Good day, everyone and welcome to the Vectrus Incorporated Second Quarter 2015 Earnings Call. Today’s conference is being recorded. For opening remarks and introductions, I will turn the call over to Mr. Michael Smith. Please go ahead, sir.

Thank you, Debbie. Good morning, everyone. Welcome to the Vectrus second quarter earnings conference call. Joining us today are Ken Hunzeker, Chief Executive Officer and President; and Matt Klein, Senior Vice President and Chief Financial Officer. Slides from today’s presentation are available on our Investor Relations website, investors.vectrus.com. Please turn to Slide 2. 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 statement in our press release 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. We assume no obligation to update our forward-looking statements. Also, we’ll be making reference to non-GAAP financial measures during the call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. You can find the non-GAAP reconciliation and other disclosures in our earnings release and in our presentation slides, which are publicly available on the Vectrus website at investors.vectrus.com. At this time, I would like to turn the call over to Ken Hunzeker.

Thank you, Mike. Good morning, everyone. Thank you for joining us on the call today. We are excited to be here to discuss our second quarter results. Before I get started, I would like to highlight that on June 13, we celebrated our 70th anniversary of incorporation. We recognized this occasion by hosting anniversary events at each of our locations around the world. Please turn to Slide 3, where you will see just one example of how our employees marked the occasion. This is one of our teams in the Middle East forming a big 70 to mark the day. Along the bottom of the slide, you will also see a set of posters that commemorate our participation in key milestone events for the first 70 years. These range from the Distant Early Warning programs above the Arctic Circle to the reception operations for equipment during the final withdrawal from Iraq. Each of these posters were sent to our programs to raise employee awareness about the history and to kick off the platinum anniversary events. Please turn to Slide 4. Finally, we ran a series of historical vignettes created to celebrate our historic history of supporting critical missions all over the world. Here, we have featured 2 of my favorites. The first feature is nearly 1,000 faces of the most important aspect of our success over the years, our employees. The second, on the right page, is a very brief description of the legacy work we have done in our service lines over the years. The Distant Early Warning line program was located above the Arctic Circle and was the precursor to successful programs we have participated in like Tax Walkup and On-Decks Walkup. An interesting fact is that we have provided exceptional results for our customers from the subzero…

Thank you, Ken. Good morning, everyone. Please turn to Slide 7. Today, I will be discussing our results for the three months and six months period ended June 26, 2015. The table at the top of Page 7 and 8 reflects the generally accepted accounting principles financial results, which includes the Tethered Aerostat Radar System program and separation costs required to become a standalone company. The TARS program was retained by Exelis as part of the spin and separation costs are a non-recurring cost to the business. I will address the financial results on an adjusted basis, which we believe better reflects the ongoing business trends. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP. I would like to turn your attention to the table shown on the lower half of Slide 7, which reflects the adjusted financial results for the second quarter of 2015. Funded orders were $332 million. Orders were down $16 million compared to the second quarter of 2014, but up from $144 million in the first quarter of 2015. Revenue for the quarter was $310 million, $8 million higher when compared to the same period of 2014. We succeeded in achieving positive year-over-year revenue growth of 3% in the quarter. We believe we have reached a revenue inflection point as new programs offset the Afghanistan revenue declines we have experienced the last couple of years. Afghanistan contracts contributed $46 million of revenue, down $27 million or 37% compared to the prior year’s quarter. Our core business revenue, which excludes Afghanistan contracts from our adjusted revenue, equated to $264 million, up 15% compared to prior year’s quarter. Due to the stabilization of our existing programs and the ramp up of new contract revenue, we anticipate growth in our core…

Thank you. [Operator Instructions] We will go first today to Bill Loomis with Stifel.

Hi, thank you. Good morning.

Good morning, Bill.

Just looking at the re-competes in 2016, so including the big three ones plus other smaller ones, what would be your total revenues that will be up for re-compete in 2016?

In 2016, I think it’s – you have got 30% of our business tied up in K-BOSSS roughly. And then you add what we have disclosed was APS-5 Kuwait and Qatar and Maxwell. They all add up to roughly close to about 50% of the business. If the current burn rates hold that would still be about the same number in 2016.

Okay. And then that’s – there is no other larger ones that will come up initially in 2016?

This is the big cycle. I think what you have seen in ‘15 we had everything planned to re-compete and award this year. Everything is delayed. So, whatever would naturally come up, which is a lot less material on ‘16 would – could see the same kind of effect and could delay and push.

But Bill, this is Ken. There is nothing else in ‘16. Those are the only – there are some smaller ones, but those are the big three.

Okay. And then the $3.5 million was that operating income from the Afghan contracts in the quarter?

$3.5 million?

Yes.

Yes, correct.

And the $6.3 million for the six months, so why did the – why was the margin higher in the second quarter on that? Did you have more direct labor on the Afghan?

So, what we were pleased with in the second quarter is we saw a slight increase in our Afghanistan revenue stream. So, we went from about $44 million in the first quarter to $46 million in the second quarter. And on those contracts, when we see stability, you have clarity on how to perform and how to manage your cost and the outcome was our margins were a little bit better in the second quarter. If that continues through the rest of the year, we could see that same kind of profitability. If there is a lot of change on these programs, which causes a lot of churns that’s when you can see a slight dip in your profit.

So, now you had sequential improvement from first to second on that. And others that do a lot of OCO revenue have had similar situations, where in fact, one yesterday said they could actually see an increase in the back half. What’s your view on – because your guidance of $160 million implies some sequential declines in the second half? What’s your views on that? Is that a conservative view or is the client doing something different overseas this year?

When you look at the year-over-year, we still had a 42% decline from last year. The positive sign, like I said, is we are seeing an increase in the second quarter. The $160 million benchmark for the full year would anticipate further declines in the third and fourth quarter, whether or not we realize that, that’s an uncertainty. I think that the $160 million is firm and it’s probably in the lower end of the range. And I will turn it over to Ken to give you some thoughts on what’s going on in Afghanistan.

Clearly, we are in touch with our customer. We are talking to all of our leaders on the ground. And as Matt said, we are seeing a lot of stability there. There could be some slight upside there, but we are really waiting till some signals come from the administration to see exactly what takes place. So, we are being conservative there, Bill.

But do you think the revenues for you and other contractors over there being more stable is because we are kind of in a pause from a policy standpoint in terms of there is no aggressive withdrawals or anything going on and until we hear something differently that, that could continue to be more stable than it has been over the last year?

I think that’s exactly what we are seeing.

And just one quick final one, on the EACs, the fixed price contract adjustments, why was it – I know you had some favorable and both unfavorable, was a net unfavorable, but what’s causing the unfavorable adjustments on that?

So, the pressure that we are seeing through the midpoint of the year is really on our new programs. We kind of described those as you start up contracts. They are a little less efficient than when you really get a year behind you and we are starting to see some of that. The positive news is our performance is outstanding on these contracts. The customer feedback is very positive and that’s where you can go wrong, which we are not doing. Performance is really essential at the beginning of the contract. Now, we can focus on the cost in the coming quarters and we expect those programs to generate and contribute the normal range that we have guided to before.

On the EAC adjustments, is that what you are talking about?

Yes, right. Part of the EAC adjustments on a quarterly basis, we go through our material contracts and do a bottom-up estimate. That created pressure on the second quarter related to our new contracts primarily. And then we expect those to improve over time. We just have to figure out how quickly we can see that improvement.

So, when you decided on the fixed price contracts with the costs, those are – the costs are higher now for some reason on the new ones?

Yes. I mean, when you think about your phasing in over the next 30 to 60 days, there is a lot of activity to get ready and prepared to take over the responsibility of the contract. That drives some additional cost. And there is some open elements that you negotiate with your customer that you have to work through and all those things are kind of in play. That will take some time to kind of work through.

Okay, thank you.

Thank you.

[Operator Instructions] We’ll go next to Brian Ruttenbur with BB&T.

Yes, thank you very much. Great quarter. Couple of questions. First of all, following on Bill’s question on the OCO, so the trend right now maybe you can address so far in July, has it been any different than the June period or have you seen a falloff?

Really, at this point, Brian, we are seeing very consistent contract requirements in July that we are seeing what we saw in the second quarter. I think the positive sign, if you go back a year, the positive sign is we are not seeing contraction. We are seeing very stable programs across all of our programs and that shows that there is a pause. And if there is an upside, we haven’t started to see anything material at this point.

Okay. So, with core contracts being extended, just on the revenue side, just trying to understand the revenue range, it seems like 2015 should be at – close to the top end of the range rather than the bottom end of the range. Maybe you can help me out and understand what would push you to the bottom end? Maybe there are some seasonality issues coming up and fourth quarter is always a little weaker than – is one of the weaker quarters because of holidays and things like that. But help me out with why you wouldn’t continue the second quarter run-rate going forward?

Well, clearly with the extensions of these key re-competes, we do feel more comfortable with the second half of the year. Things that can play in differently in the Q3 and Q4 timeframe then played out in the second period is programs that complete can change your top line impacts. We do have a couple of programs that have small construction projects that can be in the several million dollars that could create some variability and then the – really the unknown in Afghanistan. We saw some consistency in Afghanistan, but those could change and those change pretty rapidly, which is one of our differentiators. We can adapt to that, but that could also cause some pressure both on the top line and the bottom line in the second half. It's shaping up nicely. We are very pleased with the first half results. We are getting more comfortable, especially on the operating margins finishing two periods or six months at 3.6%, at the higher end of our range. There we are making very, very good progress.

Okay. And then you mentioned the operating margins, what would change your operating margins from what you know right now, especially with the extension [ph] for the remainder of the year?

The core is pretty stable. It would really be around the mix of sites and staffing requirements on Afghanistan. So that would be one element and that changes like I said. And then just the pressures on the new programs that would cause another bottom line pressure in the second half, like I said, I think we are in really good shape having completed the first quarter on these two programs. We are getting more and more clarity on where those risks are and where those pressures are. But those are the two main elements that I – we are watching.

Okay. Last question, debt repayment plans this year, you have accelerated some, are there plans for further acceleration of debt repayment beyond the minimum?

I am sorry. So our objective in 2015 is really to focus on the debt. We guided that if given the opportunity, we would accelerate payments in the $5 million to $10 million. So obviously, we made some good progress in the second quarter. We are still on that same path. If given the opportunity and we have some additional cash at the end of the year, we will work closely with the Board and we may actually exceed the $10 million. But we will communicate that and make those decisions as we kind of complete the third and fourth quarter.

Okay. And then, I said that was my last, I am going to throw one more out to Ken just on a macro basis. What are you seeing in terms of new contracts coming up, margin pressures and we had talked in the past about maybe low price technically acceptable is becoming less the norm. And maybe just talk a little bit, from a macro standpoint, what’s going on, on the top line and in terms of government services, where you are positioned and in terms of margins and pricing?

Well, Brian, as we have discussed in the past, there is a natural tendency for LPTA to put pressure on margins. What – an interesting thing that we are seeing in a lot of our pursuits is we are seeing more fixed price elements, which obviously puts the risk on the contractor and not on the government, but also allows you some opportunities away from a large majority of our contracts being cost-plus now. What I am – what we are also seeing at the macro level is what we experienced with extensions on K-BOSSS, APS-5 Kuwait and Qatar and Maxwell is also taking place on the pursuits that we are going after. So it’s kind of on one hand, you see the – your program getting extended and then now going into ’16. We are seeing the same thing on – as you are going after in a takeaway basis other contracts.

Thank you very much.

Thanks Brian.

We will take our next question from Michael French with Drexel Hamilton. Sir if you would check your mute button, we are not hearing your response.

Hi, good morning thanks for taking my questions.

Good morning Mike.

The first question I have is kind of a follow-up to Brian’s question about debt repayment. For the rest of this year, if there is any cash left over, would you have a preference for share repurchases or would you think about M&A. And then kind of the next phase of the question is, looking into next year, let’s assume the debt is substantially paid down and you have got essentially some dry powder, how would your capital deployment priorities change in that – under that scenario, would M&A become more important or...?

So we are executing on a very focused strategy in 2015. There are a couple of reasons. One, we are a new company. We are standing up a lot of new functions. So managing our debt was very important to us in the first year. And I think we are doing quite well in that regard. The second is really the credit agreement and the terms in the credit agreement, being a new company are pretty restrictive. So the idea in ‘15 was to pay down debt that’s reasonable, get those leverage ratios as low as possible to give us flexibility in the future to make different capital allocation decisions. Those capital allocation decisions, we would work closely with our Board. And we haven’t communicated what ‘16 would look like, but when the time is right we will do that. And we will contemplate further opportunities and options.

And we have communicated – this is Ken. We have communicated that we are looking at all options as far as capital allocation. And we are not taking anything off the plate. But clearly this is a year where want to pay down the debt, get comfortable with covenants and then look at what the opportunities that come forward.

Okay, alright. Yes, that makes a lot of sense. And then on your CapEx, you have guided for $2 million this year. Just curious, what’s in there and what is that going to look like next year?

Year-over-year, that stays pretty consistent in the $2 million to $3 million and that’s really driven mostly by contract requirements. So, there is nothing really that we do from a central location in the capital arena that drives that number.

Okay. And then, I think you said there is $1 billion of proposals outstanding. Maybe you can discuss what your win rates have – how those have changed, if at all since the spin and what you expect going forward on that?

So win rates in our business are tough because we have some very large programs. Take you back to the fall of last year, winning those three contracts, adding over $1 billion, that really skews your PWS [ph]. I think we see what normally contractors see, we have high re-compete win rates. We have talked about our re-compete contracts, so we expect to win those contracts. And then as far as the pipeline – we think the pipeline is, we have to have a robust deep pipeline that rolls, right $2 billion to $4 billion in a given year that we are submitting on new contracts allows us to win our fair share of the business that’s in our core space.

Okay, alright. Thank you. I appreciate it.

Thanks Mike.

Thanks Mike.

Ladies and gentlemen, this will conclude our question-and-answer session. Mr. Hunzeker, I will turn it back to you for closing remarks.

Thanks, Debbie. Thank you for joining us on the call today. We are happy to have returned to our positive adjusted revenue growth. We are making solid progress on executing our strategy to enhance the foundation, balance and diversify the portfolio and increase value through the offerings. Thank you for your interest and look forward to updating you on our progress in the next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference.