Thank you for joining us for the Vectrus Second Quarter 2017 Earnings Conference Call and Webcast. Today's call is being recorded. My name is David, and I'll be the operator for today's call. At this time, all participants have been placed in a listen-only mode [Operator Instructions] And now I'll pass the call over to your host, Mike Smith, Director of Investor Relations and Corporate Development at Vectrus.

Thank you. Good afternoon, everyone. Welcome to the Vectrus’ Second Quarter 2017 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer and Matt Klein, Senior Vice President and Chief Financial Officer. Slides for 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 statements in our press release and presentation materials for a description of some of the factors that may cause actual results to differ materially from the results contemplated by these forward-looking statements. We assume no obligation to update our forward-looking statements. At this time, I'd like to turn the call over to Chuck Prow.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us on the call today. Please turn to slide three. I am pleased to report our solid operating performance and success in the marketplace continued in the second quarter. I will look for this momentum to continue through the second half of 2017. With regard to new busyness, the Keesler contract cleared all legal challenges, and we're currently in contract startup. Additionally, our pipeline progression continues at a good pace, and I am optimistic with regard to additional pipeline conversion in the second half of 2017. I'll discuss both Keesler and our pipeline in greater detail later in my remarks. With regard to operating performance, I am very pleased with our team's progress on the program startups at Thule Air Base and Keesler and on the re-competed and a retained contract at Maxwell and the army OPMAS-E program. The program startup phase was difficult, and I am proud of our team's success to this point for these four complex programs. Although I will discuss Enterprise Vectrus in greater detail later in my remarks, I do want to reinforce how optimistic I remain with regard to the impact it will have on our business performance, as we seamlessly integrated for programs and functions and aggressively leverage best business practices and technologies wherever possible. Given that the execution of our strategy will continue to place added focus on leadership and talent development, we recently held a summit for current and future leaders within Vectrus at our Colorado Springs headquarters. With the global workforce of approximately 5,600 employees that spans 143 locations and 18 countries, we've an extensive and rich employee base from which they cultivate future leaders. We’ve planned to leverage and invest in our people to drive our strategy and…

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 5. Today I'll be discussing our financial results for the three and six months ended June 30, 2017. In the second quarter of 2017, revenue was $259 million, down $49 million or 15.8% as compared to the second quarter of 2016. This decrease in revenue was attributed to lower activity from our Middle East programs of $24.3 million. Afghanistan programs of $16.8 million and our U.S. programs of $9.6 million, partially offset by an increase of $2.1 million from our European programs. During the second quarter of 2017, as previously discussed, our outsized contracts came to a conclusion driving much of the Middle East programs period-over-period there-ins. Operating income for the second quarter of 2017 was $9.2 million, down $2.1 million or 18.5% compared to the second quarter of 2016. Operating margin for the second quarter of 2017 was 3.5% compared to 3.7% operating margin in the second quarter of 2016. Operating income for the second quarter of 2017 was lower when compared to the same period of 2016, primarily due to the reduction in revenue and slightly higher SG&A, offset by cumulative contract adjustments. During the second quarter of 2017, we recorded net favorable cumulative adjustments to operating income of $2.2 million compared to $0.3 million in the same period of 2016. There are many factors that drive contract performance, including successful contract modifications and extensions of current contracts. Adjustments can be positive or negative, are normal part of the business and our guidance contemplate this reality. Interest expense for the second quarter of was $1.1 million or $0.7 million lower in the same period of 2016. The decrease in interest expense was due to a lower debt balance. In addition, in the second quarter of 2016, we incurred…

Thank you. [Operator Instructions] Our first question is from Brian Ruttenbur with Drexel Hamilton.

Yes, thank you very much. A couple of questions, first of all on your 2018 guidance. You got several moving parts in there. Can you then tell me assuming you keep K-BOSSS, then what is all of the puts and take mean, roughly flat revenue in '18 or slightly down? What direction are we going assuming no new wins and no new losses?

Yeah, so let me just reiterate what we had in the prepared remarks. If we use our 2017 midpoint as a guided or 20 or 10.40 and we have the year-over-year change on APS-5 of about $53 million, and then the incremental growth on new business for Keesler and Thule, that would all aligned to essentially flat revenue base in 2018. We also have a $1 billion of bids submitted and pending awards this year. Depending on the success of the second half of this year, that can also contribute into '18 to give us some growth potential in the next year.

And Brian, this is Chuck. I would like to reiterate as well that of that $1 billion vendor current evacuation, we fully expect to see half of that materialized one way ore the other in the second half of this year. So that will give us a great deal of clarity about our growth trajectory for next year.

Okay. So APS-5 plus the two wins that Wash and then you have a bunch of bids and then you have your own roughly 10% of your base up for rebid, is that correct?

Correct. And if you think about our business, we have on average, a periodic performance of 5 years, you would expect every year to have about 20% under recompete, so it'll be 10% below is the light year.

Okay, very good. Let me talk about -- or ask about, excuse me, the refinance coming up or potentially coming up. It seems like you're finally in a position that you can change your terms. You paid down your debt nicely. According to at least my calculations, you'll be down below $70 million by year-end debt. What kind of cash will you have with that roughly $40 million, is that right ballpark?

We're trending to about $50 million today in actual cash balance. As we think about the second half of the year, let me go back to when we spun as a new company, we had a very restrictive credit facility. And then so doing a new public company, a lot of uncertainty in the business. We got two years of consistency and a strong debt pay-down plan and we’ve executed that nicely. As we look forward into the fourth quarter of '18, we had a pretty stiff amortization schedule, and we want to get ahead of that. So we're looking at the second half of '17 to refinance our current credit facility. And with two years behind us and some consistency on how we're willing the debt, we think that the term should get much more favorable going forward.

Okay. And then another financial question and then I'll ask something different. On the tax rate, do you see that same tax rate rolling forward into '18, barring anything changing in Congress?

Yeah, we think that 36% of since '18 and the simple way to think about, it the federal tax rate is 35% and another percent or so for state taxes, primarily related to our contract.

Okay. And then let me ask about pipeline. Chuck, what are you bidding on? Is it more base operations? Is it IT work? Is it -- can you tell me what direction you're going with these bids? Is it all over the board and what is your stated objective to expand margins, to expand revenue? What do you want to accomplish?

Our pipeline is highly reflective of our current business. So about 75% of our pipeline is based on logistics operations work and 25% approximately is IT-related. And I see that continuing as we move forward. However, what I do see is that the bids that we're submitting in the facilities and logistics business are much more heavily IT-enabled, which will allow us to be much more competitive, and as we've talked in the past, will help us drive margins in the future as well.

Okay. And then in terms of LOGCAP the K-BOSSS situation there, it sounds like nothing will happen, an award won't happen until June. That's kind of at the earliest that's assuming all stars line up realistically that it seems like with most recompetes and other things like that seems to stretch out. So you're probably fine for 2018, but -- how are you doing on the recompete side in terms of the K-BOSSS/ LOGCAP, how do you feel like you're positioned this time versus last time?

I think that is a great question and we're very excited about both LOGCAP and our positioning for K-BOSSS. We continue to operate in exceptionally higher levels in K-BOSSS in Kuwait in general, I might add, and the Middle East in general I might add, I should say. With regard to LOGCAP, LOGCAP IV did not include, what I'll call, the enduring missions i.e. the K-BOSSSes and Q-BOSSSes of the portfolio, it will and LOGCAP V. So I really think that bolsters our position to win one of the six awards versus the prior three awards on LOGCAP V and that $82 billion of market is something we feel very, very positively positioned for.

[Operator Instructions] Our next question is from [Ben] with [Indiscernible] Capital Markets.

Thank you. You got a few questions here, first regarding APS-5. Now this $63 million contributed this year. As we look into our 2018 quarterly model to that $63 million would imply roughly $15 million to $20 million was included in the early part of the second quarter, is that a fair assessment?

Yeah, the second quarter has a $12 million of APS.

$12 million of the $63 million was in Q2? Okay. Perfect. And then a pipeline question kind of building off of what you were discussing here for the facilities and logistics pipeline described as more IT-enabled. I am wondering if you’re able to kind of quantify at all the level of the pipeline that's enhanced with technology solutions that will help enhance your margins. And how does that compare with the same -- with your pipeline a year ago. I mean, how has your pipeline shifted from say 12 to 18 months ago to today in terms of technology solutions in that business?

It's hard to put it on a percentage basis, but what I will say our familiarity with how we can augment current manual processes that we support everyday in our facilities and logistics business is improving. So with each passing quarter, we are becoming much more capable and much more comfortable with augmenting what has been typically manual processes through pretty basic in some cases to in some cases pretty sophisticated technologies.

And you have to remember, Ben, that pipeline is been evolving over the last 12 months, so we're just starting to see that technology infusion into the pipeline. So as we go through the coming quarters, that will get stronger and stronger.

The last point that I'll make with our over laboring as appose is that what we’re also seeing in that business is with our current timeframe base our clients are asking us to be more innovative everyday and find new and better ways to sale for our existing contract base.

Kind of last question I have and it's might be a little premature to ask, but sounds like you basically gave some legal her employee ID and had her hit road. And I'm wondering if you can elaborate a bit on what's helps you identify the whole with the existing growth strategy or any shift that you're beginning to make? How has she impacted your strategy thus far if you're able to identify any shift as if yet…

So our strategy has come together in its entirely here early in 2017, and when I still in her stead focused on is extending the ecosystem that we can participate in. Today we are largely a prime contractor on major base facilities in select IP programs. There are very important channels out there that we can leverage through alliances and other ways of configuring our service with go-to-market. So I see the immediate impact quite frankly, because now we have a focus on it from Sue’s participation in the business and retain.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the Question-and-Answer Session, and I would like to turn the call back to Chuck Prow for closing remarks.

Thank you, David, and thank you for moderating the call today. And thanks all of our participants for attending the call today. I look forward to updating you on our performance following the third quarter of this year. Thank you very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.