taker if you will, over the coming years. We're investing in that marketplace both from a talent and a capability perspective and it is one of the areas that we feel very strongly about for the future.

You have a follow-up question from the line of David Williams with Drexel Hamilton. Please proceed with your questions.

Hey, guys. Just wondered to see if you could help me understand a little -- the K-BOSSS contract and is that rolling to LOGCAP and kind of how that I guess impacts the revenue trajectory but kind of thinking about K-BOSSS or excuse me LOGCAP being awarded in April. Assuming you were on that contract how would the K-BOSSS contract slip I guess and how is that that stepped out over the next couple of quarters or maybe through the year? It doesn't necessarily just in the K-BOSSS and pick up at LOGCAP right. So there'll be some time before that will begin.

Yes as we indicated in the prepared remarks that we expect to receive an extension on K-BOSSS for one year to March of 2020 with an additional six month option. So our anticipation is that a transition either to our self or to body else will occur throughout the remainder of 2019 and early 2020 and a transition to the new approach will happen sometime on or about March of 2020. Again with that potential for a six-month option. So we fully expect the same K-BOSSS relationship for the next year with transition planning to occur toward the end of that period.

Okay, great. And do you have any other largely companies that are coming up this year?

On Deck is the largest recompete that we just described in the prior question.

We have another follow-up from the line of Joe DeNardi with Stifel. Please proceed.

Thanks again for taking my question here. Just to the follow-up here is what is the customer saying about your push to move into this integrated base and injecting technology into the mission? What are the aspects that they're most interested in and when you think about it what's kind of the timeline for them to go from where they are now to where the technology and the base operations aspect are all kind of merged into one larger contract?

I will frame it this way and I spend a good deal of my time around the world in the field talking to clients. The range is from receptive to demanding. So our clients realize that they can no longer drive down cost and improve resiliency by purely labor based methods. And so they are very open and in fact in many cases demanding that we innovate and find better, faster, cheaper ways to perform the same mission at lower cost and with greater resiliency. As you may know, I mean this trend has been in the commercial infrastructure markets for a while now and I'm very pleased to see where our clients are and they're again receptivity. And they all realize that this is the way that they are going to provide greater capabilities at a lower cost point. End of Q&A

Ladies and gentleman, as appears there are no further questions at this time. This concludes today's teleconference. I would like to thank everyone for your participation. And you may disconnect your line at this time.