Q4 2020 Vectrus Inc Earnings Call

Thank you for joining us from fixes fourth quarter and full year 2020 earnings conference call and webcast. Today's call is being recorded my name is Devon and I'll be the operator for today's call. At this time all participants have been placed in a listen only mode. Following management's presentation.

Open the call for Q&A session.

With that I would like to pass the call over to your host Mike Smith, Vice President of Treasury, Investor Relations and corporate development of buttress.

You may begin.

Thank you good afternoon, everyone welcome to the <unk> fourth quarter and full year 2020 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, Inc.

<unk> got Petrus dotcom.

Please turn to slide two.

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 we will be discussing and reporting non-GAAP metrics, including adjusted operating income and margin EBITDA and EBITDA margin adjusted EBITDA and margin adjusted net income.

And adjusted diluted earnings per share.

The definition of these non-GAAP measures can be found in our presentation materials and press release.

At this time I'd like to turn the call over to Chuck Prow, President and Chief Executive Officer.

Thank you Mike and good afternoon, everyone. Thank you for joining us on the call today.

Please turn to slide three.

We ended 2020 on a strong note achieving several important milestones in the fourth quarter the.

These accomplishments would not have been made possible without the dedication of the more than 15000 combined employees and partners of the actress.

I'd like to thank our entire workforce for their fortitude throughout the pay on Debbie.

The commitment to delivering high operational readiness and support of our clients critical infrastructures and missions across the globe.

Our fourth quarter and full year 2020 results reflect the operating and financial resiliency of our business model.

Which includes the ability to generate strong cash flow.

We generated $26 million of cash from operations in the quarter and $64 million for 140% net income conversion.

Our ability to generate substantial cash from operation remains an important characteristic of our business.

For the fourth quarter, we reported revenue of $355 million.

And adjusted diluted EPS of a dollar of heat.

The revenue and EPS in the quarter were impacted by $26 million.10, respectively due to COVID-19 related host nation and base access restrictions.

We delivered full year revenue of approximately $1 $4 billion, which was up 1% year over year, despite of $63 million or four 6% headwind associated with Covid.

Additionally, the continued execution of our enterprise wide performance improvement initiatives.

And focus on program delivery yielded a record fourth quarter adjusted EBITDA margin four vectors of 5%.

During the fourth quarter, we continued to grow our backlog, which now stands at $5.1 billion of 84% year over year.

And in all time high per vectors.

This was partially driven by the recent 882 million dollar of Recompete win of our Amdocs walk of contract significantly improving our visibility over the next five years.

We also achieved several milestones in our converged infrastructure journey by winning a prime contract for the Navy Smart warehouse five G initiative, while further expanding our capabilities through two key new acquisitions.

Finally.

Looking into 2020, one we expect to generate strong top and bottom line results, representing 20% revenue and 23 per cent EPS growth. We believe our strategy strong backlog pipeline and targeted campaign will continue to drive solid financial results.

Please turn to slide four.

As we have discussed on our strategy is to be a leader in the converged infrastructure market and capture the opportunity to transform <unk> into a larger scale higher value and differentiate the platform.

This transformation remains grounded in the understanding of our clients need to move from a traditional way of operating their facilities supply chains of networks to a much more instrumented predictive and convergent approach.

We have leveraged our experience and how installations are being supported today with our clients should prepare for the future by providing thought leadership to the marketplace. This includes how operational technology and converged infrastructure can play a role in transforming the operation of client missions.

Building on our thought leadership, we have also made internal investments engaged in partnerships and focused on inorganic activities to expand our strategic position in this market.

For example over the past three years, we have extended Becker says maintenance of facilities two of the electronic protection and security of facilities and increased our sensor integration infrastructure instrumentation and perimeter security solutions. Additionally, we have created the vector of resiliency.

Some initiatives to bring targeted.

Integrated innovative smart secure and energy efficient technologies and capabilities to our clients infrastructures.

Vectors of the thought leadership significantly enhanced capabilities and strategic focus over the past several years with recently recognized through two important strategic wins associated with the Dod's five G initiatives.

First record for the awarded of three year Prime contract for Naval base Coronado of five G Smart warehouse on.

Through this effort vectors will provide industry, leading inventory management network security robotic material moving and environmental sensing capabilities. The objective of the project is develop a fire G enabled smart warehouse focused on trans shipment between shore facilities.

And naval units to increase the efficiency and fidelity of naval logistics operations.

Second vector it was part of the team that was awarded of Testbed contract to modernize the Marine Corps of logistics warehouse and Albany, Georgia.

This effort the team is working on private wireless the appointment of for industrial Iot automation, which would support a broad set of of smart warehouse use cases, including barcode scanning and holographic augmentation and virtual reality applications. The.

Of the awards of part of the Dod's five G experimentation and testing of five U S military test sites.

Which have been earmarked the $600 million and represents the largest full scale <unk> test for dual use applications in the world.

Together these projects provide of bad for testing refining and validating emerging five G enabled technologies.

And broader converged infrastructure solution sets.

We expect the initial contribution from these contracts to be small on value the Windsor of significant and replace it vectors in a market where digital solutions are now being applied within traditional facility and base operations in it services.

And importantly represents of our clients continued migration toward converged infrastructure operations.

Please turn to slide five.

Over the past few years, we have made great progress in delivering strategic and financial momentum to our defined strategy three core elements enhance the foundation expand the portfolio and add more value. We have significantly enhanced the foundation of our business and December 2021 of the Recompete of our second large.

Just contract on.

The ex Walker under the five year $882 million contract, we will continue to provide uninterrupted.

To support reliability and protection of this large and dynamic network.

In support of the forward deployment in southwest Asia the.

This contract represents 30 years of support to this important mission.

This award further builds on our 2019 successes, including winning the largest recompete and contract in our portfolio Logcap five.

These two successful recompete represent approximately 50% of our 2020 revenue and are now in backlog and provides substantial revenue visibility for the next five years. Additionally, no other contract in the portfolio makes up more than 10 per cent of our revenue as such we expect minimal recompete risk.

On our portfolio over the next several years.

As the chart on the left hand side of the page indicates our recompete wins organic and inorganic growth and resulted in a record high backlog of $5 $1 billion. Our backlog represents three times, our 2021 revenue at the midpoint.

Please turn to slide six.

The expand the portfolio of component of our strategy continues to evolve with new clients capabilities and solutions that are transforming our business.

Our targeted growth campaigns are pivotal to this effort and we continue to make great progress executing our navy growth campaign, which is harnessing capabilities across the vector of portfolio to deliver innovative technology based solutions, while improving mission effectiveness the.

The results of this campaign are seen in our financial results with Navy revenue, increasing 22% year over year and 2020.

Notable wins during the year include a new eight year $210 million firm fixed price contract to provide base operations support and Bahrain.

Additionally, we were awarded an eight year $45 million firm fixed price contract to provide base operations support.

At the naval support facility in Romania, we.

We also won a 196 million dollar five year Recompete contract to continue base operations support services at Naval station Guantanamo Bay.

Finally of that Chris joint venture, where the awarded of $154 million seven year firm fixed price contract to support the U S Naval Academy.

Our Navy facility on base operation of the growth campaign has resulted in more than a half a billion dollars of prime contract wins.

The pie charts on the left side of the page illustrates the progress we have made expanding in balancing our portfolio, notably these numbers do not include two recent acquisitions, which further provide diversification to our portfolio. Please.

Please turn to slide seven.

Our pipeline of new business opportunities also represents our efforts and continuing to execute targeted growth campaigns and further balance of our portfolio. Our new business pipeline currently exceeds $11 billion the significant increase from $7.5 billion through 2016. This.

The increase is partially driven by our expanded capabilities, which are generating additional opportunity the cross federal non federal and international client basis on.

Our pipeline also supports the shift the more advantageous contract types and higher margin solutions in terms of timing, we are continuing to see solicitations and awards progress at a normal pace, while the timing of phases has been elongated due to COVID-19 dynamics overall, we remain confident.

Confident in our ability to successfully compete and win our fair share of new business.

Please turn to slide eight.

While our expanded capabilities are yielding increased opportunities and new business pipeline. We have also been successful leveraging our capability advanced Mr Drive technology insertion into our core facilities and I T offerings, enabling us to win important New awards, which also support future margin expansion for example.

Recently vectors, where the water the position on our best in Class General Services Administration multiple award contract or the IQ vehicle known as the Oasis. This vehicle provides integrated professional services for all government customers worldwide.

This award demonstrates our increased ability to function of the prime contractor in large scale I T as well of our traditional markets Oasis provides access to new funding streams that enable us to bid on task orders.

Creative to our pipeline.

Additionally, during the year, we were awarded of U S. Navy contract to provide concepts and develop prototype software to integrate the spirit onboard sensors to support the signal discovery and integration.

We were also awarded an O T a contract to provide software and engineering to support sensor data integration and visualization of the U S investments of national secured equipment to the joint services.

Furthermore, vitreous was awarded a strategically important five year firm fixed price <unk> IQ to provide intrusion detection system supplies hardware and services at Edwards Air Force base the.

These wins raw based on our differentiated capabilities.

And position in the marketplace.

Please turn to slide nine.

The inorganic dimension of our business model is founded on making strategic acquisitions, and we will expand clients and capabilities to strengthen our leadership in the converged infrastructure market.

In 2018, we acquired a pioneer in the Internet of things with court with core competencies in sensor integration and perimeter security solutions in 2019, we acquired a leading provider of integrated electronic security systems.

In December of 2020, reacquired genetics, and Hh B, which adds several capabilities in advance of our ability to deliver a more integrated and comprehensive suite of solutions to our clients globally.

Strategically the springs integrated security capabilities that provide systematic protection across the physical and digital spectrum.

Enhancing our vertically integrated and a credit of network security technology platform protecting tens of thousands of facilities and assets.

Additional capabilities include comprehensive solutions for assisting in the planning engineering, designing and implementation of I T embedded solutions that streamline facility management and maintenance.

We're also excited about the higher end logistical capabilities these acquisitions crane, including all aspects of skills and services to establish execute and maintain and maintain logistics policies processes and procedures.

Furthermore, we are strengthening our asset management.

Property oversight supply chain and inventory monitoring in aggregate. These services will substantially augment our current logistics expertise on.

Major focus within our strategy is to expand records with content on client facilities.

V is a Netflix we have materially advanced this effort by providing full spectrum.

Maintenance repair and overhaul services for legacy and next generation Air aircrafts.

For example at Fort Bragg vectors of operational logistics readiness center, while the Netflix is responsible for the maintenance of various aircraft. This combination increases our continent footprint, giving us further insight into many missions on the base and improving our clients' operational visibility and awareness.

From a client perspective, both company to broaden our access to the highly attractive intelligence community clients.

It is important to note.

The net and Hh be worked together in the intelligence community market today.

And the expanded opportunities under Vectra is to reach our existing clients open the aperture to even greater growth.

Finally, one of our client campaigns include growing our foreign military client portfolio, which will be bolster bolstered by the genetics legacy and foreign military sales supporting more than 40 countries.

This include logistics and training support to the Dod and foreign nation for the F 18, the H 60, the C 130, and the Harpoon weapon systems Importantly, the company has also been able to build on those logistics the net from his capabilities.

To position for future growth for example in late 2020. The team was awarded a prototype projects to create an international readiness software system utilizing state of the art predictive analytics and artificial intelligence techniques to analyze data and improve readiness initiatives.

Celebrate product delivery and optimize the reliability of operational on aviation readiness for foreign partners I am excited to welcome the more than two thousands of headaches in H H b employees to Vectra as the capabilities of both companies creates a stronger platform from which we can deliver of fully converged solutions across all of our clients' mission.

Now I'd like to turn the call over to Susan Lynch Susan.

Thanks, Chuck and good afternoon, everyone.

Tourists may to slide 10 to discuss our fourth quarter results.

Fourth quarter 2020 of revenue was $355.3 million down nine $9 million or two 7% year on year.

The COVID-19 pandemic of deferred approximately $25 $8 million of revenue, resulting in a seven 1% impact on revenue growth.

The Covid impact was caused by client base access restrictions.

The other pandemic related delays and work being performed.

Revenue increased sequentially to $9 million or 8% as we work seamlessly to adapt to our clients' restrictions and new deployment quarantine requirements.

Adjusted EBITDA was $17 9 million a margin rate of 5%.

The margin was up 10 basis points year on year, and 20 basis points sequentially.

This robust margin rate is the highest since we've been a public company.

And is an impressive accomplishment as EBITDA margin includes an estimated 10 basis points of COVID-19 impact.

This record performance reflects our continued focus on process efficiencies.

Cost management, our ability to leverage our supply chain and continued technology enhancements.

During the year vectors performed a functional transfer pricing of analysis, focusing on services being provided to the U S. Military bases. There are located in foreign countries.

Based on this analysis in the fourth quarter <unk> recognized a tax benefit in total of $7 $1 million.

2 million $2 5 million and $2 $6 million relate to the years 2018, 2019 and 2020, respectively.

As a result, the company also reduced its uncertain tax position by the same amount.

Diluted earnings per share in the fourth quarter of 2020 with the dollar 42 cents.

Adjusted earnings per share, excluding the favorable tax benefit associated with 2018 in 2019, whereas the $1 18.

Up 21% year on year.

Adjusted EPS includes a 10 cent impact from Covid.

Excluding the favorable tax benefit associated with 2020 adjusted earnings per share with 96% up 3% year on year and up 8% sequentially.

EPS growth was driven by lower interest expense as a result of favorable operating cash flows and cares act of full.

Both of which resulted in lower usage of the company's revolving credit facility.

Moving on to slide 11.

2020 revenue was $1 $4 billion up $13 million or 1% year on year.

The COVID-19 pandemic deferred revenue of approximately $63 million and had a four 6% impact on revenue growth.

2020, adjusted EBITDA was $56 $3 million or 4% compared to four 3% last year.

And was in line with our guidance as we met the operational challenges of the COVID-19 pandemic.

Most of the COVID-19 impact with high margin work that customers delayed due to limited base access and social distancing restrictions.

And the fact is adjusted EBITDA by approximately 20 basis points.

Adjusted EBITDA for the year was also affected by a Q2 2020 contract adjustment to a European program and onetime Closeouts.

We are pleased to report that the European program has been operating in line with our expectations as we've previously discussed.

The adjusted tax rate for 2020 was 16, 9% and excludes the aforementioned tax benefit for 2018 and 2019.

On a pro forma basis, excluding the cumulative tax benefit in its entirety. The adjusted effective tax rate was 22, 9% as compared to 22, 8% in 2019.

Diluted earnings per share for 2020 was $3.14.

Just had earnings per share was $3 seven and was flat to last year.

2020, adjusted earnings per share had a 22 cent tax benefit pertain to 2020.

Excluding the 22 cent tax benefit.

<unk> the EPS was $2.85 exceeding the high end of our guidance after reflecting the previously mentioned items.

And a 39 net impact from COVID-19.

Turn with me now to slide 12.

Fourth quarter 2020, total backlog was $5 $1 billion.

Record for of Vectren, and an increase of 84% year on year.

Total backlog was up 35% sequentially driven by the $882 million Armtek's walk, our recompete win and the two acquisitions.

Funded backlog was approximately $850 million compared to $707 million last share.

The company's trailing 12 month book to Bill ratio was two one times.

Taking into account our recent wins under protest our pro forma total backlog is $5 $5 billion on our book to Bill is two four times.

Moving on to slide 13.

Net cash generated from operating activities in 2020 was $64 $1 million.

Per to $27 $6 million in 2019 the.

The company benefited from the cares act tax deferrals by approximately $13 $2 million.

Excluding the impact of the cares Act operating cash flows were $59 million.

The record for of Vectren with operating cash flow conversion to adjusted net income ratio of 140%.

Total debt at year end was $179 million up of $108 $5 million from the prior year due to borrowings associated with the Companys two acquisitions on December 31 2020.

The company's leverage ratio was approximately two times well below our covenant level of three five times.

Cash at year end was $66 $9 million up $31 $6 million over prior year.

Net debt was $112 million.

At the end of the fourth quarter in conjunction with the acquisition, we expanded our credit facility Inc.

Increasing the amount of funding available under our revolver from $120 million to $270 million, while expanding our leverage ratio from three times to three five times.

This improved facility is indicative of our strong financial position.

Our total liquidity is over $220 million.

Moving now to slide 14.

In 2021, we will continue to face in Logcap, five and expect our record of solid revenue performance margin expansion and EPS growth to continue.

Our revenue guidance is 164 of five to $1 71, $5 billion, reflecting the year on year growth of 18% to 23% the.

Low end of this range reflects a conservative view on the timing of full operations on Logcap five.

Along with a long dated COVID-19, EA access restrictions.

The high end of our range includes reduced COVID-19 headwinds and continued success in our targeted campaigns, winning and phasing in new business.

We continue to drive margin performance in our business and expect 2021, adjusted EBITDA margin in the range of four 6% to 5% a 60 to 100 basis point improvement over 2020 performance.

Our path to higher EBITDA margin will continue to be of focus as we integrate our recent acquisitions and continue organic expansion associated with our targeted campaigns and new business pipeline.

Additionally, we expect to see the benefits from the implementation of our new enterprise.

That form which is streamlining modernizing and automate our core processes.

The outcome of these priorities is starting to become visible in our financial result, and are reflected in our 2021 guidance.

Our estimate for 2021 interest expense is approximately $8 million.

Up from $4 $8 million in 2020, as a result of the increased debt associated with the previously mentioned acquisitions.

Depreciation and amortization is anticipated to be $17 million up $9 million, primarily due to the two acquisitions. Please.

Please note that we are in the process of completing the purchase accounting for these acquisitions and our amortization estimate could change.

The 2021 tax rate is estimated at 19%, which is a four point improvement over our historical effective tax rate due to our successful efforts in improving our tax efficiencies.

Our 2021 of adjusted diluted earnings per share guidance is in the range of $3 and 48 since the $4 at 8%.

Presenting on a 23% growth rate at the midpoint.

Excluding the additional amortization as a result of the two previously discussed acquisitions adjusted EPS guidance is in the range of $4 of three to.

<unk> to $4 63 ships.

Diluted shares outstanding are estimated at 11 9 million shares.

In 2021, we expect revenue adjusted EBITDA margin and adjusted EPS to demonstrate the improvement over what we saw last year.

In the first quarter, we expect margins to show year on year improvement, but dipped from the fourth quarter of 2020.

We anticipate our 2021 on revenue and earnings per share to be higher in the second half of the year as we work towards being fully operational on Logcap five.

For 2021, we expect net cash provided by operating activities to be $55 million to $65 million of.

Operational capital expenditures guidance is approximately $5 million up slightly year on year.

Finally, 2021 mandatory debt payments are $8 $6 million.

Now I'd like to open up the call for questions. Thank you.

At this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star one on your telephone keypad.

The <unk> solar indicate your line is on the question queue.

You mean per start to fuel electric remove your question from the queue from participants using speaker equipment, and maybe the necessary to pick up your handset before pressing the star keys when most of the visas from poll for questions.

Our first question comes from the line of Joseph de Nardi with Stifel. Please proceed with your question.

Thanks, Good evening.

Chuck I think it seems like the revenue guidance implies of about 5%.

So I think organic at the midpoint correct me if I'm wrong, but can you just talk about maybe the cadence through the year just trying to understand what the growth rate could be towards the end of the year once you're more fully ramped on logcap and past the COVID-19 headwinds.

You have the you have the Max math approximately correct first of all how you doing thanks for joining the call today.

Thank you.

Yes.

We have intentionally put what we think the making of conservative guidance.

With regard to revenue because the reality is with regard to.

The COVID-19 and the headwinds associated with Covid, particularly and then they'll pay com are still a bit uncertain for the revenue guidance cash.

Contemplates.

Fully transitioning to the same.

Our operations in mid year.

And we although we do have some smaller tasking and opaque.

This guidance does not contemplate us transitioning.

Two kwajalein until 2022.

And when you net it all out that's about 120% of $160 million of potential COVID-19 headwinds.

In the year. However, we're working through our host nations contacts and with our clients.

To do what we can to continue to move.

Mood transition of quiet Joanna to the left of it is highly dependent upon the vaccines and he thought today of the President just announced some good news on the vaccine so.

The short story is conservative view of revenue largely driven by Logcap transition of Endo pay com and we will update you and everyone else as we learn more as the year progresses.

Okay. That's very helpful is that another way of saying that there is an additional $120 million to $160 million of Logcap revenue coming in 2022.

And do you actually have visibility into getting ramped on on on that just relative to COVID-19 and getting vaccinated and that sort of thing maybe more visibility than you had three months ago.

If not all of Logcap, but there are number of puts and takes with regard to COVID-19 related base access restrictions, but big muscle movements predominantly driven by <unk>.

Predominantly driven by squad Joanne and yes, the more quickly we can get vaccinated and we're making good progress on that the more likely we are to be able to work with our host nation partners on our clients.

To expedite the movement of fly Joanne.

Implementation because again, we currently contemplate beginning transition in Q4.

And going of full operational capability in 2022.

As you know I mean, that's the big that's a big chunk of revenue and so yes.

We're able to work with our host nation partners on our clients to move that to the left.

Could have a substantial impact in 2021.

Okay, that's great I'll hop back in the queue. Thank you.

Great. Thank you Joe.

Once again of fuel like to ask the question. Please press star one on the telephone keypad once again, if you'd like to ask a question. Please press star one on the telephone keep on our next question comes from the line of Joe Gomes with Noble capital. Please proceed with your question.

Good afternoon, Chuck Suzanne of nice quarter, Congrats on the recent awards and acquisitions.

How are you doing.

Doing well here can't complain too much.

A couple of Big picture type of questions for you. So in the in the D. O D budget. They finally got the continuing resolution at the end of the year were there any surprises either positive or negative for you guys from the operations and maintenance funding or anything that stuck out there.

That you know you work considering initially.

I wouldn't say I would say.

Budgetary really no it's pretty much what we expected I will say when you take a look at the budget and you look at what you can see publicly in terms of the op tempo in the Indo pay Com region.

It would appear that the new administration.

Working through the department of Defense is.

Continuing to focus on activity in the endo pay kind of region and backing that up with Rio with real action in the region.

While big muscle movements on the <unk>.

On the budget not much surprise, but the but the activity and the focus on the discussion around <unk> continues.

Continuing.

Continues to be very consistent on the part of the New administration.

Okay. Thanks for that.

On the the the.

The smart warehouse, you talked a little bit about you know the naval.

Naval base, Coronado and the water Georgia.

Big picture again, I mean, what what what can this mean, what's the.

What's the end game here in terms of the.

How big of a market here or are we are we potentially exploiting.

With all of this smart warehouse and five G stuff that they're currently testing on what kind of timing.

Do you guys think that it goes from the attesting to let's call the implementation.

No.

We shouldn't look at two predominant tracks to your question. The first track is in our traditional base operations and supply chain marketplaces.

The <unk>.

Demonstrate our continued move to what we've been calling the converged infrastructure. Our clients are going to expect us to operate facilities in the supply chains.

Much more instrumented and predictive way.

And these awards continue to demonstrate our clients' commitment to that path.

We think that we will continue to insert this technology into our current projects and then to new proposals added expedited expedited rate over the next couple of three years that's the.

Kind of track on track too is as I fundamentally believe and as you know we've been talking about this now for a couple of years.

We're going to see some much more pointed and our tactical procurement.

Focused on different types of facilities and supply chain.

That will be markets that may have not been addressable by the that Chris in the past, so we really and by the way acquisitions like advance or the net aches and Hh be really further our access to these new channels.

So new channels it will begin to emerge and we see that now on our pipeline.

As well as of the way, we actually operate and propose our traditional markets.

They are going to continue to change there is no going back five G enable of more efficient more effective operation and as you know since we met each other a few years ago now we've.

We've been on this path and we're going to continue to stay on the path on an even more aggressive rate.

Great. Thanks for that I'll jump back in queue.

Our next question comes from the line of Joseph the body Stifel. Please see what's the question.

Thanks.

It looks like you did about $475 million on.

K boss in 2020 of the.

Question, you have been getting for probably two years now how are you thinking about the revenue opportunity once you're fully ramped on logcap between centcom and into the pay kind of kind of whats. The range you see is reasonable now that you're a little further into it.

We're not we're not going to we're not going to get down to the actual because there are lots of puts and takes because K vocs will survive for a while and they're the kind of a different revenue between law of Catherine cable off of what we will say.

Is that I expect a.

The expected year over year increase in the Centcom AOR will materialize.

As we often talk about we have puts and takes with regard to contract transitions.

In the region.

I would expect to add we get more into the second half of this year.

And we can see precisely what's going to happen in endo pay come although I know that's not your question will.

We will begin to project Logcap revenue.

The expectations by region since that's obviously more than 10% of our of our margin. So you should see the expected increase year over year in the Centcom AOR and will begin to provide more of fidelity in terms of exactly the revenue on logcap by AOR towards the end of this year.

There are beginning of next year, depending on how quickly we transition in the and the and opaque on AOR does that help okay. It does.

You said, you expect into pay com to be greater than 10%.

We just do it do in the eye.

Would fully I would again I don't want to.

Do the math on the fly here I would fully expect both the Indo pay com task in their aggregate in the Centcom task in the aggregate.

To be obviously zone, but to be more than 10 per cent of revenue.

Okay, that's great.

And then Susan maybe margins for the year I think excluding the charge in <unk> and maybe the Covid headwinds are kind of high 4% and which is similar to the guidance for 'twenty. One. So can you just talk about kind of the the moving pieces in the next year between Logcap ramping.

The acquisitions Covid kind of what is the underlying margin once you work through that and maybe look into 'twenty two better than the the 'twenty one guidance.

That makes sense.

Yes.

It's obviously something we've been talking a lot about and when you add back roughly the 60 basis points.

From from the Q2 results.

Pretty much come right to the low end of our guidance hearing of the four six to the 5%.

And.

We feel like the for this is.

A wider range than what we've given in the past and it represents the high number of program transitions that we're going through where the margins tend to be a little bit lower in the beginning as we work to.

To improve and get the margins up so it's on.

A little bit wider range than what we've given you in the past.

Sure.

We don't feel like.

The debt, there's too much risk on the downside and we feel like we really have to watch what's going on with Covid. There was a lot of.

High margin work that moved out of 2020.

We're hoping to recoup some of that.

This summer but.

We have some flexibility in that range.

Okay, and then just lastly, Chuck on the on the $2 5 billion and 7%.

The kind of a year closer I guess can you talk a little bit about how realistic that target is.

Net Cup Yeah. Yeah go ahead go ahead in Europe.

Great.

Is that something youre compensation should be tied to necessarily or is that more of an aspirational goal and maybe provide us with maybe the path from high fours two seven.

Okay. So you kind of kind of break it down in the in the pieces here. So.

This year would be essentially the mid year of the commitment.

We have made notable progress on the top line.

We've done a lot of hard work on the bottom line.

And I would say kind of this year and early 'twenty. Two is where you really begin to do the math on how close to seven can we get on the bottom line as you know as we continue to grow our top line, we're creating cash and leverage that we need to.

Continue to invest.

Invest in our inorganic strategy.

So as you begin to see us continue to make inorganic move.

We're obviously going to stay focused on those higher value solutions.

Of that will allow us to kind of push along on the bottom line. So.

The COVID-19.

And obviously second quarter of this year it didn't help but with Covid.

Hi.

Certainly slowed us down a bit but I have not seen anything yet on the top line that would indicate we can't get there.

And on the bottom line, we still have a lot of hard work to do.

But the returns on the investments that we've made on the prior 18 to 24 months need to start showing up on a material way on the bottom line as we kind of wind through 'twenty, one and move into 'twenty two.

The others jump in.

Our add on to that the <unk>.

Enterprise Spectra's systems that we've.

<unk>, we are very hopeful that we can continue to take costs out now that we've got one system and we have greater visibility.

Is that in addition to enterprise veteran and all of the six Sigma projects that we have ongoing I think we just have a tremendous opportunity to continue to expand our margins.

Organically and naturally but then we also have the acquisitions, we've always said that that passed the $2 5 billion, whereas the organic and inorganic.

And I think the acquisitions that we're attacking on are accretive to our margin and the fact that we posted a 5% record margin and you saw our margin in Q3.

Yes, we have continue to have that margin expansion here in the second half of the year.

It's really quite impressive.

Okay. That's great. Thank you very much.

Got it thank you.

And once again as a part of a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Once again, if you would like to ask the question. Please press star one on your telephone keypad one moment. Please.

Just sort of no further questions left from the queue I would like to pass the floor back over to Mr. Chuck Prow for any closing remarks.

Thank you very much and thank you for joining us on the call today I'll just end, where I started thanking the 15000 men and women of veterans to include our partners on the incredible amount of diligence and innovation that they demonstrated through hell of an unprecedented year.

We feel very comfortable with regard to our guidance.

As Joe's last question indicated.

We realized the 2021 early 'twenty two is an important segment of time and our path to 7% and we look forward to talking to you about that as we move forward so with that.

Have a good rest of your day and we look forward to talking to you next quarter. Thanks very much.

And this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Okay.

[music].