Thank you for joining us for the V2X Third Quarter 2022 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Keith and I will be the operator for today's call. At this time, all participants have been placed on listen only mode. Following managements' presentation, I will open the call for Q&A session. [Operator Instructions] Please note this call is being recorded. I now would like to turn the conference over to your host Mike Smith, Vice President of Treasury, Investor Relations, and Corporate Development at V2X.

Thank you. Good afternoon everyone. Welcome to the V2X third quarter 2022 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Susan Lynch, 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 three. 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. The company assumes no obligation to update its forward-looking statements. Additionally, I'd like to point out that in addition to GAAP earnings, we will be discussing and reporting various adjusted non-GAAP metrics including pro forma revenue adjusted operating income and margin adjusted EBITDA and margin, adjusted operating cash flow, adjusted net income, and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials, press release, and Form 10-Q filed with the SEC. At this time, I'd like to turn the call over to Chuck Prow.

Thank you, Mike and good afternoon everyone. Thank you for joining us on the call today. Please turn to slide four. I am pleased to report a strong start for V2X with third quarter results that are demonstrative of our ability to grow, generate substantial cash flow, and increase value for our shareholders. I'd like to thank all of our employees for their focus on delivering results and achieving significant progress on integration, while providing high-quality uninterrupted service and support to our clients. We reported third quarter pro forma revenue of $961 million which is up 10% year-over-year compared to Vectrus and Vertex third quarter 2021 results. This growth was driven by continued expansion on existing business and the phase-in of new awards. Notably, year-over-year organic growth for the legacy Vectrus was approximately 10% in the quarter driven by performance in INDOPACOM, growth on LOGCAP, contribution from Fort Benning, as well as volume associated with rapid response and contingency support. Adjusted EBITDA was $79 million in the third quarter, representing an 8.2% margin. Adjusted diluted earnings per share was $1.33. Results were ahead of our plan for the third quarter and driven by the solid execution of our teams in delivering strong results. They were also earlier than anticipated. A significant achievement in the quarter was V2Xs solid adjusted operating cash flow of $121 million. Our cash generation reduced net debt by almost $90 million since July 5th and demonstrates the strong cash flow characteristics of our business. Given our current momentum, significant progress on integration, and Q3 performance we are increasing the midpoint of our guidance range for revenue, adjusted EBITDA, and adjusted operating cash flow. During the quarter, we seamlessly executed across all aspects of our business and successfully reached full operational capability on our new seven-year $850…

Thanks, Chuck and good afternoon, everyone. Turn with me now to Slide 8. The results we will be discussing today, reflect the contributions of Vectrus from July 1 through September 30, 2022 and Vertex from July 5, the close date through September 30, 2022 unless otherwise noted. Our third quarter financial results were strong and a great start for V2X. Third quarter 2022 revenue was $958.2 million. Pro forma revenue was $961.3 million representing, an increase of 10% year-over-year when compared to revenue of $876.3 million for Vectrus and Vertex in the third quarter of 2021. Organic revenue growth was 10% for legacy Vectrus and was driven by continued strong performance on LOGCAP V, growth associated with the Fort Benning Eagle contract award and volume associated with rapid response and contingency efforts in Europe, as well as INDOPACOM. Organic revenue from INDOPACOM increased 113% year-over-year, which is a noteworthy achievement especially, given the revenue contribution from the Pacific Defender exercise during the prior year period. V2X is continuing to increase its footprint in the region, positioning us well for growth to support our clients' mission and strategic initiatives in INDOPACOM. Pro forma revenue growth was driven by the previously mentioned items, in addition to the ramp of new business wins including E-6B, Advanced Helicopter Training System, Navy Test Wing Atlantic and Global Strike Command. Today, V2X has a more diversified portfolio from a client, capability, contract and geographic perspective when compared to the legacy Vectrus. This diversification also helps provide top line resiliency through various economic and political cycles. The improvement in V2Xs portfolio composition is demonstrated in our third quarter revenue metrics. Our revenue with the Army in the third quarter now makes up 37% of total revenue compared to 66% for legacy Vectrus last year. Our revenue with…

Thank you Susan. We have taken a great first step in our journey of V2X and are excited about the path in front of us to continue driving results, enhancing shareholder value and delivering converged solutions throughout the mission life cycle. Now, I'd like to open the call up to questions.

Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Tobey Sommer with Truist.

[Technical Difficulty] areas that you could pursue together that you weren't able to pursue separately very effectively. You had a list of those, is there one you would highlight as a near-term opportunity and one that might excite you the most over a medium one to two-year period?

So Tobey you cut out a bit in the early part of your question. I think the question was of the $20 billion of new opportunities we're pursuing, which ones of those are most interesting in the near and longer term?

That's right. Thank you.

Well, thank you and hello Tobey. How are you doing? Yeah, we talked about in detail in our last discussion that we have opportunities that are emerging in -- both in NASA as well as the intelligence community that are very interesting to us in the shorter term. As we've mentioned in the prepared remarks, that we've looked at approximately $20 billion of net new opportunities that will be evaluated to be pursued. And those are two categories of opportunities that again, I would put in the shorter-term horizon say the next say six to 18 months. And then longer term there are opportunities like the Arctic opportunities and the National Science Foundation and there are other also larger opportunities in both USAID and the Department of State that would be out probably closer into the 18- to 30-month horizon, any other question on that, Tobey?

No. no, I think, you addressed that well. The performance was good in the quarter and then you did adjust guidance. Would you say that you have improving visibility into financial performance as you enter into 2023? And if so what are the main drivers?

Yes. I think I was very, very pleased with the performance of our team in this really our first quarter. As we talked about in the prepared remarks we were very fortunate to move both revenue and EBITDA to the left and it was one of the drivers for our third quarter performance. I will say that, we continue to see pressures in the marketplace in terms of slowing awards. Having said that, we do have very good visibility into the fourth quarter, we feel like we understand 2023 reasonably well now. And we look forward to providing our guidance for 2023 in our February discussion. But again, we're very, very confident of the guidance that we provided today for the remainder of the year.

Thank you. And the next question comes from Brian Gesuale with Raymond James.

Hey. Good evening and thanks for taking my questions. I wanted to talk about free cash flow. It really outperformed what we were looking for. Can you talk maybe about what the rate of debt paydown might be over the next few quarters and really what we can think of from a cash flow perspective as well as you've kind of integrated the businesses? I'm assuming, there's, some big improvements on DSOs maybe talk about where the combined organization was in July which wasn't very long ago where it is today and where you might be six or nine months down the road? Thank you.

Hi Brian thanks for the question. We had a really good cash flow quarter, from all [Technical Difficulty] when you go into a merger. And you're kind of figuring out how to forecast cash. The team just did an excellent job and really exceeded our expectations and was able to haul a couple of things into the quarter which we will see kind of be offset in the fourth quarter projection. We are a low capital-intensive business. So when you think about, how you model our cash flow going forward, I would just kind of think about our interest expense forecast. We are a low cash taxpayer and we've got low CapEx. And so, we're going to be working to pay down debt as quickly as possible. We'll be taking a look probably in the first half of next year of refinancing our debt and getting something with a little bit lower cost of capital. And so just stay tuned to hear more about that going forward but an outstanding quarter from a cash flow perspective from our viewpoint.

That's great. I appreciate the color. I wanted to maybe talk about it the integration sounds like it's going really well. We think the fit is a really good one between all the companies as well. Can you maybe talk about any synergies that you saw from this quarter from the mergers but which is probably very few and then really talk about the milestone to unlocking some of the key synergies that you've previously outlined? Thank you.

Yeah. So I've been very pleased with the kind of initial operation of the combined company. As you remember, the legacy Vertex company was integrating a merger from Raytheon earlier in the year. We saw very, very strong execution and continue to see strong execution in that aspect of our synergy case. With regard to the combined operations of the full V2X we're very closely aligned in processes we're closely aligned now in kind of our technology. In a very short amount of time we found a way to consolidate our kind of financial operations so that our operators can receive insights into their financial performance. And we're on track as I mentioned in the prepared remarks, to meet the synergy commitments that we have previously communicated. On top of all of that, operational color just the cultures couldn't be more aligned. The focus of both legacy teams now one V2X combined is very mission-oriented. And given the complementary nature of the missions that, we supported it's really been fun to watch the teams come together. We talked about the Industry Solutions Summit that we had in Indianapolis and to me that just brought to life all the possibilities for future revenue synergies in addition to the cost synergies we've already discussed.

That's great. And if I could just sneak one last one in, before I jump back into the queue. It looked like EBITDA margins were really healthy. Is this the way we should think about the run rate going forward, kind of pre-synergies, or was there something that kind of produced some of that incremental strength in this quarter that might be non-recurring?

Yeah. We were very pleased as both Susan and I have mentioned in our remarks about the EBITDA performance in the quarter. The quarter was aided by a couple of transactions. The teams did a really great job of pulling into the quarter. We did set and raise our EBITDA guidance for the remainder of the year. And we look forward to providing 2023 guidance with regard to EBITDA when we get together again in February, but net-net a very, very strong performance in the quarter driven by great execution from the teams that have now come together.

Fantastic. Congratulations. I'll jump back in a queue.

Thank you. Good talk with you.

Thank you. And the next question comes from Robert Connors with Stifel.

Hi Chuck and Susan. Thanks for taking my questions.

Hi Rob. How are you?

Hey, doing well.

Rob, how are you doing? Thanks for the call.

I am doing well. I think you guys gave a pretty good breakdown of what sort of drove the revenue there. And just doing the back of the envelope calc I think the Vertex portion in the quarter was about $453 million of revenue. Just wondering sort of what the flavor of that was year-over-year and what drove that from the legacy Vertex?

Yes. As we mentioned, the combined growth rate was pretty well split up about 10% per legacy company. And I would say the complexion is very similar. We had really healthy on-contract growth. And as we mentioned in a time where we do have slowing awards that's important. But it's also important to note that the legacy Vertex part of our now combined V2X company was coming off a very, very strong first half of this year in terms of new awards with Navy Test Wing, Atlantic and Global Strike. So the Vertex component of the business again was really aided by new start-ups, which I've just described as well as on-contract growth.

Okay. Great. And sort of a follow-up for Susan. Of the about $90 million debt pay down when I look at the three sort of tranches of debt where was the majority of that pay-down? Was it on the higher cost capital debt?

Yes it was all on the ABL. We have not yet paid down any of the second lien and that will be our focus going forward.

Okay, great. I’ll jump back in queue and congrats on the quarter.

Thank you. Appreciate it. Thanks for the phone call.

Thanks.

Thank you. And the next question comes from Joe Gomes with NOBLE Capital.

Good afternoon. Congrats on the quarter.

Thank you, Joe. How are you?

Doing well. So I wanted to start off and circle back. Susan you made a comment that you're monitoring inflation but you're not seeing a material impact yet. And a number of the other companies that I follow in the defense space have all identified inflation as a real headwind. I'm wondering maybe you can just give a little more insight as to why at this point in time inflation is not really been impacting you guys?

Yes. There's actually two things. So most of our labor is controlled by labor unions or I should say our labor cost is controlled by the labor unions. So as we go through negotiations with the unions, we are also working with our customers to make sure that those changes get included in our contracts via contract change order. And then conversely on almost all of our contracts except for one or two, the materials are on cost recovery contract line items. And so we do the best that we can to negotiate with our suppliers to keep the cost low for our customers. But in the case that we cannot that cost is paid by our customers. And we have seen our customers and we've not had to do this quite yet but we will consider it is that the – our customers are becoming more open to having an EPA or Economic Price Adjustment clause in the contracts. And so it's a global issue with inflation. It's not one that we alone are facing and we'll be working with our customers, when we do encounter a problem. We'll be doing that proactively in our bidding process to include that contract clause in our contracts. And if we start to see an issue, we will be going back and negotiating with our customers.

Okay. Thank you for that.

Yes.

You mentioned on the guidance in the last quarter when we talked we were talking about kind of the guidance split in revenue for the back half of the year you guys were kind of talking about 45-55 split between the third and the fourth quarter. Given the performance in the quarter, it looks like it's going to be much closer to a 48-52 type of a split. And you mentioned that you were able to pull some business forward into the quarter. I was wondering if you could talk a little bit more about the business you were able to pull into the quarter and maybe just highlight some of that as to where it came from and why you were able to pull it forward. : Susan Lynch: Yes. Thank you. So there was actually two events. One was a large revenue item that working with our customers, we were able to – or one of our customers we were able to meet their need. And so we were able to pull that effort forward into the quarter. And that I would say was a – I'll characterize it as an average margin item. And then there was a second item that we actually had in our fourth quarter forecast as well that working with the customers they were actually very motivated to get that into the third quarter and we accommodated them. And that was a very high-margin type of situation. And so we will actually be collecting that in the – and within our second half and fourth quarter forecast but we've been able to confirm that we will be able to collect that in the fourth quarter. So really two items and the underlying business performed very, very well and within our forecast. So that was the main driver. And you're exactly right a 48 to 52 split, a little bit more of the EBITDA came into the third quarter from the fourth quarter. So you're exactly right on Joe.

Okay. Thank you. And then Chuck you mentioned about somewhat of a slowing award environment. Maybe give us a little more color and detail on that and kind of your thoughts here on the continuing resolution, which runs to mid-December, and what kind of impact you see that having on the business here in the short term?

Okay. I'll start with the later part of your question Joe. As you know we're predominantly funded across our business through the O&M budget which is a bit more stable when it comes to continuing resolutions. And you also know we're heavily OPTEMPO-driven. And given what's happening in Europe and there's still ask any, [ph] new operations as well as activity and INDOPACOM, we're seeing a good deal of activity that what I like to think about is kind of on-contract growth if you will. With regard to our pipeline, as I indicated in my prepared remarks, we are seeing a slowdown. You saw that in the $2.7 billion worth of pipeline that has already been submitted which was up 16% over the last quarter. So we're continuing to see the bids submitted grow. We're continuing to see a very strong pipeline growth as represented in the $20 billion of the pipeline I should say. But it has slowed down. I wouldn't necessarily attribute it to the continuing resolution, but it's something that we're going to continue to work closely with our clients on.

Okay. Great. And one more if I may. You talked Susan, about the potential in the next year of looking at refinancing the current debt out there. Any thoughts -- I know it's really early but are you just looking to lower rates, or are you looking at maybe kind of getting a different type of debt structure out there? Any thoughts you might have? And again, I understand you're probably really early in the process here.

Good question. So the biggest thing is to lower the rates. The rate on the second lien is quite costly, so that is thing one. Thing two is the labor intensity on the ABL. I think Mike Smith and I and Chuck would really like to get into just more of a traditional revolver where we have access to it and don't have to file a borrowing base every month. But that being said, we really do appreciate the support and help that we get from our lenders.

Great. Thanks. I’ll go back in queue.

Thank you, Joe. Appreciate it.

Thank you. [Operator Instructions] And the next question is a follow-up from Tobey Sommer with Truist.

Thanks. I was wondering if you could give us some color for what the re-compete percentage of the book of business looks like over the next year or two. You already talked about how you don't have anything chunky over the next 2.5 years. But to what extent kind of can you be outward-facing rather than depending on the base?

Yes. We are really fortunate and that many of our largest re-competes are now behind us. And as I stated in the last quarter's remarks and also in the discussion today as well, we really don't have any re-compete more than 2% of revenue for the next couple of years actually. And Tobey, what that is going to allow us to do is going to allow us to free up some business development resources to focus on this net new combined opportunity set that we've talked about. So while there's always re-compete in a portfolio, that's as broad as V2X is it's pretty smooth when it comes to the size and not being our largest opportunities. And as I've indicated, that's going to free up some time and attention to really focus on and make progress on these net new opportunities that are so attractive to us.

Just to drill into that would you describe it as sort of moderately lower than average in addition to not having anything of scale or would you call it substantially...

I would say -- I mean just -- I think just mathematically, in the early years just moderately lower than average. And if you can think about the way how the seven-year contracts go, it's -- you understand the math as well as anybody. It will be lower in the first couple of years, more average in the middle and then higher at the end obviously.

Thank you very much.

Appreciate. Good talking to you.

Thank you. And we also have a follow-up from Robert Connors with Stifel.

Just to touch on the INDOPACOM revenues, which was pretty strong in the quarter, can you give any just sort of comments as far as like initial discussions you're having with regards to the future OPTEMPO in the region, and whether we can still see some sort of sequential growth out of that?

Sure. Yes, we couldn't be more pleased with the connection we have with our clients in INDOPACOM. We're now at full operational capability on Kwajalein, as you know, we have been for a while. There actually have been, some exercise support activity this year in INDOPACOM as well. The work that we're doing in the Philippines is now at full operational capability as well. And as you may or may not know, every other year in INDOPACOM, there is a large exercise. It was Pacific Defender in 2021 and in 2023, the name of the exercise is…

Talisman Sabre.

Talisman Sabre. Thank you. Just skip my mind. So we're looking at another large exercise in the INDOPACOM region next year as well. The last point I'll make on this is that we really see an opportunity to actually add on to Tobey's earlier point with regard to our aerospace business and our training business, with regards to extending the capabilities we have and to augment the former Vectrus capabilities in INDOPACOM as well. And we're closely looking at a number of opportunities that would provide that type of revenue synergy into the future as well.

Okay. Great. That's very helpful. And then, if I remember, 1Q has sort of traditionally been the lighter of the cash flow quarters under the old Vectrus. So, I was just wondering if seasonality of just cash flows has changed with the combined entities.

Great question. It's almost identical to our cash flows. So when you pay all your FICA dues SUTA your management bonuses, et cetera, the -- and even through I would say, the first half of the year that's where we really push to go cash flow positive. And then we typically have just -- that's when we generate all of our operating cash flows, is in the second half of the year. So unfortunately, it's almost identical.

Okay. Great. Thanks for the help and thanks for taking the question, again.

Thank you.

Thank you. And this concludes the question-and-answer session. I would like to turn the floor to Chuck Prow for any closing comments.

Thank you and thank you all for joining us on our call today. We really enjoy these discussions, and we look forward to continuing to talk with you, and we'll talk to you on our fourth quarter and year-end call next time. Talk to you soon. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.