Good day, and welcome to the Vectrus Inc. First Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Michael Smith, Director of Investor Relations. Please go ahead, Sir.

Thank you, Leroy. Good morning everyone. Welcome to the Vectrus first quarter 2016 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 will be making reference to non-GAAP financial measures during this 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 reconciliations 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 and thank you for joining us on the call. Today we reported first quarter 2016 financial results. Before we get started, I would like to recognize two of our programs for the recent achievements of an important accolade. Our Operations, Maintenance and Supply-Europe team in Germany and the Consolidated Installation Property Book Office team the at Logistics Readiness Center, Fort Rucker Alabama were both awarded the Army’s Chief of Staff Supply Excellence Award. Since 1986, these awards have been used to recognize supply excellence at various army units and organizational levels. The winners represent the best of the best in supply discipline and logistics readiness across the army, army reserves and army national guard. Our teams underwent a rigorous competition that prevailed. These coveted awards showcased the high standards we meet in support of customer requirements to help us achieve our vision of being their fresh choice and most trusted partner. It’s our success on programs like these and our commitment to continuous improvement that enable Vectur to report the strong results that we will be discussing today. Please turn to Slide 3. First quarter results were strong. Our total revenue increased 19% year-over-year to $311 million driven by strong performance in our existing business and contributions from programs that achieved full operating capability in the second and third quarter of last year. We were able to achieve this strong revenue growth despite the continued and expected year-over-year reductions in our Afghanistan base programs excluding Afghanistan, our revenue increased 28% year-over-year. Our operating margin in the first quarter was 3.8%, up 20 basis points over operating margin in the prior year. Diluted earnings per share increased 33% year-over-year on a GAAP basis and 30% on an adjusted basis to $0.61. Emphasis by our team…

Thank you, Ken. Good morning, everyone. Please turn to Slide 5. Today, I will be discussing our first quarter results for the three months ended April 1, 2016. The table at the top of page 5 reflects the Generally Accepted Accounting Principle financial results of Vectrus. The table at the bottom of page 5 reflects adjustments made to operating income and diluted earnings per share in the prior year period. I will address operating income and diluted earnings per share on an adjusted basis, which we believe better reflect the ongoing business trends. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP. Funded orders during the quarter were $605 million. Orders were up $462 million, compared to the first quarter of 2015. This change is primarily driven through recent contract modifications. Our book-to-bill ratio was 1.9 times in the quarter. Revenue for the quarter was $311 million, $50 million higher when compared to the same period of 2015. This is a positive year-over-year revenue growth of 19% in the quarter. In the first quarter, revenue excluding the Afghanistan contracts was $279 million, up $61 million or 28% compared to the prior year's revenue. Revenue benefited from the ramp up of the Turkey-Spain Base Maintenance and the ASIC contracts which began full performance in the second and third quarter of 2015 respectively. We also witness growth in our existing contracts based in the Middle East. Afghanistan contracts contributed $32 million of revenue, down $12 million or 26%, compared to the prior year’s quarter. First quarter operating income was $12 million or 3.8% operating margin. This represents $2.3 million or a 20 basis point improvement when compared to the first quarter of 2015 adjusted operating income and margin. This improvement is driven by an…

Thank you. [Operator Instructions] And we will take our first question from Brian Ruttenbur with BB&T Bank.

Yes, thank you very much. Couple questions. First of all on Afghanistan, you mentioned $80 million this year, you are on a much stronger run rate than that appears. Do you expect weakening in the second half of the year and then maybe you can talk about where you see things going in 2017?

Sure, so, Brian, we had $32 million of revenue in Afghanistan in this quarter. For the second quarter it should trend slightly lower than that and then it will come down in Q3 and Q4. So the second half of our year we are anticipating that to come down to match the $80 million of revenue projection. As far as 2017, what we are expecting is, that revenue stream to continue. We still expect that to come down slightly, slightly being about 50%, because of the contract close outs we experienced in 2016. So we are at – we are projecting $80 million in 2016. We expect that at this point in time to be around $40 million in 2017.

Okay. Can you maintain the margins on $40 million? If you cut things in half, can you maintain a 4% margin there?

Yes, at this point, it’s very similar to other contracts that we have in our portfolio. That’s what we are going to get away reporting or separating it from our financials. Historically, it was such a large contributor to our income base that we felt it was important to get visibility on where it was going. But going forward, there will be additional contracts in Afghanistan that we’ll compete on and we can win, but it will be more inline to what we would expect on a normalized basis in the 4% to 5% and maybe a little bit more and maybe a little bit less depending on the contract dynamics.

Okay. And then, on your core business, you had good core growth this first quarter. Can you talk about beyond 2016, where you see your core growing and what the dynamics are with that?

Sure, that’s a great question. We are starting to get some visibility into 2017. 2016 is shaping up nicely, obviously as we talked about. From 2017 perspective, we have – there is some key elements that we need to make everybody aware of. Obviously, we’ve been talking about re-competes. So we need to win our re-competes first and foremost and we are in good position to do that. Second element of re-compete that need to be considered is, almost in every case, we’d expect those awards to come in at a lower run rate than what we are currently experiencing. Those run rate declines could be as much as 10% or more due to the competitive and sensitive nature we are in right now I don’t want to elaborate anymore. But that we will see a decline on those re-competes coming into 2017. We talked about Afghanistan. So another 50% decline is a reasonable estimate if you are modeling 2017. On a positive note, new business depending on the timing of new business award in the second half of this year, if we see something in early fall or even later in the year, we could see a full contribution into 2017 that replaces some of that headwinds we are seeing our existing contracts. And then Thule is part of the new business. If Thule comes back our way and assuming nothing has changed in a new contract, we could see as much as $60 million of annual revenue from that contract alone. So when you look at the broad picture, we need these re-competes to award. We need to bring them back in and we are focused on that. That would give us five years of revenue visibility that gives us a nice solid foundation to build on. So any incremental or additional award that we receive after that, we can see some growth in the future.

Okay. So, to sum up, the core – first of all, the Afghanistan business is going to be cut by half in 2017 more than likely that’s what you are thinking and then your core business assuming you win or you re-bid that’s going to be down, let’s say ballpark 10-ish percent, will those margins be the same you said already on Afghanistan the margins will be in the same ballpark. Will the re-competes you anticipate being in the same ballpark is where they are now or better?

Well, we’ve seen some good progress today, right, a 4% core business margin in this quarter is a nice outcome. Some of that has to do with timing on how we record our EACs. But, nonetheless, we have some steady improvement there. As we said in the past, these re-competes, yes, give us more leverage to improve profitability. So we would expect those profit margins to increase. They are more fixed price elements. So as long as we get these contracts off on the right foot, and perform well, we have more leverage to manage cost and improve margins. So that is our expectation to realize our 4% to 5% operating margin going forward.

Great. Thank you very much.

And we will take our next question from Bill Loomis with Stifel.

Hi, good morning. Just on EAC, just to be clear, I thought you said in your talk $1.7 million contribution to net income, but the Q says $2.7 million, what it was?

That 1.7 is the change year-over-year. So, 2.6 in the Q, yes, it’s just the change that we had in our script.

Okay. And then the second is on the new wins. Can you just elaborate a bit on the $1 billion outstanding. First of all, I know you don’t have any new wins in the first quarter. Was there any awarded that you just weren’t successful on? And then, of that $1 billion that you have out, is it lumpy? In other words, is there, I guess, $500 million of it one contract? If you can just talk about that the make up and then, timing so, when you expect those awards to play out mostly in the third quarter, some in the second? Thanks.

Hi, Bill. This is Ken. As lumpy is a good word, because when you look at new business it’s really impacted by a bunch of factors. Really delays and some outright cancellations. So, we’ve actually had some bids come back in based upon protest and things along those lines and there is some that we actually haven’t won. But, it’s been as steady about $1 billion weighted award and we continue to submit as you saw we have about $6 billion over the next 12 months in our pipeline that we are going to submit and that doesn’t include some of the new IT things that we are looking at, based upon bidding the IDIQs that we are actually going after. I think – if you look at the continuous improvement and what we are trying to do on the BD side as part of the reorganization, and looking at the pursuits and really get in front a lot of these things, I really expect a better win rate and being able to address this appropriately across the team. These improvements to our processes will allow us – I really think a better percentage to win on these opportunities.

Yes, Bill, I would add too, look at our re-competes. You draw back to 2015 at the beginning of the year, we saw we would have all these re-competes decided last year and it’s taken up full year to get resolution. So that’s a very similar dynamic that’s going on in our pipeline. And that’s not all the activities going on in our pipeline, but, clearly the same effect is playing out there as well.

And we are continuing to look at our addressable market within all our service lines and we look for opportunities and things that we can bid. But as – every year that we continue to look at the marketplace, it is lumpy.

So, just going back, my question in the first quarter, were those some meaningful bids that you just weren’t successful on? And then, also is – of the composition the $1 billion is half of one contract? Or any kind of big programs in there, or what is it, but a lot of smaller?

Sure, so, Bill, we haven’t talked specifically about pursuits. I mean, it’s a big pipeline and we have a very active process that’s qualified and close to our core. What’s important to us is that we make sure that if pursuits come out of that waiting award bucket that we have enough behind it that we can put it in and have more in consideration. We are constantly looking at our addressable market to increase that pipeline. I think our investment in IT will do that over time and may take a couple of years to realize sustained results there. But we feel good about where we are. We’ve made some changes internally that that will help adjust where we need and our success rate will improve. But the biggest challenge is things are moving to the right, and that’s the biggest challenge right now, Bill.

Okay, and then on – just a final one on the reorganization and business development. Can you tell us did you realign by customer or any – just give us a little more flavor, any new people brought in? Things like that, thanks.

No, we are just really reorganizing – we are doing a centralized business development and what I’ve really done is taken the capture piece and really we are reorganized it as our general managers and when you look at how we do that, it’s really the front-end of the business that have taken the cost in and that’s made in and really move that into the business development function. So it’s really working more on the front-end and looking to how we do it on the back end. So as we are really looking at that holistically across the entire process.

Yes, if you think of it from an investment perspective, we are taking costs that are centralized now and putting it at the beginning of a process and we think our solutions will be even stronger than they are today. And we’ll be able to optimize our investment because we will only bid on things that we have really good opportunity to win.

Okay, great. Thank you.

Thanks, Bill.

[Operator Instructions] We will go to our next question from Morey Marcus with Sidoti & Company.

Hey guys, how are you doing?

Hi, Morey.

So, my first question is on, just kind of on the modeling side. As share count in 1Q came in a little bit, I guess, lower than I was expecting. So, just if we get to that $11.2 million that you guys are expecting for the full year. Should we see a pick up in 2Q or will that be more back-half weighted?

Yes, we will see a pick up in the second quarter and then it will level out in the third and fourth quarter. But the $11.2 is still solid.

Got it. Okay, so then, now, just on AFCAP, I know you guys talked about you had something like, you’re seeing opportunities. Can you talk about what those opportunities are and maybe a little bit on the timing side of that?

Yes, again, we don’t talk about specific opportunities. We are seeing heavy RFPs on AFCAP and we expect those to turn pretty quickly. So, as on other pursuits we are seeing delays. On this contract vehicle, and in the - right in our core space, we expect the RFPs to come in and we’ll submit bids and then the award is to be announced pretty quickly. So we can see some activity in the second half of 2016 on AFCAP.

We have a number of prospects committed. It’s a really very lively IDIQ.

Okay, that’s good. Now, just on K-BOSSS, you guys said that you have a strong rating. Can you just tell us what that rating was for 2015? I mean, in the past, you talked about having the 97%, 98% award score. What was that in 2015?

So, we are still actually waiting for, in the most recent award fee period, but we are over 90% and more importantly, we’ve been rated as excellent. So that’s the highest rating that you can have and so our performance is strong. As you would expect, with activity in the region, there was a lot of dynamics going on, on the contract. And, the team has done an outstanding job managing that volume and performing and not having an interruption in performance. The one thing that we can control is our performance and our performance will weigh into K-BOSSS 2.0 evaluation. So – and we are doing that quite well.

Okay, great. And then just one last question, I know you guys are targeting on operating margin long-term 4% to 5% and right now, you guys are at the high threes, so how do you get there? Is it got using a really good job of managing your cost, is it just winning new contracts that just have higher margins, just because given the current environment it seems like, margin is tough to combine?

Right, and there is no doubt. It’s a challenge. Our VIP program is really important to us. Every opportunity that we can lean out operations and create more value for our customers, we got to take that and that gives us some opportunities. Now there is some natural caps on how much margin we can realize on existing contracts. What we’ve talked about in the past is, we need these contracts to re-award. So some of those natural dynamics that we are currently experiencing kind of reset, gives us some new opportunities to improve margins. Those new contracts by and large have a larger complement of fixed price settlements, which can help us if we do things correctly. If we perform well, meet customers’ expectations, and then we can optimize using our VIP program, optimize that cost, then we can benefit from increasing margins. I mean, 4% to 5% is a reasonable target for this business.

Historically, on every contract we’ve improved margins year-over-year through our continuous improvement or VIPs and that’s just the legacy of ITT coming over from Exelis and then it is a culture. It’s part of the culture of what we do within Vectrus.

Okay, great. Thank you guys.

Thanks, Morey.

Then we will go to our next question from Michael French with Drexel Hamilton.

Good morning gentlemen.

Hi, Michael.

Hey, Mike.

Hi, congratulations on the strong performance for the quarter.

Thanks.

So, I had one on an item that’s in the news, it was announced at the United States kind of 250 special operators into Syria and you guys have bases in the area, are you involved in supporting them? And this has resulted in any uptick in activity on your bases?

Well, as you know, we have - a lot of folks that are in the region and we – basically, when you look at what operations take place there, we don’t really talk on in a classified scenario on anything – things-wise there. But when you look at the bases that exists in Turkey and what takes place in Kuwait and what takes place in Qatar, and support structures that exist there, you can just assume that, if anybody is going in and out of the region that they are going to come out of one of those different locations and they are going to get equipment from one of those regions. If they are going to go into Afghanistan, Syria or into Iraq.

Okay, understood. And I’d like to ask you to collaborate on the comment you made about rest and you said you are seeing some solid progress there. Do you care to add some color to that?

Sure, well, as you know, we started – we’ve been in the IT and network business for a long time. It’s part of the legacy of when we start out as a company 70 years ago, and we’ve been on existing contracts, we have been running the network and then Middle East for multiple years on an existing contract that was OMDAC-SWACA which before that was TAC-SWACAA. We’ve been running the network in support of this signal in Europe under different names of contracts for a while which is now [Indiscernible]. So we’ve had quite a – almost 2000 network engineers and what we decided to do is because when we were under Exelis, we couldn’t really bid the IDIQs because it was another division that had a lot of that work and so we recognized a lot of those IDIQs in the IT network business were coming of age. So when we – after our first year of running the business, we said, well, we want to expand into that business area, because those IDIQs are becoming available. And so, we opened the office in Reston, hired Chico Moline, our new General Manager came over to us from Harris and then basically, said, we are going to go after those pursuits, hired a bunch of new capture managers, decided to basically run it out of Reston, because we look at – where all the customers are, where a lot of the talent is, and where a lot of the people in the IT network business is, it’s really in the Washington DC area. So it’s a hub. It’s where the action is. It’s where a lot of the things take place and that’s where we started this process in January and we are building that out. I go back and forth there quite a few times and I sit with the team and it’s really coming together well. Matt, anything to add?

No, I mean, it’s a minimal investment for a pretty sizable opportunity. We talked about it’s going to take a little while, but if we do this correctly, and hit some early wins in the 2017, we see this as an increasing addressable market for us. And we are really small in this market at this point in time.

Okay, Reston, specifically, there is a lot of intelligence community contractors in that area. And you are mostly with DoD. So, are you still focused looking at the Pentagon or are you looking at other agencies as well?

We’ll work for anybody, Mike. So, quite candidly, we’d like to get into three letter agencies and do some of that work. We’ve bid some of their work in the past. We’ve don’t that. So, quite candidly, I’d like to get on some of the new contract vehicles.

Okay, very good. Thank you and good luck with that.

Thanks.

And there are no further questions at this time. Mr. Hunzeker, I’d like to turn the conference back to you for any additional or closing remarks.

Well, thank you all for joining us on the call today. We are off to a strong start in 2016 posting improvements to revenue, operating margin, earnings per share and cash flow in the first quarter. Our execution and improved visibility have allowed us to increase the lower-end of our 2016 revenue, free cash flow and diluted earnings per share guidance. Thank you for your interest and look forward to updating you on our progress in the next quarter.

This concludes today's conference. We appreciate your participation. You may now disconnect.