Q2 2019 Earnings Call
Thank you for joining us for the Vectrus second quarter 2015 earnings conference call and webcast. Today's call is being recorded my name is Brandon and I'll be your operator for today's call.
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And now I'd like to turn the call over to your host Mike Smith, Vice President of Investor Relations and corporate development at Becker.
Thank you. Please go ahead.
Thank you.
Good afternoon, everyone.
Welcome to the <unk> second quarter 2019.
This conference call.
Joining us today are Chuck <unk>, President and Chief Executive Officer, and don't they're acting Chief Financial Officer.
Well I for today's presentation are available on our Investor Relations website investors stopped actress Dot com.
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 Law.
Please review our safe Harbor statements in our press release and presentation materials for discussion of some of the factors that may cause actual results to differ materially from the results contemplated by these forward looking statements.
We assume no obligation to update our forward looking statements.
At this time I would like to turn the call to Chuck Crow President and CEO .
Thank you Mike Good afternoon, everyone. Thank you for joining us on the call today.
Please turn to slide three.
Second quarter demonstrated our continued momentum in the marketplace and the execution of our strategy.
Our growth related efforts continue to be successful, we significantly increased our revenue with the Navy and Air Force, one new contracts, including our first contract with the department of state.
Expanded existing contracts pick her recompete that that's kind of what a seat on the previously announced well kept five contract.
We also continue to invest in all aspects of our business, which includes the acquisition of advanced or early in the third quarter and we are preparing for substantial growth and 2020 and beyond.
We are well on our way to creating a two and a half billion dollar and 7% EBITDA margin company that will be a leading converged infrastructure provider in the market.
Our second quarter financial results demonstrated the anticipated sequential ramp for the second half of the year.
Revenue grew 2% sequentially and 3% year over year and part due to the $350 million of new programs, one and 2018 of which $200 million were fixed price.
We recorded we recorded adjusted EBITDA margin of 4.2% consistent with our expectations adjusted EBITDA margin expanded 30 basis points sequentially.
While we do not normally make sequential comparisons this year it is appropriate and that reflects our expectation of quarter to quarter improvement, particularly as we move into the second half of the year and compete to complete the phase in of our 2018 contract.
Excluding approximately $1.2 million of M&A cost related to the acquisition of advanced or act fees associated with a lot of <unk>, five which support our pre operational legal efforts adjusted EPS was 74 cents.
Our momentum and growth related activities continue.
And during the second quarter, we were pleased to have been awarded our first ever I'd like you contract with the department of state to provide logistics life in mission support and other operations and maintenance services in any country, where the department of state how to present.
The five year I'd like to contract vehicle known as Deb has a $6 billion ceiling value and was awarded the Vectoring and 10. Other companies. We look forward to bidding on task orders under the contracts.
Our organic expansion.
Targeted campaign and diversification strategy of becoming increasingly visible in our revenue stream.
And backlog and that momentum and 29 can't continues.
Based on all the things I've just mentioned our 20 night your results to date and the event or acquisition, we now expect to generate revenue growth of 7% to 9% in 2019.
This is up from our prior revenue guidance of 2% to 4%.
Additionally, we continue to believe that based on our current new business Awards pipeline and anticipate a timing of lockout five revenue, we can achieve double digit revenue growth and 2020.
Our confidence in our top line outlook is supported by a strong backlog, which including Logcap five.
Equates to 3.6 times, our 2018 revenue.
And a robust new business pipeline.
Our new business pipeline includes almost $7 billion of opportunity we plan to bid over the next 12 months.
Additionally, we currently have $1.6 billion of new business awaiting award.
Which include protested contracts.
Our balance sheet and cash flow generation remain strong.
Ample financial flexibility to drive our future organic and inorganic strategy.
At quarters end net debt improved to approximately $3 million.
From $26 million in the first quarter. This improvement was driven by strong cash management by our team, resulting in cash from operations of approximately $22 million in the second quarter.
On April 12, we received the news regarding Logcap five.
The award at both the U.S. Central command or same comp.
And the U.S. into Pacific command, or Endo, peco areas of responsibility or a ours are game changing it will significantly enhance our growth profile.
Given this result, we are expediting the pace of our internal one investments in order to further enhance our capability.
And foundation to support the significant volume growth in 2020 and beyond.
As mentioned, we have increased our 2019 revenue outlook.
What are utilizing the return on this additional volume to pull forward internal investments and global operations.
To support our anticipated growth and long term margin expansion.
Specifically, we are expediting the execution of our enterprise wide performance improvement initiative enterprise Vectrus to streamline and automate our core program at the port processes craft for more supply chain and more effectively integrate and leverage our global operations to generate better client outcomes.
All of these efforts are fulfilling the opportunity we have to transform vectrus into a larger scale higher value differentiated platform.
Therefore, while we have increased our revenue range, we have lowered and tightened our EPS range importantly, we have tightened the range for adjusted EBITDA margin and slightly increase the midpoint. Additionally.
Based on one time acquisition related expenses and pre operational legal costs associated with Logcap five.
We are presenting non-GAAP measures to better reflect the operations of our business.
Despite the investments we're making in 2019 is important to note that at the midpoint, we still anticipate achieving year over year improvement in adjusted EBITDA margin.
Bill will discuss this in more detail shortly.
Now, let's move to slide four and discuss the recent acquisition of advanced or.
In July we acquired advanced or systems, a leading provider of integrated electronic security systems that protect over 2000 and facilities and assets for the U.S. Steel D.
Federal civilian and international clients.
Including those in the Endo Paycom AOL or.
While relatively small in size. This is a highly strategic acquisition and aligned with our strategy.
Advanced or provide real world immediately practical capabilities that extend our maintenance facilities to the electronic protection and security.
Strengthening that Chris as an innovator in the emerging converged infrastructure market.
Advanced or the only vertically integrated command control and Communications network security technology platform in the industry.
Aside from advanced drift presence in and opaque I'm extremely important geographic region for Vectrus going forward.
Advanced or it's a sole source exclusive provider of integrated C network services to U.S. fourth is Korea.
As well as the security provider of choice for an important aircraft program with Japan's Ministry of Defense, that's expands that crisis client and geographic footprint, allowing for greater cross selling opportunities.
That Chris and advanced or are similar in many ways. Our cultures mission vision values and client Centricity are all very closely allied Additionally from an operational perspective.
Our businesses are complementary for example, we provide 24 seven facility a base operations at that Julie Airport space, where advanced or has provided the integrated electronic security solution for over a decade.
This transaction, which is expected to be accretive in 2019 earnings per share. Excluding one time transaction cost supports our immediate scale in a future growth and advances our transformation into a higher value technology enabled and differentiated platform.
Now I'd like to turn the call over to build new our acting Chief financial officer to take you through the results in more detail Bill.
Thanks, Chuck and good afternoon, everyone.
Let's move to slide five to discuss our second quarter results.
Before we get started I would like to point out that we will be discussing non-GAAP measures, including adjusted operating income and margin adjusted EBITDA and margin.
Adjusted net income and adjusted diluted earnings per share.
These adjusted non-GAAP measures remove the impact of expenses associated with M&A and Logcap five preoperational legal costs and better reflect the underlying operations of the business.
In the second quarter revenue growth continue.
We recorded sequential expansion in EBITDA margin and earnings per share.
Keeping with the expected progression of our results throughout the year.
Second quarter, 2019 revenue was $331.6 million up $10.5 million or 3.3% as compared to the second quarter of 2018.
The increase in revenue is due to increases of $8.6 million from European programs and $4.4 million from middle East programs, partially offset by a decrease of $2.5 million from U.S. programs.
During the quarter, our K BOSSS contract contributed $119.3 million to revenue.
For 36% of total rather.
Our growth related activities targeted campaigns and diversification strategy continue to contribute increasingly to our revenue.
During the second quarter, we grew our revenue with the Navy by 68% year over year and increased our air force revenue by 20%.
Our expansion within our intelligence and other federal clients increased 32%.
Operating income for the second quarter of 2019 was $11.2 million or 3.4% margin.
A decrease of $1.8 million or 70 basis points compared to the second quarter of 2018.
This decrease was primarily due to an increase in essence, United costs associated with investments in our business. In addition to M&A Logcap audit preoperational legal costs of $1.2 million.
Adjusted operating margin, excluding M&A Logcap five related costs was 3.8% down $1.1 billion or 40 basis points compared to the second quarter of 2018.
Due to higher us DNA costs, partially offset by higher revenue volume.
During the second quarter of 2019, we recorded net favorable cumulative adjustments to operating income of $1.9 million compared to net favorable adjustments of $3.7 million for the second quarter of 2018.
There are many factors that drive contract performance, including program execution contract modifications of scope changes.
Cumulative catch up adjustments can be positive or negative and are a normal part of our business and our guidance contemplates this reality.
Second quarter 2019 interest expense was $1.3 million.
$200000 higher than second quarter, 2018, reflecting variations associated with financing short term working capital requirements.
EBITDA for the second quarter of 2019 was $12.6 million or 3.8% margin.
A decrease of $1.2 million or 50 basis points from the second quarter of 2018.
Adjusted EBITDA margin, which excludes the M&A and Logcap cost was 4.2% down $400000 or 30 basis points from the second quarter of 2018.
This decrease is primarily due to increased costs associated with investments in our business.
Net income for the second quarter of 2019 with $7.6 million compared to $9.2 million in the second quarter of 2018.
The effective tax rate in the second quarter was 22.8% compared to 22.5% in the second quarter of 2018.
Adjusted net income, which excludes M&A logcap cost was $8.6 million down $1 million from the second quarter of 2018.
The year over year change is due to higher SGN AE and interest expense, partially offset by higher revenue volume.
Diluted earnings per share for the second quarter of 2019 was 66 cents compared to 81 cents in the second quarter of 2018.
Adjusted EPS, excluding eight cents of M&A logcap costs were 74 cents.
Down 12% compared to 84 cents in the second quarter of 2018.
The changes related to the factors associated with net income and a slightly higher share count.
Now moving to our balance sheet and cash flow.
Cash generated from operating activities in the first six months of 29 team was $15.5 million.
Including cash generated in the second quarter of $23 million, an improvement of $6 million as compared to the second quarter of 2018.
Day sales outstanding for the second quarter of 2019 was 63 days compared to 60 days in the second quarter of 2018.
Our ability to generate strong cash flow is an important characteristic of our business and we continue to expect to generate over 100% cash conversion compared to net income in 2019 and beyond.
Total debt at the end of the quarter was $73 million.
Down from $77 million in the second quarter of 2018.
Our leverage ratio is 1.17 times and down from 1.44 times in the second quarter of 2018.
Our leverage ratio remains well below our covenant levels of three times.
Cash at quarter end was $70.3 million for net debt of approximately $3 million.
At quarter end, we had $112 million of available borrowing capacity under our revolver with the possibility to expand borrowings by an additional $100 million.
In July we acquired advanced or systems for $44 million using cash on hand, and drawing on the company's revolver.
While we expect net debt to increase in the third quarter to reflect the acquisition. We continue to have ample flexibility to continue our organic and inorganic growth strategies.
Let's now move to slide six to update you on our backlog.
Second quarter 2019, total backlog was $3.2 billion of which $934 million was funded.
Funded backlog decreased 15% from the first quarter of 2% year over year as we implement recently won awards.
Book to Bill for the second quarter of 2019 was 0.6 times and in line with historical second quarter trends.
Given that our order flow fluctuate significantly from quarter to quarter, particularly on the second quarters of each year.
A trailing 12 months view a book to Bill is a more accurate reflection of our business.
Our trailing 12 months book to Bill was one times.
As a reminder, our book to Bill does not reflect contracts under protest and it does not reflect logcap five.
Total backlog includes both funded and unfunded backlog and represents firm orders and potential orders on multiyear contracts.
Our contracts are multiyear contracts on the ride to exercise an option period is at 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 logcap five were included in our reported backlog pro forma total backlog would rise significantly and will be approximately $4.6 billion.
And now I'd like to turn the call back over to Chuck.
Thanks, Bill lets move to slide seven to discuss contract wins that are driving organic growth.
That's perfect dedication to providing exceptional program performance to our clients and our significant investments in growth focused talent and capabilities continue to drive our success and win rate.
These are the contracts that make up $2.3 billion and award activity year to date with several important awards of renewals occurring in the second quarter.
First and foremost as I mentioned earlier on April 12 that profit awarded a seat on the $82 million Logcap five contract and whether we wanted to have seven A.O. ours.
Thanks, Tom and Endo Paycom.
Ill discuss logcap in greater detail shortly but suffice it to say, we appreciate the army's confidence in our ability to support their most critical mission requirements.
Our airport campaign has been an area of significant focus on growth for Vectrus, which has resulted in 20% year over year revenue growth in the second quarter.
Our momentum continues and during the quarter, we were successful atwenty two half cap for task orders.
One being a recompete worth a combined $24 million to provide installation support services incentive comp.
Importantly.
So far in the third quarter, we have won two additional task orders worth a combined $21 million.
Bringing our year to date award is under AFE cat $4 million to $45 million.
Looking at 25% increase compared to our full year 2018, ASCAP awards of $36 million.
During the second quarter, we were also successful in retaining our catheter slide and family housing maintenance contract.
This program supports the largest us military community overseas.
Providing maintenance services for more than 1900 family housing units in Germany.
This is a five year $24 million fixed price contract, which we have held since 2014.
Importantly, two new contracts scope expansion and successful recompete.
Our revenue our presence in Europe continues to increase.
And was demonstrated by 32% year over year revenue growth in the region during the quarter.
As I mentioned earlier, we want a spot on the department of state to provide diplomatic platform support services or depth through a potential five year 6 billion dollar I'd like to contract.
This program offers vectrus strong adjacent season, not only with the state department, but with the department of defense and the intelligence community.
Importantly department of state anticipates, a large portion of this contract will focus on location in the middle East.
And south Central Asia contingency environments.
Vectrus has a strong and long standing presence.
With approximately $900 million of annual revenue in the Middle East factors. So one of the largest service providers in the region and with over 70 years of experience, providing rapid response capabilities in support of contingency mission requirements.
We believe Vectrus is well positioned to support the department of state and these focused contingency environments.
On last quarter's call, we discussed our new five year 117 million dollar contract to provide defense cyber operations.
And operational and maintenance IP services, which was subsequently protested I am pleased to announce that the protest has been adjudicated in the favor of the government and Vectrus and we look forward to supporting our client with exceptional performance.
Additionally, further building on our first quarter ITD when during the second quarter, we were awarded a $26 million for our fixed price subcontract to provide defensive cyber operations.
Not all army military networks, and the Endo Paycom AOR.
Becca Visibilities provide complex mission critical IP services, and austere and challenging environments.
As a differentiator and an important reason behind both wins.
We leveraged our strong IC capabilities, which include the operating the largest I'll refer you to our army Cyber center.
And historical performance on our Ondecks locker contract to provide our client with a value added and differentiated solution.
Now, let's move to slide eight to give you an update on Logcap five.
In the second quarter for the awarded a position on Logcap five and the initial value of our task orders and ascend calm and Endo Paycom AOR at approximately $1.4 billion or 40% of the $3.5 billion total initial value of task orders awarded to all seats.
The protest process began early and is ongoing and we are confident in our position.
In the meantime.
We have been actively preparing for phases.
Vectrus teams have been spending time in both ours and are making internal preparations in order to get ready for the notice to proceed. We are moving ahead on schedule and expect to be set for Faiza.
On July 30, Onest. The Geo denied one of the four a lot of Cadfive protest remaining threeg protests are still anticipated to be resolved by mid August .
Given the complexity and a possible timing of program transitions associated with these awards. We continue to expect revenue, resulting from these task orders to begin in 2020.
We are proud of our Centcom incumbency and our team's high level of performance in support of many missions in the region.
We look forward to providing the government with the same excellent service and Endo Paycom.
Endo Paycom other strategic focal point of our nation's national security and we thank the army for their confidence and Vectrus to support their critical operation in the region.
As I previously stated this award significantly expands our footprint and market positioning and that vast region.
Lock have five also offers additional growth potential through access to all additional.
Non urgent and compelling opportunities.
In all commands for the contracts tenured direct duration.
We see significant opportunity for future growth beyond beyond our current awarded task and we are eagerly awaiting the protest conclusions that we cant proceed full throttle to support our clients.
Let's move to slide nine to look at how we are tracking to our five year goal.
Our five year financial goals, our $2.5 billion on revenue and 7% EBITDA margin.
Last quarter, we discussed three components of our long term margin expansion plan.
Volume on contract mix.
Enterprise, Vectrus and client mix and solution.
And introduced a scorecard, our strategic level leverage that correspond to each component.
In order to prepare far and leverage the significant revenue growth expected in 2020 and beyond.
This year, we are aggressively reinvesting in our business to further solidify the margin advancement component of our goal.
The first dimension.
Volume and contract mix seeks to drive 80 basis points of margin improvement over the next four years.
Hi, driving operating leverage to scaling both organically and inorganically and working with clients toward more advantageous contract structures.
The second quarter, our fixed price contracts comprised 23% of our revenue and and we believe that while the overall percentage will be difficult to forecast that dollar value will continue to increase over time.
We are investing in our expected increase in fixed price contracts given the higher margins that can be generated overtime.
Specifically, we are ensuring that program phase in leverage processes and technology for our repeatable and transferable cost structure.
The phase in foundational cost structure will also leverage enterprise Vectrus, which aims to deliver another 80 basis points of margin expansion.
This program is receiving significantly heightened attention this year.
Priorities in 2019 remain delivery excellence.
To include program phase ins evolving our global talent chain.
Establishing supply chain as a core competency.
Implementing our modernized platform announced in 2018.
And to Quicken, the pace of technology insertion, such as advanced or into our current program base.
And as a standalone offering.
Given the high priority of enterprise Vectrus, we strengthened our leadership in this area and are pleased to announce that Mario Kart Sadie's has joined Vectrus to lead this dimension of our business.
Mario brings 25 years of operations shared service supply chain and six Sigma experience within the aerospace automotive.
And oil and gas manufacturing segments.
And with the volume and contract mix dimension in enterprise Vectrus, we are pulling forward initiatives with respect to program delivery in aggregate. These investments will further our ability to.
Attained the margin advancement associated with volume contract mix and enterprise Vectrus.
We are assessing enterprise vectrus qualitatively this year, but aimed to begin disclosing a quantitative assessment and 2020.
The third dimension of our margin expansion plan solution and client mix target contribution of 130 basis points.
Advanced or the key example of that company executing this strategy.
Which will enhance and expand our operational technology offerings and margin profile.
In addition from an organic perspective, we currently have several bids submitted to provide water treatment and power generation solutions to existing clients.
These solutions are being injected into our existing contracts.
And are expected to yield great our contract profitability and client outcomes.
Importantly, this is exactly what our converged strategy is intended to accomplish.
We will continue to benchmark our progress towards these targets on a quarterly basis and overtime may adjust the individual components target as we execute against our growth strategies.
Overall, we have a tremendous opportunity to expand our profitability.
As we grow and further transform into a higher value.
Differentiated business, leading into converged infrastructure market.
Now I would like to turn the call back over to Bill to discuss our 2019 guidance.
Thanks, Chuck let's move to slide 10.
As Chuck mentioned, we are updating our 2019 guidance to include our results to date in 2019, the acquisition of advance or higher non operational costs and the redeployment of profit dollars into investments to support growth and long term margin improvement.
As mentioned.
We have included the following non-GAAP measures adjusted operating income and margin adjusted EBITDA and margin adjusted net income.
And adjusted EPS to better reflect the businesses performance the adjustments exclude nonoperating M&A costs and Logcap five pre operational legal costs.
For 2019, we now expect revenue to grow 7% to 9%.
Year over year and be in the range of $1.37 billion to $1.39 billion.
Revenue is expected to build through the year as we phase in recent new business wins expand our base and account for advanced or.
Our operating margin outlook is now in the range of 3.5% to 3.7%.
Operating margins adjusted for onetime costs are now expected to be in the range of 3.8% to 4%.
EBITDA margin is now expected to be in the range of 4% to 4.2%.
Adjusted EBITDA margins, which exclude onetime costs are expected to be in the range of 4.3% to 4.5%.
The midpoint of our adjusted EBITDA margin is now, 4.4%, which would equate to 20 basis point improvement compared to 2018.
As we realize performance from the investments made into our recently won programs. We continue to expect margin expansion to build sequentially throughout the year with the second half of 2019 being greater than the first.
We have increased our outlook for interest expense to $6 million to reflect somewhat higher debt levels and working capital required to support new contracts.
Depreciation and amortization is now anticipated to be $7.1 million.
The increase reflects the acquisition of advanced or as well as updated amortization associated with the purchase of IP mission support contracts in late March and the timing of program requirements.
We now estimate a 22% tax rate for the year up slightly from 21%.
Net income guidance has been revised to $32.7 million to $35.4 million with diluted earnings per share in the range of $2.82 to $3.05.
Adjusted EPS is expected to be in the range of $3.06 to $3.29 like revenue, we expect EPS to build sequentially throughout the year.
Weighted average diluted shares outstanding are estimated at $11.6 million.
Our 2019 net cash provided by operating activities is now expected to be in the range of $38 million to $42 million, reflecting over 100% conversion of net income and incorporates our increased internal investments.
Operational capital expenditures guidance is approximately $10 million, including our application modernization project of $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 or in part over the performance of the contract.
Finally, 2019 mandatory debt payments or $4.5 million.
Now, let's move to slide 11 to look at the puts and takes in our guidance update.
This slide summarizes the per share impacts of the adjustments we've made to our 2019 guidance.
This waterfall also illustrates the relative dollar values of operating and non operating costs, we will incur this year.
Demonstrating the rationale behind our non-GAAP measures.
During 2019, we expect to incur M&A and Logcap five pre operational legal costs of 24 cents or $3.7 million.
Additionally, based on our current estimates we've assumed approximately eight cents contribution from advanced or which could change based on our final purchase price allocation.
We anticipate the higher interest taxes, depreciation and amortization will have a 20 cents impact relative to our prior guidance as mentioned working capital requirements as well as the updated amortization associated with the purchase of IC mission support contracts and the timing of program requirements are driving the higher forecast.
Importantly.
Based on increased momentum and expected revenue in our core business, we are deploying incremental profitability to build capabilities and prepare for our substantial growth.
These investments are slightly offset by our revenue volume and are expected to have a net positive impact of one cents.
Finally, when adding back the onetime M&A and Logcap five preoperational legal costs, the midpoint of our adjusted non-GAAP diluted EPS moves to $3.18.
Chuck.
Let's move to slide 12, and end with our near term priorities and execution.
Our results at the halfway point of the year demonstrate that we are executing consistently on our strategy.
To innovate and lead in the emerging converged infrastructure market.
Through each of the tour three core elements enhanced the foundation.
Spanned the portfolio and add more value our near term priorities remain the same as an organization. We are entirely focused on their execution.
Our growth teams are hard at work and we are driving activity to extend recompete wins.
Prosecute campaign to both expand with existing clients and diversify our client base.
And finally, we are advancing our M&A strategy to build out our service portfolio capabilities.
And add key client verticals with the backing of our strong balance sheet.
With respect to enterprise Vectrus, we have added leadership and accountability to drive enterprise performance and efficiency improvement to establish repeatable practices for affirmative client outcomes and margin expansion overtime.
This is an example of how as an organization. We are focused on pulling the levers in every aspect of our operations, particularly supply chain to drive process improvement in order to maximize profitability in preparation for accelerating growth.
Our goal to make Vectrus the premier converged infrastructure company in the market will be unattainable without the drive and dedication to client service admission excellence of our entire team.
I would like to thank the people of veterans for their commitment to duty and the missions we support.
Before we close.
I would like to highlight that yesterday, we announced as Susan Lynch with appointed senior Vice President and Chief Financial Officer.
Effective seven August Susan brings over 25 years of senior leadership financial experience to Vectrus and a strong track record in the government services technology defense and manufacturing industries.
In addition to a deep financial experience are focused on both performance and cost control will support us well on our journey to our five year goals of two and a half billion dollar in revenue and 7% EBITDA margin. We are thrilled to welcome Susan to the Vectrus team.
I'd also like to take us opportunity to thank bill for his hard work dedication and leadership as acting CFO during this period.
Bill a tremendous asset the vectrus and we are proud to have them continue in his role as chief accounting officer.
Thanks, again, Bill now I'd like to open the call up for questions.
Thank you if you'd like to ask a question at this time. Please press star one on your telephone keypad a confirmation Tom indicate your line is in the question queue and you May proceed Sir two if you'd like to remove your question from Keith.
For participants using speaker equipment and be me the answer to pick up your handset before pressing the star key.
Again that is star one to ask a question at this time.
Our first question comes from the line of John Lady luck with Stifel.
Hey, guys good quarter.
Thanks, John .
I'm doing well I am doing well. So you can you guys just kind of update us on the op tempo and the SEC comment into pay Tom regions.
Well, just kind of getting a sense for what the recent events in the Gulf.
I have been pretty newsworthy and we're just kind of does that is that affecting your outlook around the OPTEMPO going forward and demand in those key areas.
In the same com AOL, our we're certainly seeing an uptick in up tick in op tempo.
Now I will say, however that debt.
Region has been.
At a high op tempo for a long period of time so.
We're seeing it we will see some I would assume.
Tailwinds from a revenue perspective, as we move through the second half of the year.
And as you've indicated it very consistent with what we all see in the news reports.
Okay.
Can you guys give us an update excuse me an update on Ondecks Walker.
Is there anything Ben or anything changed in terms of the timeline for that we compete.
It has not we have submitted our bid.
We expect an award in November of this year, we have heard not anything to the contrary and again I continue to be very pleased with the performance of our team.
I have high expectations for the outcome of the award.
Okay.
Bigger picture for Recompetes, what's the risk going forward for the remainder of 19 and what are your initial thoughts on 20.
In 19, the only real swing or that we have from a recompete perspective is.
Index lock as you have indicated.
And in 22019.
There won't be any change to amdec independent of how that contract is awarded until well into 2020 at best.
In 2020, we don't have any programs that exceed our 10% threshold that we typically disclose but in general 2020, as a light re compete year.
Perfect Okay.
Well, we made a big focus in on the call has been talking about the emerged convergent infrastructure markets.
Can you kind of elaborate on.
Where the customer is in their approach.
I guess do they have a plan to get there or are they still take an inventory and kind of where does that Chris proceed itself within this.
Mark.
Again, we believe.
That we are leaders in the market, we believe and have evidence that our clients.
Are all focused on the requirement to further utilize it in certain technology into their operations.
An example of this is the army installation to the future activity.
We've been heavily involved in that both from a solutioning.
And positioning perspective.
And I would also like to say that with regard to our existing contract basis admissions. We support our clients are very open to us providing kind of new and innovative ways.
To become more efficient more effective and obviously allow the government to do more work with the same amount of money, so long winded way of saying.
Our clients in many respects are really.
Leading us to be even more aggressive in this area.
Okay, just a few more questions I promise.
When you look at the customers right now your Army Navy Air Force.
Can you kind of give us some color around which ones are being more proactive about embracing the fixed price, which one is kind of the leader in the converged infrastructure and.
Really who still kind of using the LPTA approach to their contracts. If you could give us some additional color and then I'll jump back in the queue.
Yes so.
By and large all of our clients are very open to utilizing new and innovative ways to become more efficient and more effective.
We do see a lot of fixed price contracting in the Air Force.
But in general I would say that across the military.
All of the commands that are responsible for maintaining infrastructures.
Are all very similar in how aggressive they want themselves to be.
As acquirers and how they would like for industry to be.
As solution providers.
All right. Thank you guys.
Thank you appreciate it.
Our next questions are from the line of Joe Gomes with noble capital.
Good afternoon.
Hi, Joe how are you.
Good.
So.
It's been two quarters in a row you mentioned that you know the top line is really been driven by the middle Eastern Europe .
What's.
Going on in the us that it's been lagging behind those two in terms of at least contributing to the top line recently.
So as as we've talked in the past that the us.
It is very much more aligned with small business with regard to two base and operation support.
So as such we do see our us business is somewhat cyclical.
In fact 2020 has some very large us based opportunities in our pipeline.
It is however, almost essential that the.
Middle East to a certain extent Europe in certainly Asia Pacific.
It relying upon companies of scale like Vectrus to really support those missions.
So that would be that would be the summary, but again the real takeaway is US is mall is more small business centric, although we see some changes to that to the positive.
And overseas is more dependent upon larger businesses of scale.
Okay got it thank you.
And I think last quarter, you talked a little bit about some commercial opportunities and just was wondering if you could give a little bit more of an update there.
Yes, so the commercial opportunities are.
Opportunities at this point in time, where we are largely sub contracting our solutions to more commercial type entities.
We do have a pipeline in that area, we have not fully disclosed our solutions pipeline, yet, but we're intending to do that later on this year, either the third quarter, our the fourth quarter.
It advance to our provides.
A.
And excellent conduit for us to do that and as I mentioned in my prepared remarks of one of the clients.
That is a part of the advantage our acquisition is the Ministry of defense in Japan, which is very exciting to us because thats.
That's a new channel.
And it provides us additional reach.
In the Endo Paycom AOR.
Okay, great. Thank you very much.
Thank you appreciate it.
Thank you and once again as a reminder, you May press star one to ask a question at this time. Our next question from the line of Daniel Java with FBR. Please go ahead.
Hi, Thanks for taking my questions and congrats on the quarter.
Thanks, Thank you.
So just to start on the State Department Award.
Can you provide us a little color on.
How that came about it being your first award with that customer and it seems like a fairly large queue are there any sort of historical perspective, you can provide on the.
Spending levels towards those.
Towards the contract.
So this is a first of a type award for the Department of State I'd like to think we are here because of.
The positioning and past performance that we bring to the infrastructure support aspects of our defense business.
We at this point did that apartment no state has not disclosed anything in addition to the contract ceiling of $6 billion, but we have.
Been working with the state Department and much of all of this is public that the intent is to utilize that contract.
Very similar to the department of defense with both Middle East and East and.
Asian opportunities in general.
So no real market.
Dollar availability, yet other than the contract ceiling.
Okay fair enough.
And then the advantageous acquisition congratulations on that.
Can you give us a little color on the.
Timeframe for.
The revenue synergies could it seems like that's a really really compelling opportunity from that acquisition in particular.
Yes, the advent of the advance our team ran in my view a very good business.
Their pipeline is is clean and clear and executable.
And what I like about the revenue synergy is that in addition.
Two.
The bases that they have in their pipeline, we can add our existing deployed contract base to that pipeline.
So I like the opportunity for revenue synergies. Our sales teams are working together already very early on into the acquisition and I look forward to.
A real successful integration.
Both operationally and from a sales perspective.
Great and then last one for me.
Can you offer a little bit of an outlook on your SGN, a spending rates as we move through this year and into 2020.
Seeing as you've pulled ahead some of the investments as you mentioned and you know you've added a advent tore so how should we be thinking about your margin trend line as you move beyond 2019 into 2020.
Again, we have.
As we mentioned several times on the call.
Aggressively began to implement performance improvements, both and program execution and supply chain.
If you take that in combination with the expected increase of volume.
Over 2020 and beyond.
We really like the trend line now obviously, we have to demonstrate that and.
As we gain additional clarity on Logcap timing.
We will become very transparent in our expectations for margin and margin expansion.
In 2020 and beyond.
Okay Fair enough. Thanks, guys I appreciate the time.
Appreciate it thank you.
Thank you. We've now reached the end of our question and answer session I would now like to turn the floor back to Chuck Pro for closing comments.
Thank you Brenda and thank you to everybody on the call today, we appreciate your time and input and we look forward to updating you.
On the progress that we're making and the next quarter's call. Thank you very much and have a good day.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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