Ladies and gentlemen, welcome to Cubic Corporation's First Quarter Fiscal Year 2018 Earnings Conference Call. At this all time, all participants are in a listen-only mode. Today's webcast includes a slide presentation as part of the formal presentation followed by a question-and-answer session. You can advance the slides by using the left and right arrows located in the upper right-hand corner of your window. [Operator Instructions]. As a reminder, this conference is being recorded. If anyone has any objections, you may disconnect at this time. Now, I'd like to turn the call over to Kirsten Nielsen, Vice President of Investor Relations. Thank you. Please begin.

Hello, everyone, and thank you for joining Cubic’s webcast. Today, after the market closed, we reported our first quarter fiscal year 2018 results. I am joined by Brad Feldmann, Chief Executive Officer and Anshooman Aga, Executive Vice President and Chief Financial Officer. I would like to reminder everyone that statements made on today's call that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. You can find factors that could cause the company's actual results to differ material from our expectations listed in today's presentation, press release and most recent SEC filings. In addition, we've included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix of today's presentation. With that, I'd like to turn the call over to Brad.

Thank you, everyone for joining us today. Thank you, Kirsten. I want to start by welcoming Kirsten, our new Vice President of Investor Relations. Kirsten is an experienced financial executive who joined our team from Arconic, formerly Alcoa, where she was Director of Investor Relations. Kirsten has already made significant contributions and enhanced our dialogue with our shareholder base. We're excited to have her on Board. On today's call, I will start by discussing our first quarter results for fiscal year 2018 and the highlights of the quarter. Then I'll hand the call over to our CFO, Anshooman Aga, who will cover our financial results in more detail. Starting with Slide 3, you will find an overview of our first quarter results. As you can see, strong execution on our Winning the Customer initiative has led to the highest backlog in the company's history totaling $3.64 billion. We won all of the major opportunities we're pursuing including our major transportation wins in New York and Boston. An Air Force Datalink Enterprise ID/IQ Award and an important defense training wins for continued support of the Joint Readiness Training Center in Fort Polk Louisiana and at OASIS-EUCOM for training support, as well as a training support services enterprise mission support services ID/IQ. This accelerated award momentum generated a book-to-bill ratio of 2.44 for the quarter, providing us substantial organic growth in the future. Sales for the quarter were $340.7 million, a 2% increase compared to last year. Adjusted EBITDA was $17 million in line with our expectations and slightly lower than last year's $20.1 million. R&D increased roughly $3 million due to our investment in CMS Technologies and our acceleration of development of innovative training technologies. We remain hopeful that the president and congressional leadership will reach a new 2018-2019 bipartisan budget…

Thank you, Brad. Please turn to slide nine to cover a few of the highlights for the quarter. Our financial results for Q1 were in line with our expectations. Adjusted EBITDA of $17 million was down $3 million year-on-year primarily due to higher R&D investments in our technology and products that will deliver long-term returns for our shareholders and the timing of shipments and mix from our defense business. While Q1, R&D spend was $3 million higher than prior year, full year R&D expense is expected to be slightly below fiscal year 2017 levels. As Brad already mentioned, we ended the quarter with a record backlog of $3.64 billion, which now reflects the $554 million contract for New York signed in October. We continue to expect the financial close and booking for Boston in fiscal Q2. Free cash flow was negatively impacted by the timing of collections in the Middle East, higher unbilled AR and defense services, timing of the mobilization payment from New York and an increase of inventory in transportations for delivery scheduled in the coming months. Going forward, we expect cash flow to improve as we collect on these receivables. As you are aware, the recently enacted tax legislation significantly revises the U.S. corporate income tax system by reducing the corporate’s income rate to 21% adopting a territorial regime and then posing a one-time transition tax on deemed repatriated foreign earnings. As a result of proactive tax planning, our current estimate is that no material impact or results from the deemed repatriation of our offshore earnings. Additionally, we expect to benefit from the lower corporate tax rate once we get passed past our investment in the ERP and deliver on the planned growths in the U.S. We will continue to analyze the impact of the Tax Act…

Thank you, Anshooman. Turning to slide 16. In summary, we are very pleased with our start to fiscal year 2018 led by our major transportation wins in the New York and Boston. Our Mission Solutions Air Force data links IDIQ award and the defense training JRTC win in Fort Polk. We expect CMS revenue and profitability to increase due to the recent T2C2 full rate production decision. We will continue to make technology investments to drive revenue growth and margin expansion. Finally, our ERP back office implementation is nearing project completion and will provide us with a solid foundation for first class processes and efficiency. We are standardizing our engineering tool sets and workflows to drive further consistency and efficiency. In closing, I'd like to thank my Cubic teammates for their hard work in increasing shareholder value and to the investor community for our ongoing partnership as we continue to grow Cubic. Now let's proceed to the Q&A session.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Ken Herbert with Canaccord Genuity. Please proceed.

Hi good afternoon.

Hey, Ken, how are you doing?

Hi, pretty good. Brad and Anshooman. I just wanted to start off first within transportation systems, can you just provide an update on what the contribution was in the quarter perhaps from the New York City contract and how we should think about that contract maybe and the contribution on a full-year basis from a top line and maybe from an EBITDA basis?

Thanks, Ken. As we don't break out individual revenue and profitability of individual contracts, I'll remind you that the revenue is in the form of bell curve. We will see some ramp in the quarters to come in this fiscal year from a revenue perspective and then fiscal '19 and fiscal '20 will be the steeper ramp in terms of New York revenue. From a profitability perspective, while we don't disclose individual contract profitability as we mentioned in the past we are committed to our goal 2020 targets and see this contract contributing towards our goal 2020 margin.

Okay. Okay. Now that's helpful. And then if I understand correctly, due to the accounting and how you count for the contract, as the revenue ramps from '18 to '19, do you see any expansion of the margins or are you booking the revenues now at a consistent margin?

It's cost to cost completions so the margins during the duration of the design book contract will remain slight assuming we deliver on time in terms of profitability.

Okay. Okay. Thanks for that. And then if I could just on the specifically within mission solutions, I can appreciate the investment in support of GATR and T2C2 as you think about this business, I just want to clarify you talked about this business as maybe 10% to 15% sort of growth business across the cycle I guess or as part of your 2020 goal. Do we start to see that growth this year? Is that more of 2019-2020, as we get the full benefit of T2C2? Or how do we think about the growth ramp here moving forward within Mission Solutions?

We'll see some growth this year, but next year we'll see even better and better growth.

Okay. So next year we should be in that sort of long-term target range?

Indeed.

Okay. Perfect. And if I could just one final question. Within Mission Solutions, again do you expect to have incremental investments to support GATR and T2C2 that we should maybe keep in mind as we think about the margin? Or does this step up or the spend this quarter does that position you or is there going to be more you think you're going to have to invest to support those in those programs?

So, Ken in terms of R&D, what I mentioned was our R&D expense for fiscal '18 will be slightly below the fiscal '17 levels. Last year, we had lower R&D investment in Q1 with significant ramps in Q2, Q3, Q4. This year, it's a little flatter in terms of the R&D spend. So, there's no significant R&D expense ramp up planned from current levels.

In addition to that Ken, we're expanding our facility in Huntsville, so that we can rapidly produce terminals for the army and associated customers.

Okay. Great. Thanks a lot. And obviously great work on these contracts.

Ken, thanks so much.

Thank you. Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed.

Hi. Thank you. Good afternoon. Just wanted to go back to your full year guidance and your reaffirmation of sales and adjusted EBITDA. I’m wondering as I look at the range for adjusted EBITDA to get to the upper end of the range, does that assume a bigger contribution from the defense portion of the business. I'm just trying to get a better feel for what may get you to the high end of that range?

That’s -- hi Jim, definitely a larger contribution for the high end of the range would come from a Defense business. As we mentioned the timing of the discretionary spend from the U.S. government and also the duration of the CR are big determinant factors of the range. So, Defense is the bigger variable in our range.

And Anshooman, looking at that, that would be probably more weighted again toward Q4, is that your sense?

Yes, as you can look at our previous results, Q4 was a significant contribution in profitability last year and the trend this year will continue especially with CR, we’re sitting through half year with the -- almost half year through with the CR, so the timing is again going to be backend loaded.

Okay. And I wonder if you could perhaps talk a little bit more about the investment in motion DSP and what that may bring to you going forward?

Yeah. This is Brad. We made an investment in the company, a partial investment. We plan in the future to buy the whole company out. We'll do that in n number of weeks. So, I suspect, the real reason we interested in that technology, again is that mission chain that we’re creating as you know, we have the ability to disseminate full motion video and we wanted to add processing in real time, so this artificial intelligence company in Silicon Valley is a great find to be to -- help us add greater value for our customers.

This is a company that you’ve had a relationship with or?

Indeed, in fact indeed and we’re currently working with them and have been working with them for months. We’ve tended to follow a pattern of working with folks before we buy them.

Okay. And last question for me, I just wanted to go back to the overall pipeline in transportation, you had a pretty high win rate certainly. But going forward as you look at some of the contracts that are in the pipeline or let’s say the programs that are in the pipeline that you’re targeting. What’s your sense in terms of looking at some of these identified Brisbane it sounds like you feel very confident about that as well as San Francisco. You also alluded to some other ones that you haven’t talked about before. What’s your sense on some of those other deals?

The technology that we’ve developed with open account and you know you’ve probably heard from that called increased acceleration in winning mobile payment contracts. We think that gives us a formidable advantage. We think that our customers that’s what they want and so you know Jim, I would want. And so, Jim, I would expect us to do very well going forward. We're not going to bid a dollar for these things. We're going to bid our costs and so forth. But I would expect us to have a very good advantage. And also, as you think about it, as we do New York, we are getting non-recurring done, as we add Boston; we're getting engineering done as we get Brisbane and the story goes. So, we'll have a lot of engineering already done before these contracts come out so we think we're in a great place.

Okay. Thanks very much, Brad.

Thank you. Our next question comes from the line of Mark Strouse with JPMorgan. Please proceed.

Yeah. Hi. Good afternoon. Thanks for taking my questions.

Hey, Mark. How are you doing?

Hey, Brad. Good. How are you? So, appreciate you breaking out the mission solutions business. Can you just, would you mind going back to the goal 2020 targets and just talk about the, you've already laid out the revenue targets but can you just remind us of the EBITDA margin targets for that segment as well as the heritage defense systems business?

We haven't given out the targets as but you'd expect the CMS business to be in the mid-teens margin range and the defense CGD training systems business to be high single digits to maybe double-digit range.

Right. Okay. Okay. That makes sense. And then after a few years now, you are on the cusp with some pretty material savings ERP upgrade both in the efficiency gains, but also from the longer investing in that line item. Can you just talk about how much of that will be, how much of those savings will be you reinvested into the business versus how much could go to other thing such as additional M&A or a potential buybacks that kind of thing?

So, you know as we finish our ERP implementation roughly mid-year, this year, the remainder part of this fiscal year we’re going to work to make the system a little more efficient, and improve the processes around SAP. And then, we should start seeing some of the savings dropped to our bottom line next fiscal year. In terms of what we do with the savings at the end of the day, we continuously evaluate best uses of our capital, whether it’s dividends whether it’s M&A, whether it’s investments in organic growth, and we’ll continue to do that. We remain to be committed to make stringent capital allocation decisions that drive the long-term shareholder return and we will just continue to evaluate that as we return – deliver higher returns.

Mark, we’ve stated publicly that we think that the ERP project successfully implemented more well along the way. We will raise the tide by 2% to 2.5%. And we and we stay committed to that right.

All right, okay. Okay. That makes sense. Thank you very much.

Thank you. Our next question comes from the line of Brian Ruttenbur with Drexel Hamilton. Please proceed.

Yes. Thank you very much.

Hi, Brian, how are you doing?

Good. Very good. Thank you very much for taking my call. So, on the R&D side, you basically said, you know the first quarter is going to be the trend around $12 million a quarter, is that right so roughly $48 million on the year, be down roughly $4 million year over year?

In the ballpark, there’ll be slightly below last year Q1 with the holidays et cetera is probably a little below run rate so you can say roughly $50 million.

Okay. And then if you could give us similar kind of guidance on G&A?

G&A…

And tell us what earnings are in three years, no -- just help me out with G&A.

I'll answer the second one first. Earnings in three years, they are much better than this year. But G&A should be down slightly. One of the reasons is going to be the fact that last year we had higher ERP costs. This year, it's $25 million and then we're starting to make certain investments in terms of delivering some of the savings that Brad mentioned and I mentioned earlier so it will be slightly below the last year's levels.

Okay. And then tax rate in fiscal 2019. You talked about the tax rate dropping but what is it going to be on a run rate basis beyond this year. I know this year has got a little bit of the old, little bit of the new but on a run rate basis what do you think the mix will be when you're profitable and generating cash, what kind of tax rate you’ll be paying?

Brian, we're still going through a lot of the analysis so I won't commit to a tax rate this quarter. We'll continue to give updates but just thinking out maybe a couple of years from now you know our earnings predominantly would be in the U.S., UK and Australia and if you start thinking out three, four years potentially the mid-to-high 20s would be the potentially the mid to high 20s would be rate to look at.

A mid to high 20s is that we said?

Right.

Okay. And then finally -- go ahead sorry.

And next -- I won't commit to it next year because, we're still going through all the implications of the Tax Act and there might be some pluses and minuses as we go through all of that.

Okay. And then final question on timing of repatriation of dollars, I guess they're primarily in pounds is that correct? You have roughly £200 million primarily in pounds?

No, we repatriated a lot of that money last year so and part of it was as we were looking at our tax planning with the new Tax Act we were a little preemptive and the key thing one of the things I mentioned was the transition of the toll tax. We expect our liability to -- tax liability to be next to nothing. It was related to a lot of the repatriation and moving the money that we did last year.

Okay. Thank you very much.

Thank you. We have reached the end of our Q&A session. Allow me to return the call for closing remarks.

Thank you for joining us on the call today. In closing, we remain optimistic about Cubic’s future. Thank you very much for your support of our great company.