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spk02: 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.
spk03: 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.
spk05: 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?
spk00: Thanks, Chuck, and good afternoon, everyone. Turn with me to slide 10 to discuss our fourth quarter results. Fourth quarter 2020 revenue was $355.3 million, down $9.9 million, or 2.7%, year on year. The COVID-19 pandemic deferred approximately $25.8 million of revenue, resulting in a 7.1% impact on revenue growth. The COVID impact was caused by client-based access restrictions and other pandemic-related delays in work being performed. Revenue increased sequentially $2.9 million, or 0.8%, as we worked seamlessly to adapt to our clients' restrictions and new deployment quarantine requirements. Adjusted EBITDA with $17.9 million, a margin rate of 5%. Margin was up 10 basis points year on year and 20 basis points sequentially. This robust margin rate is the highest since we've been a public company and is an impressive accomplishment as EBITDA margin includes an estimated 10 basis points of COVID-19 impact. This record performance reflects our continued focus on process efficiencies cost management, our ability to leverage our supply chain, and continued technology enhancements. During the year, Vectris performed a functional transfer pricing analysis focusing on services being provided to U.S. military bases that are located in foreign countries. Based on this analysis, in the fourth quarter, Vectris recognized a tax benefit in total of $7.1 million. $2 million, $2.5 million, and $2.6 million relate to the years 2018, 2019, and 2020 respectively. As a result, the company also reduced its uncertain tax position by the same amount. Diluted earnings per share in the fourth quarter of 2020 was $1.42. Adjusted earnings per share, excluding the favorable tax benefit associated with 2018 and 2019, was $1.18, up 21% year-on-year. Adjusted EPS includes a 10-cent impact from COVID. Excluding the favorable tax benefit associated with 2020, adjusted earnings per share was 96 cents. up 3% year-on-year, and up 8% sequentially. EPS growth was driven by lower interest expense as a result of favorable operating cash flows and CARES Act deferrals, both of which resulted in lower usage of the company's revolving credit facility. Moving on to slide 11. 2020 revenue was $1.4 billion of $13 million or 1% year on year. The COVID-19 pandemic deferred revenue of approximately $63 million and had a 4.6% impact on revenue growth. 2020 adjusted EBITDA was $56.3 million or 4% compared to 4.3% last year. and was in line with our guidance as we met the operational challenges of the COVID-19 pandemic. Most of the COVID-19 impact was high margin work that customers delayed due to limited base access and social distancing restrictions and affected adjusted EBITDA by approximately 20 basis points. Adjusted EBITDA for the year was also affected by a Q2 2020 contract adjustment to a European program and one-time closeouts. We are pleased to report that the European program has been operating in line with our expectations as we previously discussed. The adjusted tax rate for 2020 was 16.9% and excludes the aforementioned tax benefit for 2018 and 2019. On a pro forma basis, excluding the cumulative tax benefit in its entirety, The adjusted effective tax rate was 22.9% as compared to 22.8% in 2019. Diluted earnings per share for 2020 was $3.14. Adjusted earnings per share was $3.07 and was flat to last year. 2020 adjusted earnings per share had a 22 cent tax benefit pertaining to 2020. Excluding the 22 cent tax benefit, adjusted EPS was $2.85, exceeding the high end of our guidance after reflecting the previously mentioned items and a 39-cent impact from COVID-19. Turn with me now to slide 12. Fourth quarter 2020 total backlog was $5.1 billion, a record for Vectris and an increase of 84% year-on-year. Total backlog was up 35% sequentially, driven by the $882 million OMDAX SWACA recompete win and the two acquisitions. Funded backlog was approximately $850 million compared to $707 million last year. The company's trailing 12-month book-to-bill ratio was 2.1 times. Taking into account our recent wins under protest, our pro forma total backlog is $5.5 billion, and our book to bill is 2.4 times. Moving on to slide 13. Net cash generated from operating activities in 2020 was $64.1 million, compared to $27.6 million in 2019. The company benefited from the CARES Act tax deferrals by approximately $13.2 million. Excluding the impact of the CARES Act, operating cash flows were $50.9 million, a record for Vectris, with operating cash flow conversion to adjusted net income ratio of 140%. Total debt at year end was $179 million, up $108.5 million from the prior year due to borrowings associated with the company's two acquisitions on December 31, 2020. The company's leverage ratio was approximately two times well below our covenant level of 3.5 times. Cash at year end was $66.9 million, up $31.6 million over prior year. Net debt was $112 million. At the end of the fourth quarter, in conjunction with the acquisitions, we expanded our credit facility, increasing the amount of funding available under our revolver from $120 million to $270 million while expanding our leverage ratio from three times to 3.5 times. This improved facility is indicative of our strong financial position. Our total liquidity is over $220 million. Moving now to slide 14. In 2021, we will continue to phase in Log Cap 5 and expect our record of solid revenue performance, margin expansion, and EPS growth to continue. Our revenue guidance is $1.645 to $1.715 billion, reflecting year-on-year growth of 18% to 23%. The low end of this range reflects a conservative view on the timing of full operations on Log Cap 5 along with elongated COVID-19 base access restrictions. The high end of our range includes reduced COVID headwinds and continued success in our targeted campaigns, winning and phasing in new business. We continue to drive margin performance in our business and expect 2021 adjusted EBITDA margin in the range of 4.6% to 5%. a 60 to 100 basis point improvement over 2020 performance. Our path to higher EBITDA margin will continue to be a focus as we integrate our recent acquisitions and continue organic expansion associated with our targeted campaigns and new business pipeline. Additionally, we expect to see the benefits from the implementation of our new enterprise IT platform, which is streamlining, modernizing, and automating our core processes. The outcome of these priorities is starting to become visible in our financial results and are reflected in our 2021 guidance. Our estimate for 2021 interest expense is approximately $8 million, up from $4.8 million in 2020 as a result of the increased debt associated with the previously mentioned acquisitions. Depreciation and amortization is anticipated to be $17 million, up $9 million primarily due to the two acquisitions. Please note that we are in the process of completing the purchase accounting for these acquisitions, and our amortization estimate could change. The 2021 tax rate is estimated at 19%, which is a four-point improvement over our historical effective tax rate due to our successful efforts in improving our tax efficiencies. Our 2021 adjusted diluted earnings per share guidance is in the range of $3.48 to $4.08, representing a 23% growth rate at the midpoint. Excluding the additional amortization as a result of the two previously discussed acquisitions, Adjusted EPS guidance is in the range of $4.03 to $4.63. Diluted shares outstanding are estimated at 11.9 million shares. In 2021, we expect revenue, adjusted EBITDA margin, and adjusted EPS to demonstrate improvement over what we saw last year. In the first quarter, we expect margins to show year-on-year improvement but dip from the fourth quarter of 2020. We anticipate our 2021 revenue and earnings per share to be higher in the second half of the year as we work towards being fully operational on Log Cap 5. For 2021, we expect net cash provided by operating activities to be $55 to $65 million. Operational capital expenditures guidance is approximately $5 million, up slightly year on year. Finally, 2021 mandatory debt payments are $8.6 million. Now, I'd like to open up the call for questions. Thank you.
spk02: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation zone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, as we pull for questions. Our first question comes from the line of Joseph Donardi with CFO. Please, see with your question.
spk04: Thanks, Seth. Good evening. Chuck, I think it seems like the revenue guidance implies about 5% or so, I think, organic at the midpoint. Correct me if I'm wrong, but can you just talk about maybe the cadence through the year, just trying to understand what the growth rate could be towards the end of the year once you're more fully ramped on log cap and past the COVID headwinds?
spk05: Yeah, no, you have the math approximately correct. First of all, how are you doing? Thanks for joining the call today. Yeah, thank you. We have intentionally put what we think to be conservative guidance with regard to revenue because the reality with regard to COVID and the headwinds associated with COVID, particularly in Indopaycom, are still a bit uncertain. So the revenue guidance contemplates fully transitioning to the CENTCOM AOR operations in mid-year. And although we do have some smaller task in Indopaycom, this guidance does not contemplate us transitioning to Kwajalein until 2022. And when you net it all out, that's about $120 to $160 million potential COVID headwinds in the year. However, and we're working through our host nation's contacts and with our clients to to do what we can to continue to move transition of KwaZulu into the left. And it's highly dependent upon vaccines. And you saw today the president just announced some good news on vaccines. So short story is conservative view of revenue largely driven by log cap transition and Indopaycom. And we'll update you and everyone else as we learn more as the year progresses.
spk04: Okay, that's very helpful. Is that another way of saying that there's an additional 120 to 160 million of log cap revenue coming in 2022? And do you actually have visibility into getting ramped on that just relative to COVID and getting vaccinated and that sort of thing, maybe more visibility than you had three months ago?
spk05: It's not all log cap, but there are a number of puts and takes with regard to to COVID-related base access restrictions. But big muscle movements, predominantly driven by Indopacom, predominantly driven by Quadulin. And yes, the more quickly we can get vaccinated and we're making good progress on that, the more likely we are to be able to work with our host nation partners and our clients to expedite the movement of Quadulin implementation, because, again, we currently contemplate beginning transition in Q4 and going to full operational capability in 2022. As you know, I mean, that's a big chunk of revenue, and so if we're able to work with our host nation partners and our clients to move that to the left, it could have a substantial impact in 2021.
spk04: Okay, that's great. I'll hop back in the queue. Thank you.
spk05: Perfect. Thank you. Thank you, Joe.
spk02: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Joe Gomes with Noble Capital. Please see what your question.
spk01: Good afternoon, Chuck and Susan. Nice quarter. Congrats on the recent awards and acquisitions.
spk05: Thank you. How are you doing?
spk01: doing well here can't complain too much added a couple of big picture type of questions for you so in the in the DoD budget you know they finally got the continuing resolution at the end of the year were there any surprises either positive and negative for you guys from the operations and maintenance funding or anything that stuck out there that you know you you were considering initially
spk05: I would say budgetarily, no, it's pretty much what we expected. I will say when you take a look at the budget and you look at what you can see publicly in terms of the op tempo in the Indo-PACOM region, it would appear that the new administration working through the Department of Defense is continuing to focus on activity in the Indo-PACOM region and backing that up with real action in the region. So while big muscle movements on the budget, not much surprise, but the activity and the focus and the discussion around Indo-PACOM continues to be very consistent on the part of the new administration.
spk01: Okay, thanks for that. And on the smart warehouse, you talked a little bit about, you know, the naval base Coronado and the one in Georgia. Big picture again, I mean, what can this, you know, mean? What's the end game here in terms of, you know, how big of a market here are we, you know, with all of this, you know, smart warehouse and 5G stuff that they're currently testing? And what kind of timing, you know, do you guys think that it goes from a testing to, you know, let's call it implementation?
spk05: So, we should look at two predominant tracks to your question. The first track is in our traditional base operations and supply chain marketplaces, this demonstrates a continued move to what we've been calling the convergent infrastructure. Our clients are going to expect us to operate facilities and supply chains in a much more instrumented and predictive way. And these awards continue to demonstrate our clients' commitment to that path. We think that we will continue to insert this technology into our current projects and into new proposals at an expedited rate over the next couple of three years. That's kind of track one. Track two is, as I fundamentally believe, and as you know, we've been talking about this now for a couple of years, we're going to see some much more pointed and or tactical procurements focused on different types of facilities and supply chains that will be markets that may have not been addressable by Vectris in the past. So we really, and by the way, acquisitions like Advantor, the NetX and HHB really further our access to these new channels. So new channels will begin to emerge, and we see that now in our pipeline. as well as the way we actually operate and propose our traditional markets, they're going to continue to change. There's no going back because 5G enables more efficient, more effective operations. And as you know, since we met each other a few years ago now, we've been on this path and we're going to continue to stay on the path at an even more aggressive rate.
spk01: Great. Thanks for that. I'll jump back in queue.
spk02: Our next question comes from the line of Joseph Donati. Steve, please share with your question.
spk04: Oh, thanks. Chuck, it looks like you did about $475 million on KBOS in 2020. It's a question you've been getting for, I don't know, probably two years now. How are you thinking about the revenue opportunity once you're fully ramped on log cap between CENTCOM and Indopaycom? What's the range you see as reasonable now that you're a little further into it?
spk05: Yeah, we're not going to get down to actual because there are a lot of puts and takes because KBOTS will survive for a while and there's going to be different revenue between LawCap and KBOTS. But what we will say is that I expect the expected year-over-year increase in the CENTCOM AOR will materialize. As we often talk about, we have puts and takes with regard to contract transitions in the region. I would expect as we get more into the second half of this year and we can see precisely what's going to happen in Indopaycom, although I know that's not your question, we'll begin to project log cap revenue expectations by region, since that's obviously more than 10% of our margin. So you should see the expected increase year over year in the CENTCOM AORs. and we'll begin to provide more fidelity in terms of exactly the revenue on log cap by AOR toward the end of this year or beginning of next year, depending on how quickly we transition in the Indopaycom AOR. Does that help?
spk04: Okay. It does. And you said you expect Indopaycom to be greater than 10%?
spk05: Yeah, just doing the – I would fully – again, I don't want to – do the math on the fly here. I would fully expect both the INDO Paycom task in their aggregate and the CENTCOM task in their aggregate to be obviously CENTCOM, but to be more than 10% of revenue.
spk04: Okay, that's great. And then, Susan, maybe margins for the year, I think excluding the charge in 2Q and maybe the COVID headwinds were kind of high 4%, which is similar to the guidance for 21. So can you just talk about kind of the moving pieces into next year between log cap ramping, the acquisitions, COVID, kind of is the underlying margin once you look through that and maybe look into 22 better than the 21 guidance, if that makes sense?
spk00: Yeah. So, you know, it's obviously something we've been talking a lot about. And, you know, when you add back, you know, roughly the 60 basis points, you know, from the Q2 results, you know, we pretty much come right to the low end of our guidance here, you know, the 4.6 to the 5%. And, you know, we feel like the 4.4, you know, this is obviously a wider range than what we've given in the past. And it represents the high number of program transitions that we're going through where, you know, the margins tend to be a little bit lower in the beginning as we work to improve and get the margins up. So it's a little bit wider range than what we've given you in the past. We don't feel like that there's too much risk on the downside and we feel like we really have to watch what's going on with COVID. There was a lot of high margin work that moved out of 2020. We're hoping to recoup some of that in this summer, but, you know, we have some flexibility in that range.
spk04: Okay. And then just lastly, Chuck, on the $2.5 billion and 7%, kind of a year closer, I guess, can you talk a little bit about how realistic that target is? You know, I think, you know, go ahead.
spk05: Sorry to interrupt.
spk04: Is that something that your compensation should be tied to necessarily, or is that more an aspirational goal? And maybe provide us with maybe the path from high fours to seven.
spk05: Okay, so you kind of break it down into pieces here. So this year would be essentially the mid-year of the commitment. We have made notable progress on the top line. We've done a lot of hard work on the bottom line, and I would say kind of this year in early 22 is where you really begin to do the math on how close to seven can we get on the bottom line. As you know, as we continue to grow our top line, we're creating cash and leverage that we need to continue to invest in our inorganic strategy. So as you begin to see us continue to make inorganic moves, we're obviously going to stay focused on those higher value solutions that will allow us to kind of push along on the bottom line. So I think COVID, and obviously second quarter of this year didn't help, but COVID, you know, it certainly slowed us down a bit, but I have not seen anything yet on the top line that would indicate we can't get there. And on the bottom line, we still have a lot of hard work to do, but the returns on the investments that we've made in the prior 18 to 24 months need to start showing up in a material way on the bottom line as we kind of wind through 21 and move into 22.
spk00: Yeah, and I'll just jump in or add on to that that, you know, the enterprise vectors systems that we've implemented We are very hopeful that we can continue to take costs out now that we've got one system and we have greater visibility. That, in addition to Enterprise Vectris and all of the Six Sigma projects that we have ongoing, I think we just have a tremendous opportunity to continue to expand our margins organically and naturally, but then we also have the acquisitions. We've always said that that path to $2.5 billion was organic and inorganic, and I think the acquisitions that we're tacking on are accretive to our margin, and the fact that we posted a 5% record margin, and you saw our margin in Q3 last that we've continued to have that margin expansion here in the second half of the year, you know, was really quite impressive.
spk04: Okay. That's great. Thank you very much.
spk00: You bet. Thank you.
spk02: And once again, as a final reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please. Since there are no further questions left in the queue, I would like to pass the floor back over to Mr. Chuck Brough for any closing remarks.
spk05: Thank you very much, and thanks for joining us on the call today. I'll just end where I started, and that's thanking the 15,000 men and women of Vetras to include our partners on the incredible amount of diligence and innovation that they demonstrated through what was an unprecedented year. We feel very comfortable with regard to our guidance, As Joe's last question indicated, we realize that 2021, early 22, is an important segment of time in our path to 7%, and we look forward to talking to you about that as we move forward. So with that, have a good rest of your day, and we look forward to talking to you next quarter. Thanks very much.
spk02: And this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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