Thank you for joining us for the V2X First Quarter 2024 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Rob, 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.

Thank you. Good morning, everyone. Welcome to the V2X first quarter 2024 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Shawn Mural, Senior Vice President and Chief Financial Officer. Today, Chuck will highlight the company's recent awards as well as highlight some strategic initiatives, and then Shawn will walk us through the first quarter financial performance. Slides for today's presentation are available on the Investor Relations section of our website, gov2x.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. 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 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 morning, everyone. Thank you for joining us on the call today. Please turn to Slide 3. I'd like to thank our employees for all of their contributions and commitment to our clients' missions that resulted in a great start to the year. In particular, I'd like to take a moment to recognize our veteran workforce. V2X remains a leading participant in the veterans ecosystem with almost 50% of our 16,000 employees having prior military service. Our veteran talent base has been key to V2X's growth, and I am honored to announce that V2X has once again been recognized as a top military friendly employer by Viqtory. On a similar note, this month we'll recognize Memorial Day. As we honor the brave men and women who gave their lives in the service of our country, I would like to thank all of those, past and present, who have served to protect our freedom. Please turn to Slide 4. V2X reported a great start to the year with revenue increasing 7% year-over-year. Revenue in the first quarter was driven by a 22% year-over-year growth in the Middle East and 7% in the Pacific. Our growth in the Middle East, or CENTCOM, was driven primarily by expansion in Qatar and our recent Aviation Support & Training contract to support the Saudi Arabian Ministry of National Guard. This is a substantial foreign military sales program valued at approximately $400 million over 5 years. I am pleased to report that phase-in activities are well underway and the contract continues to ramp up. We anticipate the program to be operating at full run rate in the second half. As we have discussed previously, the demand signals from our clients in the region remain heightened. With a recent supplemental funding package, we…

Thanks, Chuck, and thanks, everyone, for joining us here today. Please turn to Slide 8. We started 2024 with strong performance, building on the momentum from 2023. Performance across our metrics was in line with our expectations for the quarter. Revenue of $1.11 billion in the quarter represents growth of 7% year-over-year. Revenue growth in the quarter was achieved through continued expansion of existing business in the Middle East and Pacific regions as well as new programs. This reflects the strong demand for our service offerings around the globe. Adjusted EBITDA in the quarter was $69.1 million, delivering a margin of 6.8%. As discussed previously, we expect revenue and adjusted EBITDA will ramp sequentially throughout the year. Adjusted diluted EPS was $0.90, up 8% from prior year. The growth reflects lower income tax and interest expense, partially offset by higher depreciation and other expense. Interest expense for the quarter was $27.6 million. Cash interest expense was $25.4 million. An important attribute of our business is the ability to generate strong cash flow with low capital expenditure requirements. We continue to expect adjusted net cash provided by operating activities to be in the range of $145 million to $165 million for the year, representing 120% adjusted net income conversion at the midpoint. During the quarter, net cash used by operating activities was $57.2 million, following our historical pattern and reflective of a receivable delay that collected shortly after the quarter closed. Adjusted net cash used by operating activities was $83.5 million, adding back M&A and integration costs and removing the contribution of the master accounts receivable purchase agreement. Regarding capital expenditures. CapEx in the quarter was approximately $8 million. We expect our CapEx profile to be more heavily weighted towards the first half of 2024 as we deploy some engineering and…

[Operator Instructions] And our first question is from the line of Ken Herbert with RBC Capital Markets.

Nice quarter.

Thanks, Ken. How are you?

Pretty good. Chuck, maybe just to start off. The timing of the supplemental doesn't seem like it was able to impact your first quarter, but you still put up some nice revenue growth. Can you maybe just walk through some of the pieces of the supplemental and how you perhaps view that supporting the top line opportunity at least through the rest of fiscal 2024?

Sure. We'll kind of walk around the globe to do that. So on the Middle East, you saw the nice year-over-year revenue growth in the Middle East. As we've talked about in prior quarters, that really represents just the increased OPTEMPO in addition to some new wins, nice new wins actually, in the region. We are processing requests for additional requirements as we speak. None of those awards have actually occurred as of this morning, but we would expect to begin to execute new requirements in the region sometime this quarter. You saw the continued growth in the Pacific. The exercises are, in fact, occurring. They're much smaller in the even years, as we've talked about in the past. But the military is really maintaining a balance between what's happening in Europe and the Middle East with the need to continue to enhance capabilities in the Pacific. As it relates to Europe, we are working with our clients and a couple of net new requirements. They may take a bit longer to materialize, but they are important capabilities that align with some of our newer modernization and sustainment activities as well as logistics enhancements in the region as well. So we're seeing high OPTEMPO across the globe. And probably throughout this quarter and into the third quarter, we'll begin to process net new requirements.

Great. Now obviously, you kept the guidance unchanged. Is it fair to assume that the -- with the supplemental, I think it was largely as expected but just gives maybe incremental confidence as we think about at least the top line through the remainder of the year.

It's earlier in the year. And as you're aware of our typical practices, as these opportunities turn into signed task orders, we'll begin to think about the guidance. But we feel very comfortable with the guidance that we previously announced and that Shawn reaffirmed here this morning.

Perfect. And if I could just finally for Shawn. Cash usage in the quarter a little greater than we'd expected. I understand the moving pieces. To get to the full year number, can you just walk through maybe the quarterly cadence, I guess, maybe cash usage in the second quarter with a strong second half, but how do we think about that cadence?

Yes, that's exactly right, Ken. I think at the first half of the year will be a modest cash usage probably in aggregate, and then cash flow generation in the second half to get very consistent with the cadence. We did in the first quarter, and I mentioned it in the prepared remarks, we had a timing of some receivables that just missed the quarter close. Nothing that's concerning to us or anything like that, but that did cause the cash to be a little bit lower than we've traditionally seen. But again, first half of the year, modest usage, and then add to the cash in the back half of the year.

Our next question is from the line of Tobey Sommer with Truist Securities.

You described, I think, multiple kind of vectors of growth in demand that you're seeing. I was wondering if you could sort of comment about what the pipeline looks like from a margin perspective and also whether it embeds a kind of uplift in margin in terms of kind of the blended profitability of the pipeline as you see it.

Hi, Tobey. So we have a new format that we talked about this year and it's portrayed on Slide 7 of the presentation. What you will see is that the training and the operational technology and engineering pipeline is a traditionally higher margin aspect of our business, in fact, demonstrated to be higher margin aspect of our business. I'm really pleased that the continued rate by which we've increased the pipeline of those 2 important capability sets. As you know, executing a pipeline in the federal services market is not an instantaneous thing. But I think the team's been doing a really nice job of very nicely balancing our traditional operational capabilities with the higher-margin aspects of our technology engineered solutions and training activities.

Great. That's what the answer I was hoping for. From a protest standpoint, could you update us on the time line and milestones to think about for the most significant ones that we've sort of got our eyes on?

Yes. The F5 adversary is a big one out there. It is now back in to GAO. You can't predict a future on these things. But I think what you can predict is this will probably be the last run at GAO. I know our client is ready to get started. We're ready to get started. In fact, we've had some modest preparation activity before the new protest happened again. So we're in the about midway point of this next GAO protest, and we're hoping to be able to move forward once this is done. And that's -- of the protest, that's the most significant one that's outstanding. Shawn, anything else?

No, that's the big one, and we'll see how it plays out.

Okay. Could you comment on the competitive landscape and maybe bifurcated in 2 areas, the logistics and overseas logistics area as well as the aircraft maintenance and sustainment? And maybe even a third area, if you could talk about that training, which seems to be growing in the pipeline?

Yes. The operational aspects of our business, and I'll include that the overseas base and logistics operations as well as contingency support -- there is -- the OPTEMPO and the level of stress that both the DoD and the State Department are under are still very significant. So our role in supporting those important clients overseas will continue to be a tailwind for us because I just -- I think those activities, the rate and pace of the activities that we all see on the news will continue for a while. It's kind of point one. Point to specific to the aircraft O&M business. We continue to see our clients extending the lifecycles of existing platforms and increasing the amount of pressure on themselves and then ultimately ourselves to keep planes in the air, especially as it relates to training. One of the major mission requirements of both the Navy and the Air Force is trained pilots and they can't train enough pilots. So we see good OPTEMPO support in addition to net new requirements across those 2 parts of our business. And as you know, that aspect of our business has continued to consolidate over the last 3 years. With regard to modernization and sustainment and what we're now beginning to call engineered solutions, frankly, the large scale O&Ms are running at capacity. And we see a real opportunity for us to provide quick and agile solutions to integrate disparate platforms, point one. And then point 2, extend the usefulness of existing platforms like you've seen with the F-16 central display unit. So that's how I would kind of view the demand profile of our major capabilities.

Our next question is from the line of Trevor Walsh with Citizens JMP.

Wanted to just maybe dig in again on that pipeline slide for Slide 7. Appreciate kind of the breakout there. Chuck or Shawn, really, but maybe just Chuck for some of your comments. As far as the OT&E business kind of growing or kind of becoming a larger part of the contribution of total, how much of that is driven by kind of the engineering kind of paces that need to go with that? Or is it more just that's how the opportunities are developing? I just -- can you give us a flavor of is it kind of R&D that needs to happen and that's why that kind of piece of the pie kind of gets larger over time? Or is there some other thing that I'm maybe not picking up on that's kind of…

I think the -- I'm sorry, I interrupted. Thanks for the question, Trevor. We are aggressively marketing, selling, experimenting with our clients in the operational technology and the engineering component of our business. So this is a very purposeful approach to sell directly to those clients. In some cases, those clients are OEMs. As well as to sell through our existing contract set. And we've had good examples of both of those that we talked about in our prepared remarks. The CBRN opportunity, that opportunity where the CBRN contract is the perfect example. It started off with experimentation with our clients. We proved a contract -- I'm sorry, we proved the concept. The clients then moved directly from there into a sole source contract. And it doesn't always happen that way, but when it happens that way, it's really nice. So Shawn, anything to add?

Yes. No, the only thing I'd offer up is to ensure that the teams have everything that they need. We talked a little bit about some engineering tools and that sort of stuff in the CapEx. We started that last year because, as Chuck said, we see the opportunities, and we want to ensure that we're well prepared to capture that work. So again, I think we feel very good about the ability to address everything in that pipeline.

Great. Terrific. That's super helpful and good segue because I wanted to ask a question around that CBRN contract. Is it base or location kind of specific in terms of footprint where it can sort of expand into maybe other geos? Or is it fairly broad-based in terms of kind of where that solution is being implemented? And just talk through kind of the on the ground…

No, it is -- it's geography independent. It happened to be being deployed overseas right now, but some of the earlier use cases were actually around events here in the United States. So it's a capability set that is very focused towards those types of threats, but is geographically independent.

Got it. Great. And maybe just one last one. You mentioned just the DoD needs to kind of balance all of the different requirements across the kind of major kind of things going on per region, whether it's Europe, Ukraine, Middle East and then INDOPACOM. How are you, I guess, balancing that or getting the read from that customer in terms -- I mean is there a lag, I suppose, in terms of that balancing act in terms of where you guys kind of put resources and whatnot? And how does that, I guess, play out in terms of how things are moving? I imagine it's dynamics. I'm just curious how you guys can -- how you keep up with that as well in the same way.

As you -- as again, you see back in the prepared remarks and on Slide 7, the bids submitted at $9 billion, and the next 12 months, bids to be submitted, $16 billion. That's $25 billion of activities there of proposals there. As we've talked about in the last couple of quarters and kind of reaffirmed here, the pace by which those awards have been made have been a bit muted. But we actually believe, particularly with regards to overseas logistics for the Army as well as major training activity that has been -- now we actually believe that some of those awards will actually be forthcoming here in the not too distant future. So the answer to your question is while things continue to be a bit muted, the contents of the $9 billion in bids submitted are to the point where they're going to have to be awarded here sometime, again, like I say, in the not too distant future.

Our next questions comes from the line of Bert Subin with Stifel.

Chuck, maybe just following up on that question. Like if I look at those bids submitted of $9 billion, about $5 billion of that is for your aerospace solutions. I mean, I think we've heard for a while that there's demand there, there's a lot of bids going out, but there's sort of this slowness in things actually being awarded. And then when they're awarded, there's the protest phase. I guess can you give us some detail on maybe how your aerospace solutions business has been growing? I guess there's been a balance of sunsetting and then the new Navy Test Wing Atlantic and Pacific Awards. And do you think sort of the cadence we've seen is starting to improve imminently, or is sort of your hope that it will improve in coming quarters?

I think we've had actually a nice run in organic growth in the aerospace aspect of our business. F5 adversary is a big one that needs to now be adjudicated. But our pipeline across both our core aerospace and our core global mission support business has -- remains high. And again, as we've talked about as -- again, this is a bit of commentary, but given the current budget realities that the nation faces, there's going to be increasing pressure to keep assets and facilities operating longer because the reality is that bringing new things to market will become -- is becoming increasingly more difficult given the budgetary realities. So not a direct answer to your question, but the demand profile in both aerospace and global mission support is not the issue. It's just -- it's working with our clients to continue to prosecute the bids that have been submitted so that they can come out and be awarded and we can begin them.

I guess maybe just to clarify there. Is there a -- you have obviously the large award in protest, and that's holding up another growth driver. But have you seen success maybe in smaller endeavors, logistics, other things within that aerospace solutions side, and it's just the large awards are getting held up?

No, actually, we have. I think the on-contract growth in our aerospace business has been strong and continues to be strong. And the modernization and sustainment of the engineered solutions aspects of the pipeline that you see in many cases are going back to improved capabilities on those platforms that we're privileged to support.

Got it. Okay. I guess a follow-up for Shawn on the margin side. It seems like started the year maybe like in line-ish with expectations, and you made the comment, sort of sequential improvement through the year. I guess as we think about going back almost 2 years to when the deal between Vectrus and Vertex was done, and then like 8% plus margin profile, what's it going to take to get there? Is that just a function of better mix? Or are there specific things you think you can do on the cost side to get there faster?

Yes, I'll start. I'll start with -- I want to reiterate, we are off to the start of the year like we expected. So $69 million. I think we said when we released the guide, the profile -- give up 45% of the adjusted EBITDA in the first half. That remains the case, Bert. No change. We're feeling good about where we stand and the opportunity sets that we see. From a margin growth standpoint, you see us -- and I talked about it a little bit. We're streamlining operations a bit, putting processes, tools, things like that in place. That's not going to be huge incremental margin enhancements. It does, of course, a couple of things also that are happening to us, and again, consistent with what we said. 60% of the revenue in the quarter was on cost-type programs, Bert. So that we said we were trending higher in the back half of last year. We continue to see that. That's supporting our clients and customers with the demands that they have. Part of what you see on Page 7, back to the earlier question on I'll say mix changes, there are certainly higher margins in some of the things that are on there. Again, we feel good about our ability to go address those things. But the team is doing an exceptional job of consistent improvement in program performance and ensuring that we can address everything and capture them that's in front of us. Chuck, any other comments you want to add?

No. No. I think you summarized it perfectly. It's just continuing to work on mix, and then our teams continuing to kind of lean out the operations. Maybe the last point that we didn't talk about was just the seasoning of the backlog. Our $12 billion in backlog continues to be very front-end loaded, i.e., in the first couple 3 years of the execution. And historically, and the progress that we're seeing indicates that as that backlog continues to season, we'll drive higher margins.

That's great. I guess last question. Another one for you, Shawn, on the leverage side. It seems like that's ticking lower sort of as expected. And you have here that you're sort of targeting 3 turns or less by the end of the year, which is encouraging. I guess as you think about your position, one, what's the current variable split? Is that still roughly 70/30? And then 2, from the cash interest expense standpoint, seems like the first quarter benefited a little bit. I think you said $25 million, but you're looking for $116 million for the year. Just some commentary on why that steps back up.

Yes. So yes, it is still -- the variable split is still 70/30. Again, I think for interest expense for the quarter, yes, we had a little bit of favorability. I think some of it is just timing. I think we feel fine with, again, the guide at about $116 million, and there are things that come up. We just want to make sure that we're covering everything, Bert. So nothing particular there in the guide that sticks out at 116.

Our next question is from the line of Joe Gomes with NOBLE Capital.

Thanks for taking my questions.

Thank you, Joe.

Morning, Joe. How are you doing?

Doing well. So first one, kind of just wanted to ask. The SG&A line, it looks like you took a step down in the quarter. Was just wondering if there's anything particular behind that and if that is a good level going forward here? Or should we see that -- expect to see that to go back up?

Yes. So as I mentioned a little bit, Joe, we continue to work on our back office operations and that sort of stuff. We did a modest amount of realignment and restructuring as we closed out 2023. So you do see a little bit of an impact with lower SG&A here in Q1. The other thing I'll say is that there's always some seasonality to it. One of the elements there in the SG&A is our bids and proposals and pursued activities. And so there's some -- there's always some seasonality to how those things play out. But I think we feel good about where our cost structure is today. It's very well aligned to meet the needs of the business. We have more work to do. We're putting those tools and processes in place, all the things you would expect us to do.

Okay. Great. And then Chuck, maybe you can talk a little bit more about the Air Force Augmentation Program. The DoD announced that you guys are one of the awardees. And as you mentioned, it's now a $15 billion program, up from $6.4 billion when it was last put out. Similar to the other program that we talked about, it was a $900 million and Vectrus was awarded about $300 million. Do you have similar type of numbers here, that $6.4 billion, what V2X end up getting under this Air Force program? And how do you see the opportunities on the Air Force program playing out from there?

Yes. I think under the last version of AFCAP, we were $250 million.

From 2021 on this one.

From 2021 to today, it's about $250 million. That AFCAP program has really been a good program for us. We've done a really nice job of expanding into new tasks. The margin profile has done very -- they've done a very nice job on the margin profile. And as I've mentioned, the demands around the world are not diminishing, point one. Point 2, existing assets, deployed assets in the military and sometimes even to the State Department require extension. And the last point I'll make is that the prior version of AFCAP had many more awardees, but the consolidation of Dyn and PAE into Amentum, et cetera, have really continued to neck down, if you will, the competitive set to the 4 or 5 players that you know. So it's a nice contract for us. I really like the operational capabilities that we've been able to develop internally in support of the Air Force client. And I look for the team to do a really nice job against the requirements that are to be issued here in the near term.

Great. Appreciate you taking the question.

Thanks a lot, Joe.

Thank you. At this time, we've reached the end of the question-and-answer session, and I'll turn the call over to Chuck Prow for closing remarks.

Thank you, Rob, and I appreciate everybody joining us on the call today. I think we've had a very nice quarter, and we'll be looking forward to updating you at the end of the second quarter. Have a good day.

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