Thank you for joining us for the V2X Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Betsy, and I'll be the operator for today's call. [Operator Instructions] And now I'll pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations and Corporate Development at V2X. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to the V2X fourth quarter and full year 2022 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Susan Lynch, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on the Investor Relations section of our website at www.gov2x.com. Please turn to Slide 3. During today's presentation, management will be making forward-looking statements pursuant to the safe harbor provisions of the federal securities. 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. The company assumes no obligation to update its forward-looking statements. Additionally, I'd like to point out that in addition to GAAP earnings, we will be discussing and reporting various adjusted non-GAAP metrics, including pro forma revenue, adjusted operating income and margin, adjusted EBITDA and margin, adjusted operating cash flow, adjusted net income and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials available on our Investor Relations website and in our press release filed with the SEC. At this time, I would like to turn the call over to Chuck Prow.

Thank you, Mike, and good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 4. 2022 was a very successful year, achieving several milestones, including the completion of the merger for the Vertex and making significant progress on the integration while driving strong results with high-quality, uninterrupted service and support to our clients. Our success is a testament to our employees' unwavering commitment to our business and the missions we support. We ended the year with strong fourth quarter revenue of $978 million, up 20% year-over-year on a pro forma basis. This growth was driven by new business wins, successful recompetes, on-contract growth and continued expansion in INDOPACOM in Europe. Adjusted EBITDA was $79 million in the fourth quarter, representing an 8.1% margin higher than our expectation due to favorable program performance, strong execution and acceleration of program productivity that was expected in 2023. Adjusted diluted earnings per share was $0.92. We continue to focus on debt reduction and in the quarter, we paid $25 million on our $185 million second lien term loan. Additionally, just this week, we were able to successfully refinance a portion of our debt into new lower cost, more efficient credit facility. This new facility is expected to generate substantial interest expense savings, improve liquidity and drive additional value for shareholders. Our integration-related activities continue to progress, and we were successful in delivering our expected cost synergies for the quarter. We also continued to align our business for future revenue synergies and enter 2023 with three operational business units that are focused on the core capabilities of advanced technology, aerospace and global mission training and sustainment. We are leveraging these capabilities across the organization and are seeing early success that I'll discuss in more detail shortly. In summary, we…

Thanks, Chuck, and good afternoon, everyone. The results we will be discussing today reflect the contributions of Vectrus from January 1, 2022, through December 31, 2022, and Vertex from July 5, the close date for December 31, 2022, unless otherwise noted. Please turn to Slide 10. Our fourth quarter financial results were strong and provides solid momentum for V2X as we move forward into 2023. Fourth quarter 2022 revenue was $978.2 million, representing a 20% pro forma increase year-over-year when compared to revenue of $816.3 million. Revenue growth was attributed to continued expansion in INDOPACOM, volume associated with LOGCAP V and rapid response efforts in Europe and new programs, including Fort Benning, E-6B, Advanced Helicopter Training System, Naval Test Wing Atlantic and Global Strike programs. As Chuck discussed above, we are pleased with the portfolio diversification that the merger has created. Our client capability, contract and geographic concentrations are more balanced when compared to legacy Vectrus. For example, our role with the Army in the fourth quarter now makes up 39% of total revenue compared to 63% for legacy Vectrus last year. Our revenue with the Air Force now makes up 17% of revenue compared to 14% last year, and revenue from Navy now comprises 31% of total revenue compared to 14% last year. Finally, our revenue from civilian and other clients, including the intelligence community, NASA, the Drug Enforcement Agency, the U.K. Royal Navy and commercial comprises 13% of revenue compared to 9% last year. From a contract mix perspective, our portfolio is now much more balanced as well with approximately 50% of revenue from cost-plus contracts and 50% coming from fixed price and time and materials contracts. This contract mix balance allows V2X to mitigate the impacts of inflation while creating opportunities to improve margins over time. For…

Thank you, Susan. We are proud of the progress we've made at V2X so far and continue to be excited about the path in front of us. Now I'd like to turn the call over to questions. Operator?

[Operator Instructions] The first question today comes from Tobey Sommer with SunTrust. Please go ahead.

A decent number of months away from the closing of the merger. What's your sense now for where the firm is in terms of teaching the employees internally about the capabilities and the portfolio of services that you provide customers? And then maybe how would you juxtapose that with where you are in the process of teaching your customers all that you can do?

Tobey, how're you? Thanks for the question. I couldn't be more thrilled really with the way that our employees are working not only within their program team, but across program teams, with our sales organizations to adapt to new ways of doing things, new technologies. You saw many of those technologies when you were with us in Indianapolis, I know. But it's really encouraging to see the enthusiasm our people have around these new capabilities. Week before last, I actually spent the entire week in INDOPACOM, talking to many of our clients. And our clients fully understand the breadth and the important addition of all of these capabilities to the portfolio. It helps us both from a contingency requirement perspective, but it also helps us in terms of a breadth and a scale perspective. When our clients are looking to increase their op tempo, if you will, in regions that are as broad and as vast as INDOPACOM, as an example.

Perfect. And then could you maybe expand a little bit in -- on the Arctic sustainment's? You did provide some detail in your prepared remarks. But I was wondering how -- what could does this mean for the income statement over the next few years? I'm not asking for any kind of specific number for this year, but as that ramps up and you become more active? How consequential could it be?

It actually could be quite consequential. The TUI contract, which, as you know, we've had in the portfolio for several years now, was revised in such a way that we bid in a very strategic joint venture with a couple of local companies. And the net result was a contract that has a substantially higher ceiling value. As I mentioned, it was almost $4 billion in ceiling. And what that will allow us to do, as that base is reset from an infrastructure perspective over the coming years, we will have an opportunity through that contract and the contract ceiling to provide new and different types of services with our joint venture partners that we believe can provide substantial opportunity for us over, in fact, the 12-year life of the contract. So we are -- again, we're thrilled to have been rewarded the contract. As we mentioned, it is still under protest, but we like where we stand with our current joint venture partners.

And then last question for me, and I'll get back in the queue. The - we have a nice budget for this fiscal year, but there is a lot of lively debates in Washington about future trends, et cetera. What kind of assumption you have in your guidance for what happens with the fiscal '24 as we work our way to the end of the year?

Yes. We still have in our guidance an assumption of got slowing new awards, if you will. But as you also indicated, such a large percentage of our revenue is currently within our backlog. That gives us a lot of confidence in the guidance that we have set. As we move into the year, it will be interesting to see how the increased OPTEMPO in place like INDOPACOM, as an example, really begin to turn into end of '23 and '24 revenue opportunities. But time will tell. And we're going to continue to work with our clients every day, every week, every month on that very point.

Thank you.

Thank you, Tobey.

The next question comes from Bert Subin with Stifel. Please go ahead.

Hi, good afternoon. And I appreciate the time. Maybe just a follow-up to that question more broadly. Your sales guidance in '23 assumes what seem like pretty conservative growth level, considering you have a couple of larger contracts that are in the process of annualizing and you likely have continued growth in MRO and across the Pacific. Do you contemplate the Talisman exercise in this guidance? Or is that sort of a zero right now? And what do you think is required to get you maybe two or above that high end on the sales side?

Yes. I think the exercise of an INDOPACOM, as they normally do really materialize kind of mid-summer, the late summer, early fall. So we do have anticipated activity around the exercises. We're not going to know yet for a couple of months the kind of the exact scope and scale of those exercises. I will tell you that we do have in our business, some natural erosion that occurs predominantly in our aerospace aviation business. It's fully contemplated within our guidance. But we're really balancing that known erosion with really the continued slowness of new awards as well as we do, again, have a good understanding of the OPTEMPO associated with the exercises. But in the abundance of caution, we're going to wait to see how that materialize this year as we get closer to the middle of 2023.

Maybe just a follow-up to your point there. What are some of those headwinds on the aerospace side? And can you give us just an update on what you're seeing on general military MRO trends?

Well, as is normally the case in aerospace engineering, there are particular airframes that are retired over time. Again, that is fully contemplated within our guidance. I wouldn't overstate that. But I would say in our industry, as you've heard from other competitors in the industry as well, these new awards have to matriculate through and actually turn into submitted awards. Again, we feel very comfortable with the OPTEMPO associated with our exercises, which again gives us a great deal of comfort with our guidance. But we really need to see new awards matriculate and be awarded at a more kind of historical rate and pace, if you will, which has now been slowed for really three, maybe four quarters.

Yes. I guess I meant more on the -- just specifically like the military MROs, I understand that's maybe more reliant on some new activity there. But is the demand pretty robust? I mean that's a pretty consolidated end market and it...

No. I mean the demand that we're seeing -- we didn't talk about it in the prepared remarks. Our total pipeline within the next year is now $14.2 billion. So we have -- we are very, very comfortable with the amount of new and important things coming into our pipeline. We continue to see slowness of awards. We have bids submitted of slightly more than $2 billion right now. So we have a very, very healthy bid submitted a group of contracts. Our pipeline, we continue to feel very strong about the pipeline, we talked about our addressable market being as high as $160 billion, and we can see the continued convergence of both the physical and digital infrastructure that we support. So we couldn't be more bullish on the marketplace that we are right in the middle of here. But the reality is that the rate and pace of the new awards are a little slower than we would like and we need to see those awards liven up here a bit. But again, the exercises that we have lined up in INDOPACOM, again, give us a great deal of confidence in terms of the guidance that we have provided today.

Okay. Thanks. I just have one follow-up for Susan. Do you guys contemplate Section 174 in your guidance in '23? Is that having an impact? And what's your general assumption about working capital? I'm just wondering if that's a material headwind as we head into this year?

Yes. So we did contemplate Section 174 in our guidance. It's a little bit more than $4 million. I would use that $4 million to $5 million in your estimates. And working capital, we expect as we grow to maybe be a slight user of working capital, but nothing material.

Thanks for the time.

Thank you. Appreciate it.

The next question comes from Brian Gesuale with Raymond James. Please go ahead.

Yes. Good evening. And thanks for taking my questions. Wondered if you could just expand on the pipeline. It sounds like there's a lot of opportunities out there. You've got 2 billion bids submitted, sounded like another $12 billion on top of that. But they're a little bit slower to matriculate. Can you maybe talk about how you think that rhythm will change as customers want to spend before the budget uncertainty at the end of the year? And then maybe some of the areas you're most excited about within that pipeline?

Sure. We continue to see a very healthy aerospace pipeline. Last year, I think you remember, we were awarded a Naval Test Wing Atlantic in our pipeline for this year and Naval Test Wing Pacific. Again, we feel very good about our offering there. And I'll also tell you that the significant number full and open bids and INDOPACOM, but many of them are Navy now in places like Diego Garcia, Singapore, Guam and a few other places. We see an emerging pipeline in INDOPACOM that are complementary to our Indo Pacific footprint in LOGCAP. So those are two areas specifically where we're very bullish. I'll also say that we have an emerging advanced technology business with 1,000-plus engineers, 500 specialty engineers where we really like the pipeline that's emerging behind our advanced technology business. So as both Susan indicated in her remarks and myself in my prepared remarks, the balance that we have now with the business both from a contract-type perspective, from a capability perspective, from a geographic perspective, is really astonishing compared to just a year ago.

That's really helpful. Thank you. As we think about your 5% organic guide for the year, and the amount of visibility you have and particularly some of those first half kind of tailwinds that you have with some of the wins you had in the second half of last year. How should we think about the way you've contemplated the organic growth rhythm throughout the year? It seems like it could be a little bit front-end loaded organic growth-wise and then you just given yourself some room for contracts to matriculate in the second half. Is that a fair way to think about it?

We do like our momentum. But as you know, from following the business for a while now, we really do have this kind of -- this 40% first half, 60% second half. There really remains kind of a characteristic of our business. So while yes, we do have momentum, we may, particularly on the revenue side, a bit more than 40% this year. But I would stick with that 40-60 characteristic that had been with the business now for several years.

Fantastic. And then last one before I jump in the queue. I think I understood that you talked about generating roughly $100 million in free cash. Can you just prioritize the use of that capital and where we might think net leverage might be at the end of the year? Thank you.

Right. So we're kind of targeting about 3.6x by the end of the year and then getting lower in 2024. Our midterm target is to get between 2x and 3x. And as you saw us pay down the second lien and then use some cash here in the first quarter to restructure that debt into a lower cost of capital. So we're doing as much as we can as fast as we can to pay down the debt. And this -- I'd like to say we're very happy with the new structure in all the banks that supported us in refinancing our debt.

Great. Thanks so much.

The next question comes from Ken Herbert with RBC Capital. Please go ahead.

Good afternoon. Chuck, I just wanted to start off when you think about INDOPACOM and the growth you saw through '23, does the guidance assume sort of a run rate on this low 50s on a quarterly basis for '23? Or is there growth off sort of where we're exiting '22 implied in INDOPACOM as part of the outlook for '23?

Yes. I would say that for -- first of all, Ken, how are you doing. Yes, I would say that we're going to see a modest increase in INDOPACOM throughout '23. As I've indicated, we really like our INDOPACOM pipeline here over the next 18 months. So I continue to see for the next couple of years. INDOPACOM being a driver of growth for us and I was out there the week before last, I guess, it was now. And the opportunities are real. The opportunities are emerging and we're going to continue to invest in different ways to make sure that we are prepositioned in the areas that are most closely aligned to where our clients' needs are going to be.

That's very helpful. Thank you. And as I think about your comment on sort of a 40%, 60%, is that the right framework as well as we think about the adjusted EBITDA in '23? Or do you maybe even see a little bit more of a pronounced second half ramp on the EBITDA side?

I would start with the 40-60, maybe a little bit more pronounced. You could be like in the 38-ish or something. But the 40-60 has been a good guide still and for us in recent years. And Mike will continue to stay focused on what that exact mix will be.

Okay. That's great. And just one final question. As we -- just to follow up on some of your comments on the fiscal '24 defense budget outlook and sort of the path between the request and when it gets put in place at the end of the year. Does the guidance assume a sort of a structured maybe three month CR for the -- into the end of calendar '23 for fiscal '24? Or how have you specifically sort of thought about risk around timing of appropriation of the fiscal '24 budget?

Well, as we indicated in our prepared remarks, I mean, we have such a high coverage of our 2023 revenue based upon contracts we already have in hand. And point two, as you know, we are so heavily focused on alignment to the O&M budget. We really didn't have a significant impact from any delays in the budgetary processes this year. I will say, however, getting back to my earlier questions -- answer to the question, but I should say that, that does impact actual new awards, right? So we're fortunate and blessed to have that coverage 90% revenue coverage this year, 2020 and 2023. But again, that really is a '23 comment, and we're going to have to look at closely as we move into '24.

Great. Thanks Chuck. Really nice to enter the year.

Thank you. We appreciate it.

[Operator Instructions] The next question comes from Joe Gomes with NOBLE Capital. Please go ahead.

Good afternoon. Thanks for taking the questions. So Chuck, you mentioned the growth in the quarter, some of the strong growth was both from on-contract growth and some phasing in new contracts. I wonder if you could kind of give us a weighting as to how much of the growth was from on contract or existing ones and how much was from new awards?

Well, as we indicated in the prepared remarks, I mean, the 20% growth we talked about in the fourth quarter, two in France through a litany of new contracts. So we benefited greatly from new contract wins throughout 2022. And I'll tell you say Naval Test Wing Atlantic as an example, I was probably, I don't know, six weeks ago now, I was down talking to that client and the accolades that we received from the ability to so seamlessly transition that new contract, again, was very heartening. So our teams continue to distinguish themselves in the field by their great program performance by their seamless transitioning of new contracts. So again, the organic growth engine continues to work very well for our business. And we continue to expect good things from our organic growth teams here as we move into 2023 and beyond.

Thank you for that. And you mentioned in remarks about the 62% growth for the Pacific Deterrence Initiative. Just looking at your little chart there, that's over a $4 billion increase. Of that, how much of that would be applicable to V2X and the services that you guys provide?

Well, the initiative and a broad set of initiatives that are operated by the INDOPACOM commander and theater of operations. All I would look at that as any time where you have OPTEMPO involved in the Pacific Deterrent in PDI, that's opportunity for us. That is an increased number of exercises. It's increased number of crude movements. It's request store and move prepositioned stocks would be a great example. We have some work right now going into Australia associated with the PDI in preparation for future activities. So just like much else that we talked about in our business, Joe, you really need to take a look at the broader DoD initiatives and how those initiatives turn into OPTEMPO because wherever you see of OPTEMPO materializing, you typically you see V2X in the wings, enabling all of that true movement, material movement, et cetera.

Okay. Thank you for that. And just one -- you mentioned on a number of occasions about the slow pace of awards. I'm just trying to get your feeling as to what is kind of behind that? What happens -- needs to happen in your opinion in order to see that pace start to pick up to a more normalized level or rate -- run rate of awards out there?

I'd be speculating, but it really is the -- our clients are overwhelmed with many, many, many things that they have to move through the acquisition cycle. And I just think that the rate and pace of the various acquisitions has slowed based upon that reality. Again, we heard about the Arctic situation here recently. We heard about the clear program. So we are seeing some movement. But again, it's just one of those things that occurs from time to time in our industry. And our clients the rate and pace of their awards just need to kind of catch up, if you will, with the [RRPs], and that's the cycle that we're in right now.

Okay. Thank you for that. Congrats on the quarter.

Appreciate it. Good to talk to you.

This concludes our question-and-answer session. I would like to turn the conference back over to Chuck Prow for any closing remarks.

Thank you very much, and thanks to all for joining us today. We look forward to reporting back to you at the end of the next quarter, and hopefully, it was another equally good result. We'll talk to everybody soon. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.