Q3 2019 Earnings Call
Thank you for joining us for the Vectrus third quarter 2019 earnings conference call in webcast. Today's call is being recorded my name is Elmer and I'll be the operator for today's call. At this time, all participants have been placed and they listen only mode. Following managements presentation I will open up the call for a <unk> session.
If anyone should require operator systems during the conference.
Please press star zero in your telephone keypad.
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 third quarter 2009, <unk> earnings Conference call.
Joining us today, a truck broker president and Chief Executive Officer.
I have too much senior Vice President and Chief Financial Officer.
Today's presentation are available on our Investor Relations website.
There's got to actress dotcom.
Please turn to slide two.
During today's presentation manageable well 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 description of some of the factors that may cause actual results could differ materially from results contemplated by these forward looking statement.
The company assumes no obligation to update its forward looking statement.
Additionally.
We were discussing and reporting non-GAAP financial and other metrics, which we believe provides useful information for investors, but should not be considered and isolation.
As a substitute.
My pleasure prepared in accordance with GAAP.
At this time I was I could turn the call or truck broker.
Thank you like and good afternoon, everyone. Thanks for joining us on the call today.
Please turn to slide three.
And the third quarter, we continued to make progress toward our goal to make that Chris the Premier converged infrastructure company in our markets driving incremental revenue and earnings momentum.
Total revenue grew 17% in the quarter driven by strong organic revenue growth rate a 13%.
As expected revenue growth accelerating in the second half the year given the continued phase in a program to one and 28 team.
And the programs one that's four in 2019.
It wouldn't have significantly diversified our portfolio and increased our market share with the Navy and the Air Force.
In July we acquired advanced or.
And with a leading provider of integrated electronic security system.
That protects over 2000 facility then assets for defense intelligence federal civilian and international clients.
Including the Endo Paycom AOR.
In the quarter advanced or contributed to our growth.
Adding 3% to our overall revenue growth rate.
As you May recall advanced or is the only vertically integrated and accredited command control and Communications network security technology platform and the industry today.
The acquisition typifies the investments we plan to make in our business.
To reinforce vectrus its position as an innovator and the emerging converged infrastructure market.
Our teams have already identified engaged in several cross selling opportunities.
We expect advanced door to continue to contribute to our financial result, as well as increase our portfolio of operational technologies that will drive in power that converged infrastructure.
Our profitability improved sequentially as anticipated with adjusted EBITDA margin, reaching 4.6%.
Up 40 basis points for the second quarter.
As we indicated in our last call while year over year comparisons are more the norm.
Also highlighting our sequential recruitment as reflective of our evolving operating model at the recent awards phased in during the second half of 2019.
Excluding approximately four cents from M&A activities related to the acquisition of advanced or add left fees associated for a lot kept five three operational legal efforts adjusted EPS was 84 cents.
I am pleased that we were able to achieve the results. Despite the continued investment in our business to include lockout five pre operational activities.
Implementation of new systems, standardizing processes, strengthening our supply chain and more broadly driving efficiencies through enterprise Vectrus.
Our ability to effectively manage our cash position drove a substantial increase in cash from operations, a $13 million for the quarter.
We continue to focus on generating strong cash flow and plan to exceed 100% of net income the cash conversion and 2019.
Because of our strong cash flow and balance sheet during the quarter reduced debt by $3 million year over year, even after acquired good bad or for $44 million.
We continue to have the financial strength to support our future organic and inorganic growth strategies.
We expect our growth momentum to continue with approximately $2.2 billion a bid submitted awaiting award which includes protested contracts or new business pipeline include $7.1 billion of opportunity planned over the next 12 months, which does not include any opportunities associated with they had tour.
Our growth efforts are yielding greater client diversification, but are also expanding our geographical presence for example that Chris was recently awarded to contract to provide services in Africa.
One award is to provide forward deployed I T support services and the other at to provide equipment maintenance services.
While small in size the wedded to broaden our presence and the African AOR and demonstrate our unique ability to provide facility a base operations.
Supply channel logistic services.
Hi team mission support and engineering, and digital technology services and complex operating environments.
Regarding lot kept five we have continued to move ahead with preparations for phase it will.
We remain confident in our position with respect to both our seat and our task orders in the Satcom and Endo Paycom Aon Wars.
We expect Acorda federal claim to lift to deliver their decision on or about December for.
At that point, we will have a clearer view of the timing with regard to receiving authorization to proceed our teams are prepared and ready to proceed.
Given our results to date, we remain confident in our growth expectation for 2019, which are on track to achieve the upper end of our 7% to 9% revenue growth outlook further at our momentum is supported by a strong backlog and a robust pipeline of new business. We are on track to double digit revenue growth and 22.
As our revenue diversification strategy customize campaigns and growth related activities increasingly pay off in terms of market share and topline results.
Our performance continues to validate our strategy and we remain focused on driving growth and profitability and on investing in all aspects of our business to prepare for and to facilitate an accelerating growth curve over the next several years.
Our goal remains to be a two and a half billion dollar, 7% EBITDA margin leader and they converged infrastructure market.
On September 20 that comes with added to the military times, that's for of EPS index due to our unwavering commitment and support the U.S. military veterans and their families.
Only company that ever under spot on the best for Vets rankings for three consecutive years have a market capitalization of at least $200 million and meet other metric that liquidity are eligible to be included in the index.
You did indeed and not have to be included at one of the 48 companies and this index and we are proud to consistently prioritize veteran and their families.
Lets veterans day coming next Monday November 11th I'd like to take a moment you recognize all veterans for the surface to our nation, particularly those who are part of that that Christine.
<unk> many of our clients critical missions oftentimes, our remote and austere environment every day. We thank you for all you do for our nation and for a company.
Now I'd like to introduce you to our new Chief Financial Officer. She was a much who is joining us on her first vectrus quarterly call.
It doesn't have the season financial executive with a strong track record in the government services technology defense and manufacturing industries.
He was in his deep experience financial acumen and focused on focus on both performance and cost control aligns well with our mission and financial objective. We are thrilled to have Susan as our CFO to execute our strategy Susan welcome to the Vectrus team.
Thanks, Chuck and good afternoon, everyone. It's a pleasure to join the Vectrus team I have been here nearly three months and gotten to know the management and finance team and Im delighted to be working at a company that supports our military at home and overseas as well as our allies.
I believe the company has a tremendous growth opportunity and unnecessary capacity to achieve its revenue and profitability objectives.
I look forward to meeting with you our shareholders and analysts over the coming quarters.
[noise] turn with me now to slide four to discuss our third quarter result.
Third quarter 2019 revenue was $359.9 billion up $51.8 million were 17% year on year.
Organic revenue growth was up 13% year on year, excluding the contribution from advanced <unk>, which was acquired on July eight.
Total revenue growth resulted from increases of $22.9 million from our U.S. program, which $10.2 million, which from the acquisitions other than to work.
An increase of $20.5 million from our middle East programs and the increase of $8.4 million from our European programs.
Our cable its contract contributed $127 million to revenue were 35% of total revenue in the third quarter.
Our growth related activities targeted campaigns and diversification strategy continued to contribute increasingly to our revenue.
During the third quarter, we grow revenue with the Navy by 56% year on year and increase our air force revenue by 35% year on year.
Our expansion within our intelligence and other federal clients increased 26% year on year.
Revenue was up sequentially $28.3 million or 9% with 3% from the acquisition of a downturn.
Operating income for the third quarter of 2019 was $14.4 million, 44% margin compared to 4.5% in the third quarter 2018.
Operating income increased point $4 million year on year due to an increase in revenue, partially offset by an increase in s. DNA tied to internal investment in global operations advanced energy in a are probably my $600000 associated with advance toward M&A and <unk> five pre.
Operational legal cost.
Adjusted operating margin, adding back the $600000 was 4.2%.
Please note that the operating income in margin in the prior year include a one time 1.4 million dollar benefit associated with the successful closure of the unresolved items on a close contract.
This had a positive 50 basis point impact on our operating margin in the third quarter 2018.
Operating income was up $3.2 million sequentially were 28%. This was in line with our expectation for sequential improvements that were discussed last quarter.
Third quarter 2019 interest expense was $1.9 million up $600000 year on year and on a sequential basis, reflecting the financing of the advance where acquisition and short term working capital requirements.
EBITDA for the third quarter of 2019 was $16.1 million or a 4.5% margin compared to 4.8% margin in the third quarter 2018.
EBITDA margins decreased year on year due to the previously mentioned one time 1.4 million dollar benefit in the third quarter of 2018, which added 50 basis point.
EBITDA increased $1.1 million or 8% year on year, adjusted EBITDA margin, which adds back the previously discussed M&A and Logcap five legal expenses was 4.6% as compared to 4.8% last year.
Adjusted EBITDA margin improved 40 basis points from Q2, 19, which is in line with our expectations for sequential improvement.
Net income for the third quarter of 2019 was $9.4 million as compared to $9.9 million in the prior year the effective tax rate in the third quarter increased to 24.8% from 22% primarily due to changes in the geographical mix of income.
Adjusted net income was $9.8 million flat to prior here.
Diluted earnings per share for the third quarter of 2019 with 80 cents compared to 86 cents in the prior year. Adjusted EPS was 84 cents. Excluding the previously mentioned adjustments and was up 14% on a sequential basis.
It is important to note that the company's effective tax rate in the third quarter had a three cents negative impact on adjusted diluted EPS.
Turning now to slide five to discuss cash and liquidity.
Net cash generated from operating activities in the first nine months of 2019 was $28.4 million up $20 million year on year net cash generated in the third quarter was $13 million, an improvement of $8.5 million year on year.
Having been here for three months I fully appreciate that our ability to generate strong cash flow isn't important characteristics of our business.
We continue to expect to generate over 100% cash conversion compared to net income in 2019, and I see pockets of opportunity to improve our cash flow profile.
In July the company acquired a bad horse systems for $44 million.
Using cash on hand and drive from its revolver.
Total debt at the ended the quarter was $73 million down from $76 million in the third quarter 2018.
The company's leverage ratio was 1.04 times and well below our covenant level of 3.0 times.
Cash at quarter end was approximately $41 million per net debt of approximately $32 million.
At quarter end, our revolver was undrawn with a $112 million of available borrowing capacity with a possibility to expand borrowings by an additional $100 million subject to lender consent.
Well our balance sheet continues to be strong we're evaluating opportunities to take advantage of current market conditions in our financial strength to expand our credit facility to support future working capital needs and lower the Companys interest expense.
Turning now to slide six to discuss backlog.
Third quarter 2019, total backlog was $3 billion and includes backlog associated with advanced were up $62 million.
This backlog of $807 million was up 4% year on year and decreased 14% sequentially due to the timing of awards.
Because our order flow fluctuate significantly from quarter to quarter, particularly in the second and third quarters of each year. It trailing 12 months view a book to Bill is a better representation of our business.
The company's trailing 12 month book to Bill was 1.0 times.
As a reminder, our book to Bill does not reflect contracts under protest and in particular Logcap five.
Total backlog includes both funded and unfunded backlog and represent firm orders and potential auctions.
Our contracts or multiyear contracts and the right to exercise an option is that the sole discretion of the U.S. government or the prime contractor when we are a subcontractor.
Total backlog excludes potential orders under indefinite delivery indefinite quantity contracts and new contract awards that are under protest.
If we include programs under protest our pro forma total backlog would rise significantly and would be approximately $4.4 billion.
Let's move now to slide seven to discuss our guidance.
Okay.
Given the year to date and current performance, we're seeing our programs we remain confident in our 2019 estimates and as such our reaffirming our full year guidance.
For 2000 my team, we continue to expect revenue in the range of 1.37 billion to $1.39 billion, reflecting 7% to 9% growth year over year with the momentum we're seeing in our business. We now believe that revenue for the full year could be toward the high end of our guidance.
We continue to expect EBITDA margin in the range of 4.0% to 4.2%.
Our guidance for adjusted EBITDA margin, which excludes M&A and lock up five preoperational legal cost remains at 4.3% to 4.5%.
The midpoint of our adjusted EBITDA margin is 4.4%, which would equate to 20 basis points of improvement as compared to 2018.
As mentioned last quarter, we focused on deploying the incremental profitability from our higher revenue volume in 2018 to build capabilities and prepare for our substantial growth.
We have continued to invest in our business and we're pleased with the sequential margin improvement we achieved in the third quarter. Despite these investments.
Look into the fourth quarter, we're working to deliver a margin that is above the third quarter level, while continuing to investments that will further enhance our capability and foundation to support the significant volume of growth in 2020 and beyond.
Our estimate for interest expense remains at $6.0 million depreciation and amortization is now anticipated to be $6.5 million down from $7.1 million.
We now estimate a 23.2% tax rate for the year up from 22% due primarily to geographic mix.
For the fourth quarter of 2019, we're forecasting a 24.5% tax rate due to the provisional tax rate true up for 2018.
Diluted earnings per share guidance remains in the range of $2, an 82 cents to $3.05.
We continue to expect adjusted diluted EPS in a range of $3 in six cents to $3.49.
Weighted average diluted shares outstanding are estimated at 11.6 million shares.
Our 2019 net cash provided by operating activities guidance is unchanged at 38 million to $42 million and incorporates our increased internal investments.
[noise] operational capital expenditures guidance is approximately $10 million, including our application modernization project, a $4 million with the remainder coming from program requirements. As a reminder program related capital expenditures are considered and contract pricing and will be recouped all Orient part.
Overperformance was a contract.
Finally, 2019 mandatory debt payments or $4.5 million.
I'll turn the call back over check now thank you.
Thank you Susan let's move to slide eight to discuss our organic growth.
This table shows our quarterly update of contract win in the year to date in 2019 Vectrus had won over $2.3 billion, an award to our commitment to delivering exceptional program performance to our clients.
Our targeted campaigns and are a significant investments in growth focus talent and capabilities.
As you know well placed significant emphasis on the Air Force campaign, which grew by 35% and the third quarter every means highly effective we continue to leverage our global rapid response think contingency capabilities to secure new business under the Air Force contract augmentation program for.
Or alphacat for program.
As a reminder, buckets what awarded a position on that's $5 billion I'd like to contract for the first time in its history in June of 2015.
We are one of a company selected for a position on this contract and since that time have executed a growth campaign that has resulted in vectrus, winning the greatest number of task orders issue due date under this contract.
With the aggregate over $136 million in total value, we look forward to continuing to grow our air force footprint, while expanding our campaign efforts and other clients such as the Navy and the department of state.
Regarding the Navy Vectrus was recently awarded a small but important 6 million dollar task order to provide told us they support services.
Under the U.S. navies global contingency service multiple award contract.
Additionally, during the quarter, we were awarded a small subcontractor provide engineering for the U.S. navies real time spectrum operation software application.
Toward with based on our decades of experience in providing engineering solutions associated with electromagnetic spectrum operations.
We continued to expand our presence with the Navy and all of our core capability areas.
We are seeing increased momentum at our IP services business, which is driven in part by our focus on executing a I'd like you portfolio and leveraging our ability to provide complex mission critical I T services and austere and challenging environments. Today. We have won our first task orders out of prime contractor on both on both.
Well I mean, I test three yes, and Rs three I'd like Hughes.
Vectrus is also recently awarded a subcontractor provide cyber operations for the Air National Guard.
Which builds on our recent subcontractor provided offensive cyber operations, all army networks and the end to end the Endo Paycom Payor.
These awards leverage our past historical performance on our Ondecks Walker contract and capabilities that include operating the largest overseas Army Cyber center.
Please turn to slide nine.
Our 2019 award activity has been solid and our pipeline of new business opportunities supports continued growth in backlog and revenue.
We currently have approximately $2.2 billion on bid submitted.
For New business Wedding award, which includes protested contracts.
This is a highest dollar amount of bids we have had under consideration since reporting on this metric. Additionally, we have identified we have opportunities of over $7.1 billion that we plan to bid over the next 12 months.
Real focus activities have driven solid when rates to date and we are confident in our ability to successfully compete for business and are more as a 9.3 billion dollar new business pipeline.
Now, let's move to slide 10 to touch briefly on log kept five.
As you are aware Vectrus was awarded a position unlock kept five contract. The Army's 82 billion dollar tenure multiple award I'd I Q contract in the second quarter.
We want to say income and Endo Paycom AOR task orders, which carried initial value of approximately $1.4 billion or 40% of the $3.5 billion total initial value of task orders awarded to all seats.
The protest process have moved along and we expect the core to federal claims decision on or about the summer for.
Our team, they're prepared and ready for Phase then once the protesters settled.
We remain very confident in our Centcom incumbency Endo Paycom will significantly expand our footprint in the vast region and we look forward to delivering excellent service to our client and to say or.
Aside from aside from the size of these task orders alone walk cadfive offer incremental growth potential by giving access to all additional non urgent and compelling opportunities and all commands for the contracts 10 year duration, and we see significant additional opportunity for growth beyond our current or to task.
We continue to expect assuming the protesters decided in early December .
That revenue, resulting from these task orders would begin sometime and 2020, given the complexity and probable timing a program transitions.
So theater with these award.
We are waiting to protest conclusion and are eager to proceed.
Let's move to slide 11 to review our tracking toward our five year revenue and EBITDA margin goal.
To reiterate there are three components of our long term margin expansion plan to 7% EBITDA.
Well I haven't contract mix enterprise, Vectrus and client mix and solutions.
This is our scorecard of the strategic levers that correspond to each component, while we cannot expect to see the levers move each and every quarter. We continue to track and measure ourselves against our objective and report how real how we are progressing.
Just first dimension volume and contract mix seeks to drive 80 basis points of margin improvement over the next four years by driving operating leverage through revenue growth and working with our clients toward more advantageous contracting structures to include fixed price and as a service models.
In the third quarter, our fixed price contract increased slightly to 24%. We continue to believe that dollar value will increase further overtime as fixed price contracts grow and reap the higher margins that this contract type can generate overtime and 2019, we have been aggressively reinvesting in our business to further solidify.
Hi, the margin advancement component of our goal in order to maximize our profitability as we move up a significant revenue growth curve heading into 2020 and beyond.
The second dimension enterprise Vectrus aims to deliver another 80 basis points of margin expansion through increased process discipline cost efficiency supply chain leverage and technology enhancements in both our programs and support functions again, our phase in foundational cost truck for new contract flows.
To enterprise Vectrus, which is receiving significantly heightened attention this year.
We're making progress on our priorities.
Delivery excellence evolving our global talent chain, establishing supply chain or the core competency.
Completing the implementation of variety modernization for platform and speeding that's the pace of technology insertion and do our current program base and past Standalone offerings as I mentioned last quarter, we're assessing enterprise vectrus qualitatively this year, but will aim to begin disclosing a quantitative assessment and 2020.
The third dimension of our margin expansion plan solutions and client mix targets, an expansion of contribution of 130 basis points.
The growth of our Air Force a navy business. The recent state Department I'd like to you win and the acquisition of advanced are all examples of our diversification strategy and action.
As we execute our growth strategies and further institutionalize our plan disciplines, we may adjust our component targets to reflect what we achieve and what we learn and we will continue to update you on our progress every quarter.
Vectrus had a tremendous opportunity to deliver a higher profitability.
And returns as we grow let's move to slide 12, and close with our near term priorities and execution.
In summary, our results this year reflect consistent execution of our defined growth strategies three core elements.
Enhance the foundation expand the portfolio and add more value.
To capture opportunity to transform vectrus into a larger scale.
Higher value differentiated platform.
For the remainder of 2019 remain entirely focused on our two key priorities first driving further momentum through growth activity that support our recompete win rate.
Prosecuting campaigns to both diversify our client base and expand with existing clients and utilizing our strong balance sheet to expand our service portfolio capabilities.
Second you enterprise Vectrus drive process improvement improve efficiency than institutionalize repeatable performance.
To generate consistent exceptional client outcomes and expand margin overtime again. This discipline is particularly crucial now as we prepare to maximize profitability on an accelerating growth.
Our objective is to transform vectrus do a higher value differentiated business, leading to converged infrastructure market.
We rely on the commitment and determination of all of our Vectrus employees, who deliver client service and mission excellence everyday many under austere conditions.
Hi, Thank all of our vector if people in the field for their diligence to duty and to the missions we support together.
We are completing a terrific year for Vectoring and are making great strides in driving toward a five year girls two and a half a billion dollars in revenue and 7% EBITDA margin now I'd like to turn the call open to questions.
At this time will be conducting a question answer session if you'd like to ask a question. Please press star one and your telephone keypad, a confirmation tone wouldn't get your line is into question Q you May press star too if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith one moment, please while we pull for questions.
Our first question is from Joe Gomes Noble capital. Please proceed with your question.
Thank you good afternoon and nice quarter.
Thank you Joe.
I was wondering if you could drill down a little deeper provide more color on these African contracts that you recently won in the quarter.
Any additional detail.
Would be appreciated.
Yeah, I mean, they were really excited about the expansion of the geographic footprint out one of their contract was for the Navy or the other for the Air Force, one and your ability and the other and a nine year. So.
They're not large enough scale, but you know as you know from our conversations over the last couple of years. Your our objective is to continue to expand our footprint, particularly in kind of emerging and austere environment is where we really can differentiate ourselves.
Okay, great. Thank you on that and.
To provide any update on the on DAC Recompete I'm not sure I'm, where we stand on that right. Now I think last time you were talking there might be award in November .
Yeah that is still the current plan, although we're not going to be surprised to see that pushed to the right. So.
Oh, you know we was a bit just submitted and we're awaiting the the clients decision.
Okay, great. Thanks, guys appreciate it.
I do know thank you.
Our next question has from Joseph Denardi Stifel. Please proceed with your question.
Hey, good evening, guys nice nice results.
Thank you yeah.
There seems to be some mixed data points over the past several months are mixed messages maybe in terms of deployment levels troop levels in the middle East I'm wondering if you just talk about what you're seeing from your business, there and what effect or any of those changes have had thanks.
[laughter]. Thanks, <unk>, we see continuing our capital through out the places that were deployed predominantly the middle East.
I am southwest southwest Asia in particular.
We we are seeing we'll call it stable revenues from our perspective.
And as you know from our discussions as that.
From an Apple perspective, it's a the same type of logic, whether a true for deploying in Iraq, whether true for deploying out. So the short answer to your question is the op tempo as high our teams are working very hard to support the op tempo, but we're not seeing any.
New opportunities. If you will that are specific to the news other recent a couple of months.
Okay and then when you look into next year, you you reiterated the expectation for double digit growth. It would seem like a primary drivers that will be the ramp up on logcap. So can you just talk about kind of expectations for the remainder of the portfolio I mean, the idea that the trailing 12 months book to Bill one time.
James realize that excludes log cabin.
Yes can you maybe help us understand why or why a book to Bill below 1.2 times should support gross.
In the in kind of the remaining portfolio. Thank you.
A couple of twice as you know our signings our sales in our business is quite cyclical.
We are at least one times not a lockout notwithstanding on a trailing 12 month basis.
As we've talked in <unk>, we prefer to look at book to Bill on a trailing 12 month basis I would point to two things in terms of my confidence in our continued growth outside of Logcap.
About one is our very strong.
Pipeline, it's the largest pipeline that we've had since I've been asked Vectrus 0.1, and twine to our win rates remain very strong so I really like the some momentum that our growth team on their sued San Diego House, and ER and quite frankly, our ability to.
More effectively than ever phase in a phase and new opportunities from a profitability perspective.
Thanks, Paul I'll get back into queue. Thank you.
Thank you.
Our next question is from Chris Van Horn B. Riley FBR. Please proceed with your question.
Good afternoon. Thank you for taking my call.
I wanted to ask about yes, you today. It seems like a you know <unk> third quarter, you became a little bit more efficient as in terms of percent of sales relative to the first half and I. Just wanted to just curious how we should think about that going forward. I think you also mentioned initial investments are you thinking more of the yesterday side or is there is there something more.
For the Cogs side, where your be seem to be investments.
You know S. T N. A in our business is is really quite closely aligned to operating leverage so as our revenue continues to trend in a positive direction, which we foresee for this for which we see for the foreseeable future Oh, we're going to make very tactical and strategic.
Decision both on how we.
Reinvested that operating leverage.
So from our perspective, it's all about you know how do we make sure we return.
The necessary amount of props more growth to meet our 7% commitment while continuing to continuing to invest strategically our business.
Okay got it and then you I know you you mentioned that you've got these key levers to achieve your 7% adjusted EBITDA margin in it and it looks like customer mix is a component of that how do you see that that mix evolving. It looks like you know Navy has has increased a little bit whereas air force has increased.
A lot relative to 2016, how do you see those two customers kind of evolving over the next year or two years.
Oh, you know we have in the pipeline that we have discussed earlier, we really like the mix of clients, we have within that pipeline.
We can't have this conversation without kind of continuing do we express how how good the centel acquisition have been for US now two years ago, we continue to grow our intelligence community footprint as well.
And I would hope that you know that's kind of get out of a size and scale here in the coming quarters that will begin to break that out individually as well so.
There are different clients that are market, though different clients have different profit profiles.
And they also favorite different contracting types, we continue to see although I will tell you that logcap.
Well, yeah, as a cost type contract and so that's going to continue to be the predominant contracting type that we deal with but other clients are moving aggressively into both fixed price and as a service.
Types of contract vehicles.
Which give us a bit more control of our margin profile.
Got it. Thank you so much for the time and congrats on the quarter.
Thank you thanks for calling yeah.
As a reminder, we're now conducting a question answer session if you'd like to ask your question. Please press star one on your telephone keypad for participants using speaker equipment, it maybe necessary to pick up your handset before person. This turkeys one moment, please while we pull for questions.
Our next question is from Joseph Denardi Stifel. Please proceed with your question.
Yes, Thanks, Chuck just kind of maybe focusing on the margin target longer term it seems like given how successful you guys.
We're on Logcap that could make it harder to get there. So if we look at it as kind of the goal of two and half billion in sales and 7% margins equates to about 175 million EBITDA is your thinking that the logcap when makes it easier to get there may be sales are a little higher in margins are a little lower but you still can.
Yet to the EBITDA target or I'm thinking about at the wrong way I mean can you get there early I think that will you meet your your point would be a logical conclusion, although I will say that that amount of volume and the increasing size and scale of our supply chain.
To support Logcap.
We have we have a lot of leverage we can pull so at this point in time, you know I would not be prepared to do in the lease come off the 7%.
Margin objective, although we're gonna have to pull a different types of levers I think under a cost type contracting scenario.
Does that help okay, yeah that that doesn't mean that does the pipeline itself as as you see it now support 7% margins in terms of customer mix in contract type or do you need that do kind of which continue to shift further in your favor.
I I will tell you that I said understood. The prior to the prior question I am very very pleased with the diversity in our pipeline and within that pipeline. The diversity of contract types are we spend a lot of time prepositioning with our clients in terms of the benefits to them of moving to fix price type contracting.
And increasingly to as a service contracting and my last point I'll make on that is with the advance or acquisition and our continued move to harden our solution sets.
We are seeing increased.
We are seeing very attractive margin profiles on our solution business. So we're going to continue to focus on solutions and as a service type offerings to help bought to help us drive to the 7%.
Okay, and then Susan you mentioned, a maybe they're being an opportunity to lower interest expense a little bit more if you could talk about that oh in a little bit more detail and then just more broadly kind of.
Just given kind of your current experience thus far at Vectrus, where you see kind of that more attractive opportunities. Thank you.
Great. Thanks for the question. So we have a great balance sheet you know the current credit agreement was negotiated in 2014, we made some changes to it in 2017, I think there's opportunity to make some further changes to it you know the interest rate market right now is it.
Advantageous to do you know what amendment and so we're taking a look at that has to see what is possible where a much different company today than what we were even in 2017, and so I just want to make sure that we align our credit facility to the growth that we're experiencing and the goals we have for.
Corporation to grow to two and a half billion dollars in sales in the 7% margin business by 2023.
In terms of my experience so far at Texas has been very very positive.
It's a great group of people that are highly now knowledgeable I think Chuck has hired a great team around him that are highly capable.
I I think there is opportunity to reduce the unbilled and to take you get the balance sheet to actually worked for us and give us yeah actually liquidity without without borrowing it.
I think we have processes that need to be automated and standardized so that there is less friction and lost touch points in the and the preparation of the a season the forecast et cetera, and you know all that is really kind.
Coming from my Honeywell days.
So with operational efficiencies six Sigma continuous improvement so that's kind of my focus and what I enjoy doing and so I hope that answers. Your question, yes, it's very helpful. Thank you.
This concludes the question answer session and I will now turn the floor back over to Chuck Pro for closing remarks.
Thank you very much we enjoy the call today and we look forward to updating you further on the fourth quarter in the full year in February . Thank you.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.