Vectrus, Inc.

Thank you for joining us for Vectris' fourth quarter and full year 2020 earnings conference call and webcast. Today's call is being recorded. My name is Devon, and I will be the operator for today's call. At this time, all participants have been placed in a listen-only mode. Following management's presentation, I will open the call for a Q&A session. With that, I would like to pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations, and Corporate Development at Vectris. Thank you. You may begin.

Thank you. Good afternoon, everyone. Welcome to the Vectris fourth quarter and full year 2020 earnings conference call. Joining us today are Chuck Probe, President and Chief Executive Officer, and Susan Lynch, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on our investor relations website, investors.vectris.com. Please turn to slide two. 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 would like to point out that we will be discussing and reporting non-GAAP metrics, including adjusted operating income and margin, EBITDA and EBITDA margin, adjusted EBITDA and margin, adjusted net income, and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials and press release. At this time, I'd like to turn the call over to Chuck Pro. President and Chief Executive Officer.

Thank you, Mike, and good afternoon, everyone. Thank you for joining us on the call today. Please turn to slide three. We ended 2020 on a strong note, achieving several important milestones in the fourth quarter. These accomplishments would not have been made possible without the dedication of the more than 15,000 combined employees and partners of Vectris. I'd like to thank our entire workforce for their fortitude throughout the pandemic and commitment to delivering high operational readiness in support of our clients' critical infrastructures and missions across the globe. Our fourth quarter in full year 2020 results reflect the operating and financial resiliency of our business model, which includes the ability to generate strong cash flow. We generated $26 million of cash from operations in the quarter, and $64 million for 140% net income conversion, our ability to generate substantial cash from operation remains an important characteristic of our business. For the fourth quarter, we reported revenue of $355 million and adjusted diluted EPS of $1.18. Revenue and EPS in the quarter were impacted by $26 million and 10 cents respectively due to COVID-related host nation and base access restrictions. We delivered full year revenue of approximately $1.4 billion, which was up 1% year over year, despite a $63 million or 4.6% headwind associated with COVID. Additionally, the continued execution of our enterprise-wide performance improvement initiatives and focus on program delivery yielded a record fourth quarter adjusted EBITDA margin for our vectors of 5 percent. During the fourth quarter, we continued to grow our backlog, which now stands at $5.1 billion, up 84 percent year-over-year, and an all-time high for vectors. This was partially driven by the recent $882 million recompete win of our OMDEC SWACA contract, significantly improving our visibility over the next five years. We also achieved several milestones in our converged infrastructure journey by winning a prime contract for the Navy Smart Warehouse 5G initiative while further expanding our capabilities through two key new acquisitions. Finally, looking into 2021, we expect to generate strong top and bottom line results representing 20% revenue and 23% EPS growth. We believe our strategy, strong backlog, pipeline and targeted campaigns will continue to drive solid financial results. Please turn to slide four. As we have discussed, our strategy is to be a leader in the converted infrastructure market and capture the opportunity to transform Vectris into a larger scale, higher value and differentiated platform. This transformation remains grounded in the understanding of our client's need to move from a traditional way of operating their facilities, supply chains, and networks to a much more instrumented, predictive, and convergent approach. We have leveraged our experience in how installations are being supported today with how clients should prepare for the future by providing thought leadership to the marketplace. This includes how operational technology and converged infrastructure can play a role in transforming the operation of client missions. Building on our thought leadership, we have also made internal investments, engaged in partnerships, and focused on inorganic activities to expand our strategic position in this market. For example, over the past three years, we have extended VECRIS's maintenance of facilities to the electronic protection and security of facilities and increased our sensor integration, infrastructure instrumentation, and perimeter security solutions. Additionally, we have created the Vectris Resiliency Program initiative to bring targeted, integrated, innovative, smart, secure, and energy-efficient technologies and capabilities to our clients' infrastructures. Vectris' thought leadership, significantly enhanced capabilities, and strategic focus over the past several years was recently recognized through two important strategic wins associated with the DoD's 5G initiatives. First, Vectris was awarded a three-year prime contract for a naval-based Coronado 5G smart warehouse. Under this effort, Vectris will provide industry-leading inventory management, network security, robotic material moving, and environmental sensing capabilities. The objective of the project is to develop a 5G-enabled smart warehouse focused on transshipment between shore facilities, and naval units to increase the efficiency and fidelity of naval logistics operations. Second, Vectris was part of the team that was awarded a testbed contract to modernize the Marine Corps Logistics Warehouse in Albany, Georgia. For this effort, the team is working on private wireless deployment for industrial IoT automation, which would support a broad set of smart warehouse use cases, including barcode scanning, and holographic augmentation and virtual reality applications. The awards are part of the DoD's 5G experimentation and testing at five U.S. military test sites, which have been earmarked $600 million and represents the largest full-scale 5G test for dual-use applications in the world. Together, these projects provide a bed for testing, refining, and validating emerging 5G-enabled technologies and broader converged infrastructure solution sets. While we expect the initial contribution from these contracts to be small in value, the wins are significant, and it places Vectris in a market where digital solutions are now being applied within traditional facility and base operations and IT services, and importantly represents our clients' continued migration toward converged infrastructure operations. Please turn to slide five. Over the past few years, we have made great progress in delivering strategic and financial momentum to our defined strategy three core elements, enhance the foundation, expand the portfolio, and add more value. We have significantly enhanced the foundation of our business, and December 2020, won the re-compete of our second largest contract, Andex Huaca. Under this five-year, $882 million contract, we will continue to provide uninterrupted support, reliability, and protection of this large and dynamic network in support of the forward deployment in Southwest Asia. This contract represents 30 years of support to this important mission. This award further builds on our 2019 successes, including winning the largest re-compete and contract in our portfolio, Log Cap 5. These two successful recompete represent approximately 50% of our 2020 revenue and are now in backlog and provide substantial revenue visibility for the next five years. Additionally, no other contract in the portfolio makes up more than 10% of our revenue. As such, we expect minimal recompete risk in our portfolio over the next several years. As the chart on the left-hand side of the page indicates, our recompete wins organic and inorganic growth have resulted in a record high backlog of $5.1 billion. Our backlog represents three times our 2021 revenue at the midpoint. Please turn to slide six. The expanded portfolio component of our strategy continues to evolve with new clients, capabilities, and solutions that are transforming our business. Our targeted growth campaigns are pivotal to this effort, and we continue to make great progress executing our Navy growth campaign, which is harnessing capabilities across the Vectris portfolio to deliver innovative technology-based solutions while improving mission effectiveness. The results of this campaign are seen in our financial results, with Navy revenue increasing 22% year over year in 2020. Notable wins during the year include a new eight-year $210 million firm fixed-price contract to provide base operations support in Bahrain. Additionally, we were awarded an eight-year $45 million firm fixed-price contract to provide base operations support at the Naval Support Facility in Romania. We also won a $196 million five-year re-compete contract to continue base operations support services at Naval Station one time a day. Finally, a VECRIS joint venture was awarded a $154 million seven-year firm fixed-price contract to support the U.S. Naval Academy. Our Navy facility and base operations growth campaign has resulted in more than a half a billion dollars of prime contract wins. The pie charts on the left side of the page illustrate the progress we have made expanding and balancing our portfolio. Notably, these numbers do not include two recent acquisitions, which further provide diversification to our portfolio. Please turn to slide seven. Our pipeline of new business opportunities also represents our efforts in continuing to execute targeted growth campaigns and further balance our portfolio. Our new business pipeline currently exceeds $11 billion, a significant increase from $7.5 billion in 2016. This increase is partially driven by our expanded capabilities, which are generating additional opportunities across federal, non-federal, and international client bases. Our pipeline also supports this shift to more advantageous contract types and higher margin solutions. In terms of timing, we are continuing to see solicitations and awards progress at a normal pace, while the timing of phases has been elongated due to COVID-19 dynamics. Overall, we remain confident in our ability to successfully compete and win our fair share of new business. Please turn to slide eight. While our expanded capabilities are yielding increased opportunities and new business pipeline, we have also been successful leveraging our capability advancements to drive technology insertion into our core facilities and IT offerings, enabling us to win important new awards, which also support future margin expansion. For example, recently Vectris was awarded a position on a best-in-class general service administration multiple award contract, IDIQ vehicle known as OASIS. This vehicle provides integrated professional services for all government customers worldwide. This award demonstrates our increased ability to function as a prime contractor in large-scale IT as well as our traditional markets. OASIS provides access to new funding streams that enable us to bid on task orders accretive to our pipeline. Additionally, during the year, we were awarded a US Navy contract to provide concepts and develop prototype software to integrate disparate onboard sensors to support signal discovery and integration. We were also awarded an OTA contract to provide software and engineering to support sensor data integration and visualization of the U.S. investments in national security equipment to the joint services. Furthermore, Vectris was awarded a strategically important five-year firm fixed price IDIQ to provide intrusion detection system supplies, hardware, and services at Edwards Air Force Base. These wins were all based on our differentiated capabilities and position in the marketplace. Please turn to slide nine. The energetic dimension of our business model is founded on making strategic acquisitions and will expand clients and capabilities to strengthen our leadership in the converged infrastructure market. In 2018, we acquired a pioneer in the Internet of Things with core competencies in sensor integration and perimeter security solutions. In 2019, we acquired a leading provider of integrated electronic security systems. In December of 2020, we acquired Xenetics and HHP, which add several capabilities and advance our ability to deliver a more integrated and comprehensive suite of solutions to our clients globally. Strategically, this brings integrated security capabilities that provide systematic protection across the physical and digital spectrum, enhancing our vertically integrated and accredited network security technology platform, protecting tens of thousands of facilities and assets. Additional capabilities include comprehensive solutions for assisting in the planning, engineering, designing, and implementation of IT embedded solutions that streamline facility management and maintenance. We are also excited about the higher end logistical capabilities these acquisitions bring, including all aspects of skills and services to establish, execute and maintain logistics policies, processes, and procedures. Furthermore, we are strengthening our asset management, property oversight, supply chain, and inventory monitoring. In aggregate, these services will substantially augment our current logistics expertise. A major focus within our strategy is to expand VECRIS' content on client facilities. Via the NETICS, we have materially advanced this effort by providing full-spectrum maintenance, repair, and overhaul services for legacy and next-generation aircraft. For example, at Fort Bragg, VECRIS operates a logistics readiness center, while the NETICS is responsible for the maintenance of various aircraft. This combination increases our content and footprint, giving us further insight into many missions on the base, and improving our clients' operational visibility and awareness. From a client perspective, both companies broaden our access to the highly attractive intelligence community clients. It is important to note that Xenetics and HHV work together in the intelligence community market today, and the expanded opportunities under Vectris to reach our existing clients open the aperture to even greater growth. Finally, One of our client campaigns include growing our foreign military client portfolio, which will be bolstered by the Xenetics legacy in foreign military sales, supporting more than 40 countries. This includes logistics and training support to the DoD in foreign nations for the F-18, the H-60, the C-130, and the Harpoon weapon systems. Importantly, The company has also been able to build on those logistics and FMS capabilities to position for future growth. For example, in late 2020, the team was awarded a prototype project to create an international readiness software system utilizing state-of-the-art predictive analytics and artificial intelligence techniques to analyze data and improve readiness initiatives, accelerate product delivery, and optimize the reliability of operational and aviation readiness for foreign partners. I'm excited to welcome the more than 2,000 Xenetics and HHP employees to Vectris. The capabilities of both companies creates a stronger platform from which we can deliver fully-converged solutions across all of our clients' missions. Now, I'd like to turn the call over to Susan Lynch. Susan?