Thank you for joining us for the Vectrus Second Quarter 2019 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Brenda and I'll be your operator for today's call. At this time, all participants have been placed in a listen-only mode and the call will be opened for your questions following the presentation. [Operator Instructions]And now I would like to turn the call over to your host, Mike Smith, Vice President of Investor Relations and Corporate Development at Vectrus. Thank you. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to the Vectrus Second Quarter 2019 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Bill Noon, acting 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 material for a discussion 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, President and CEO.

Thank you, Mike. Good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 3.The second quarter demonstrated our continued momentum in the marketplace and in the execution of our strategy. Our growth-related efforts continue to be successful. We significantly increased our revenue with the Navy and Air Force; won new contracts including our first contract with the Department of State; expanded existing contracts; secured re-compete business; and won a seat on the previously announced LOGCAP V contract.We also continued to invest in all aspects of our business, which includes the acquisition of Advantor early in the third quarter and we are preparing for substantial growth in 2020 and beyond. We are well on our way to creating a $2.5 billion and 7% EBITDA margin company and will be a leading converged infrastructure provider in the market.Our second quarter financial results demonstrated the anticipated sequential ramp for the second half of the year. Revenue grew 2% sequentially and 3% year-over-year, in part due to the $350 million of new programs won in 2018, of which, $200 million were fixed price. We recorded adjusted EBITDA margin of 4.2%, consistent with our expectations.Adjusted EBITDA margin expanded 30 basis points sequentially. While we do not normally make sequential comparisons, this year, it is appropriate as it reflects our expectation of quarter-to-quarter improvements, particularly as we move into the second half of the year and completed the phase-in of our 2018 contract.Excluding approximately $1.2 million of M&A costs related to the acquisition of Advantor and fees associated with the LOGCAP V, which support our pre-operational legal efforts, adjusted EPS was $0.74.Our momentum in growth-related activities continued and during the second quarter, we were pleased to have been awarded our first ever IDIQ contract with the Department of State to…

Thanks, Chuck, and good afternoon, everyone. Let's move to Slide 5 to discuss our second quarter results. Before we get started, I would like to point out that we will be discussing non-GAAP measures, including adjusted operating income and margin, adjusted EBITDA and margin, adjusted net income and adjusted diluted earnings per share.These adjusted non-GAAP measures remove the impact of expenses associated with M&A and LOGCAP V pre-operational legal costs and better reflect the underlying operations of the business.In the second quarter, revenue growth continued, and we recorded sequential expansion in EBITDA margin and earnings per share, keeping with the expected progression of our results throughout the year.Second quarter 2019 revenue was $331.6 million, up $10.5 million or 3.3%, as compared with the second quarter of 2018. The increase in revenue is due to increases of $8.6 million from European programs and $4.4 million from Middle East programs, partially offset by a decrease of $2.5 million from U.S. programs.During the quarter, our K-BOSSS contract contributed $119.3 million to revenue or 36% of total revenue. Our growth-related activities, targeted campaigns and diversification strategy continued to contribute increasingly to our revenue.During the second quarter, we grew our revenue with the Navy by 68% year-over-year and increased our Air Force revenue by 20%. Our expansion within our intelligence and other federal clients increased 32%. Operating income for the second quarter of 2019 was $11.2 million or 3.4% margin, a decrease of $1.8 million or 70 basis points, compared to the second quarter of 2018.This decrease is primarily due to an increase in SG&A costs associated with investments in our business, in addition to M&A and LOGCAP V pre-operational legal costs of $1.2 million.Adjusted operating margin, excluding M&A and LOGCAP V-related costs, was 3.8%, down $1.1 million or 40 basis points, compared to the…

Thanks, Bill. Let's move to Slide 7 to discuss contract wins that are driving organic growth. Vectrus' dedication to providing exceptional program performance to our clients and our significant investments in growth-focused talent and capabilities continue to drive our success and win rate. These are the contracts that make up $2.3 billion in awarded activity year-to-date with several important awards and renewals occurring in the second quarter.First and foremost, as I mentioned earlier, on April 12th, that Vectrus was awarded a seat on the $82 billion LOGCAP V contract and was awarded two of seven AORs, CENTCOM and INDOPACOM. I'll discuss LOGCAP in greater detail shortly. But suffice it to say, we appreciate the Army's confidence in our ability to support their most critical mission requirements.Our Air Force campaign has been an area of significant focus and growth for Vectrus, which has resulted in 20% year-over-year revenue growth in the second quarter. Our momentum continues, and during the quarter, we were successful at winning two AFCAP IV task orders, one being a recompete worth a combined $24 million to provide installation support services in CENTCOM.Importantly, so far in the third quarter, we have won two additional task orders worth a combined $21 million, bringing our year-to-date awards under AFCAP IV to $45 million, which is a 25% increase, compared to our full year 2018 AFCAP award of $36 million.During the second quarter, we were also successful in retaining our Kaiserslautern family housing maintenance contract. This program supports the largest U.S. military community overseas, providing maintenance services for more than 1,900 family housing units in Germany. This is a five year, $24 million fixed-price contract, which we have held since 2014.Importantly, through new contracts, scope expansion and successful recompete, our revenue and presence in Europe continues to increase. And it was…

Thanks, Chuck. Let's move to Slide 10. As Chuck mentioned, we are updating our 2019 guidance to include our results to-date in 2019, the acquisition of Advantor, higher non-operational costs and the redeployment of profit dollars in new investments to support growth and long-term margin improvement.As mentioned, we have included the following non-GAAP measures: adjusted operating income and margin, adjusted EBITDA and margin, adjusted net income and adjusted EPS, to better reflect the business' performance. The adjustments exclude non-operating M&A costs, and LOGCAP V pre-operational legal costs.For 2019, we now expect revenue to grow 7% to 9% year-over-year and be in the range of $1.37 billion to $1.39 billion. Revenue is expected to build through the year as we phase-in recent new business wins, expand our base and account for Advantor. Our operating margin outlook is now in the range of 3.5% to 3.7%.Operating margins, adjusted for one-time costs, are now expected to be in the range of 3.8% to 4%. EBITDA margin is now expected to be in the range of 4% to 4.2%. Adjusted EBITDA margins, which exclude one-time costs are expected to be in the range of 4.3% to 4.5%. The midpoint of our adjusted EBITDA margin is now 4.4%, which should equate to 20 basis point improvement compared to 2018.As we realize performance from the investments made into our recently won programs, we continue to expect margin expansion to build sequentially throughout the year with the second half of 2019 being greater than the first. We have increased our outlook for interest expense to $6 million to reflect somewhat higher debt levels and working capital required to support new contracts.Depreciation and amortization is now anticipated to be $7.1 million. The increase reflects the acquisition of Advantor, as well as updated amortization associated with the purchase of…

Let's move to Slide 12 and end with our near-term priorities and execution. Our results at the halfway point of the year demonstrate that we are executing consistently on our strategy to innovate and lead in the emerging converged infrastructure market. Through each of these three core elements enhance the foundation, expand the portfolio and add more value.Our near-term priorities remain the same. As an organization, we are entirely focused on their execution. Our growth teams are hard at work, and we are driving activity to extend recompete wins, prosecute campaigns to both expand with existing clients and diversify our client base. And finally, we are advancing our M&A strategy to build out our service portfolio capabilities and add key client verticals with the backing of our strong balance sheet.With respect to Enterprise Vectrus, we have added leadership and accountability to drive enterprise performance and efficiency improvement to establish repeatable practices for superlative client outcomes and margin expansion over time.This is an example of how, as an organization, we are focused on pulling the levers in every aspect of our operations, particularly supply chain, to drive process improvement in order to maximize profitability in preparation for accelerating growth.Our goal to make Vectrus the premier converged infrastructure company in the market will be unattainable without the drive and dedication to client service and mission excellence of our entire team.I'd like to thank the people of Vectrus for their commitment to duty and the missions we support.Before we close, I would like to highlight that yesterday we announced that Susan Lynch was appointed Senior Vice President and Chief Financial Officer. Effective August 7, Susan brings over 25 years of senior leadership financial experience to Vectrus and a strong track record in the government services, technology, defense, and manufacturing industries.In addition to her deep financial experience, her focus on both performance and cost control will support us well on our journey to our five year goals of $2.5 billion in revenue and 7% EBITDA margins. We are thrilled to welcome Susan to the Vectrus team.I'd also like to take this opportunity to thank Bill for his hard work, dedication, and leadership as acting CFO during this period. Bill is a tremendous asset to Vectrus and we are proud to have him continue in his role as Chief Accounting Officer. Thanks, again, Bill.Now, I'd like to open the call up for questions.

[Operator Instructions] Our first question comes from the line of Jon Ladewig with Stifel.

Hey, guys. Good quarter.

Thanks, Jon. How are you?

I am doing well. I am doing well. So, can you guys just kind of update us on up-tempo in the CENTCOM and INDOPACOM regions? We are just kind of getting the sense for what the recent events in the Gulf have been pretty newsworthy and we are just kind of – is that affecting your outlook around the up-tempo going forward and demand in those key areas?

In the CENTCOM AOR, we are certainly seeing an uptick in up-tempo. I will say, however, that that region has been at a high up-tempo for a long period of time. So, we are seeing it. We will see some, I would assume, kind of tailwinds from a revenue perspective as we move through the second half of the year. And as you've indicated, it's very consistent with what we all see in the news reports.

Okay. Can you guys give us – excuse me, an update on OMDAC-SWACA? Has there anything been or anything changed in terms of the timeline for that recompete?

It has not. We have submitted our bid. We expect an award in November of this year. We’ve heard not anything to the contrary. And again, I continue to be very pleased with the performance of our team and have high expectations for the outcome of the award.

Okay. Bigger picture for recompetes, what's the risk going forward for the remainder of 2019? And what are your initial thoughts on 2020?

In 2019, the only real swinger that we have from a recompete perspective is, OMDAC-SWACA, as you have indicated. And in 2019, there won't be any change to OMDAC, independent of how that contract is awarded until well into 2020 at best. In 2020, we don't have any programs that exceed our 10% threshold that we typically disclose. But in general, 2020 is a light recompete year.

Perfect. Okay. Well, big focus on the call has been talking about the emerged convergent infrastructure markets. Can you kind of elaborate where the customer is in their approach? I guess, do they have a plan to get there? Are they still taking inventory? And, kind of where does Vectrus perceive itself within this market?

Again, we believe that we are leaders in the market. We believe and have evidence that our clients are all focused on the requirement to further utilize and insert technology into their operations. An example of this is the Army Installation to the future activity. We've been heavily involved in that, both from a solutioning and positioning perspective.And I would also like to say that, with regard to our existing contract base, the missions that we support, our clients are very open to us providing kind of new and innovative ways to become more efficient, more effective, and obviously allow the government to do more work with the same amount of money. So, long-winded way of saying that our clients, in many respects, are really leading us to be even more aggressive in this area.

Okay. Just a few more questions, I promise. When you look at the customers right now your Army, Navy, Air Force, can you kind of give us some color around which ones are being more proactive about embracing the fixed price, which one is kind of the leader in the converged infrastructure? And really who is still kind of using the LPTA approach to their contracts? If you can give us some additional color and then I'll jump back in the queue.

So, by and large, all of our clients are very open to utilizing new and innovative ways to become more efficient and more effective. We do see a lot of fixed-price contracting in the Air Force. But in general, I would say that, across the military, all of the commands that are responsible for maintaining infrastructures are all very similar in how aggressive they want themselves to be as acquirers and how they would like for industry to be as solution providers.

All right. Thank you guys.

Thank you. Appreciated.

The next question is from the line of Joe Gomes with NOBLE Capital.

Good afternoon.

Hi, Joe. How are you?

Good. So, it's been two quarters in a row where you've mentioned the top-line is really been driven by the Middle East and Europe. What's going on in the U.S. that it's been lagging behind those two in terms of at least contributing to the top-line recently?

So, as we've talked in the past that the U.S. is very much more aligned with small business with regards to base and operations support. So as such, we do see our U.S. business as somewhat cyclical. In fact, 2020 has some very large U.S.-based opportunities in our pipeline.It is however, almost essential that the Middle East, to a certain extent, Europe and certainly Asia Pacific, is relying upon companies of scale like Vectrus to really support those missions. So that would be the summary. But again, the real takeaway is U.S. is more small business-centric, although we see some changes to that to the positive and overseas is more dependent upon larger business as of scale.

Okay. Got it. Thank you. And I think last quarter, you talked a little bit about some commercial opportunities and just was wondering, could you give a little bit more for the update there?

Yes. So the commercial opportunities are opportunities at this point in time where we are largely subcontracting our solutions to more commercial-type entities. We do have a pipeline in that area. We have not fully disclosed our solutions pipeline yet. But we are intending to do that later on this year, either in the third quarter or the fourth quarter.Advantor provides an excellent conduit for us to do that and as I mentioned in my prepared remarks, one of the clients that is a part of the Advantor acquisition is the Ministry of Defense in Japan, which is very exciting to us, because that's a new channel and it provides us additional reach in the INDOPACOM AOR.

Okay. Great. Thank you very much.

Thank you. Appreciated.

[Operator Instructions] Our next question is from the line of Daniel Drawbaugh with FBR. Please go ahead.

Hi, thanks for taking my questions and congrats on the quarter.

Thanks.

Thank you.

So, just to start on the State Department award, can you provide us a little color on how that came about, it being your first award with that customer? And it seems like a fairly large IDIQ. Are there any sort of historical perspective you could provide on the spending levels towards those – towards this contract?

This is the first of a type award for the Department of State. I'd like to thank we are here because of the positioning and past performance that we bring to the infrastructure support aspects of our defense business. We – the Department of State has not disclosed anything in addition to the contract ceiling of $6 billion.But we have been working with the State Department and much of all of this is public that the intent is to utilize that contract very similar to the Department of Defense with both Middle East and East Asian opportunities in general. So, no real market dollar availability yet, other than the contract ceiling.

Okay. Fair enough. And then, the Advantor acquisition, congratulations on that. Can you give us a little color on the timeframe for the revenue synergies, because it seems like that's a really, really compelling opportunity from that acquisition in particular?

Yes. The Advantor team ran, in my view, a very good business. Their pipeline is clean and clear and executable. And what I like about the revenue synergy is that, in addition to the bases that they have in their pipeline, we can add our existing deployed contract base to that pipeline. So, I like the opportunity for revenue synergies.Our sales teams are working together already very early on into the acquisition and I look forward to a real successful integration, both operationally and from a sales perspective.

Great. And then last one from me. Can you offer a little bit of an outlook on your SG&A spending rates as we move through this year and into 2020? Just seeing as you've pulled ahead some of the investments, as you mentioned and you've added Advantor. So, how should we be thinking about your margin trend line as you move beyond 2019 into 2020?

Again, we have, as we mentioned several times on the call, aggressively began to implement performance improvements, both in program execution and supply chain. If you take that in combination with the expected increase of volume over 2020 and beyond, we really like the trend line.Now obviously, we have to demonstrate that and as we gain additional clarity on LOGCAP timing, we'll become very transparent in our expectations for margin and margin expansion in 2020 and beyond.

Okay. Fair enough. Thanks guys. I appreciate the time.

Appreciated. Thank you.

Thank you. We've now reached the end of our question-and-answer session. I would now like to turn the floor back to Chuck Prow for closing comments.

Thank you, Brenda, and thank you to everybody on the call today. We appreciate your time and inputs and we look forward to updating you on the progress that we are making in the next quarter's call.Thank you very much, and have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.