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spk07: Thank you for joining us for the Vectra's first quarter 2022 earnings conference call and webcast. Today's call is being recorded. My name is Gary, and I'll 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 up the call for a Q&A session. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star, then two. And now, I'll pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations, and Corporate Development at Vectris.
spk05: Thank you. Good afternoon, everyone. Welcome to the Vectris first quarter 2022 earnings conference call. Joining us today are Chuck Perot, 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.fectress.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'd like to point out that in addition to GAAP earnings, we will be discussing and reporting adjusted non-GAAP metrics, including adjusted operating income and 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, press release, and Form 10-Q. At this time, I'd like to turn the call over to Chuck Pro.
spk06: Thank you, Mike. Good afternoon, everyone. Thank you for joining us on the call today. Before we get started, I would like to thank all of our employees and their continued commitment to our clients. Our team's demonstrated agility and outstanding performance, supporting several of the DoD's most critical and high-profile missions during the quarter. Please turn to slide four. We started 2022 on a strong note with revenue growth across several areas of our business. During the quarter, revenue grew 5% year-over-year and 9% sequentially to $456 million. Revenue growth was driven by the continued phase-in of Log Cap 5, continued high op tempo in the regions we operate in support of ongoing world affairs, as well as the progress made in executing growth in our core programs. Adjusted EBITDA for the quarter with $18.2 million or 4% margin as we work through program efficiencies in the early phases of Log Cap 5 implementation. Additionally, Log Cap 5 is generating higher revenue volume with a greater amount of material and pass-through content that has a different margin complexion. I would like to point out that approximately two-thirds of our revenue is coming from contracts in the first 18 months of their life cycle. which provides substantial revenue visibility. As is standard in our business, operating margins tend to be lower at the beginning of the contract and generally improve over time as we execute our well-established process improvement and enterprise vectors initiatives. EPS for the quarter was $0.24 and adjusted diluted EPS was $1.01. Importantly, during the quarter, we continued to expand our geographic footprint through additional growth in Indopaycom, which now makes up 4% of revenue. We expect continued growth in the region and note that the DoD recently released fiscal year 2023 budget calls for another major exercise in the region, which we believe could be similar in size to the task we performed in 2021. We also continue to expand and solidify our portfolio of work within the Army, the Navy, and the intelligence community through new wins and securing re-competes. Given our year-to-date results, we are reiterating our 2022 guidance and the non-GAAP guidance ranges. We believe our momentum will likely drive full year revenue to be at the high end of our range with margins at the low to mid given the aforementioned ramp and new programs and greater pass-through volumes. With that said, there is increasing opportunity to provide greater support to contingency events which traditionally carry higher margins. Given our visibility momentum, adjusted EPS is expected to be above the low end of the guidance. Finally, on March 7th, we announced our agreement to combine with Vertex an all-stock merger, which I will cover later in the call. Please turn to slide five. In the first quarter, we continued to focus on the needs of our clients and supported several important missions and requirements. During the first quarter, Vectors was selected to complete the final phases of the application development for 5G Naval Base Core Nautilus Smart Warehouse, which is demonstrative of our ability to provide converged solutions and operational technologies to clients. Importantly, on April 29th, Vectris leadership and DOD clients attended a ribbon-cutting ceremony and demonstration of the warehouse. The demonstrations focused on 5G radio access network and its optimization of warehouse operations via increased throughput of data, Internet of Things, and low latency. This is a major milestone for Vectris, and our client has Coronado as one of the first sites to test this technology for the U.S. military, which will help map 5G strategy, development, and deployment across the DoD. In addition, we demonstrated our ability to transition quickly and recently became fully operational on LOGCAP-5 Quadulin, approximately a month and a half ahead of schedule. This was a significant accomplishment given the extreme travel and logistical challenges we faced as a result of the pandemic. The phase-in of Quadulin involved over 1,500 employees and partners of Vectris that are now providing full spectrum of services, including operating schools, commissaries, retail stores, and community centers. We are also providing healthcare, environmental management, facility support, transportation, and IT services across the island. Several of the functions being provided are additive to our core O&M offerings, and will provide path performance to pursue adjacent and expanded opportunities with clients in the future. We also leverage our process-oriented phase-in system and, in a short period of time, became fully operational at the Logistics Readiness Center at Fort Benning, following our December 2021 $250 million award. We are proud of this achievement and look forward to providing world-class maintenance, transportation, and supply services for the U.S. Army's Maneuver Training Center over the next five years. During the first quarter, our team demonstrated Vectris' rapid response and global capabilities by assisting the DoD with the establishment of a water supply system and water remediation in Hawaii. This effort was accomplished by using granular carbon activation units that were utilized to flush over 100 water distribution points. I again want to thank our teams who have worked tirelessly on this critical contingency operation. Additionally, late in the first quarter, VECRIS was awarded a strategically important task order to provide support for the U.S. Air Force in Europe as part of the European Deterrence Initiative. While currently small in value, this contingency effort is providing vital and mission-critical services to our Air Force client in Europe and positioned us well for additional support. This effort exemplifies our global positioning and rapid response capabilities supporting our clients' most challenging and critical missions. Please turn to slide six where I will discuss some notable contract wins. Our growth-related activities continue to experience positive momentum. Several recent wins have helped lay the groundwork for continued revenue growth and demonstrate success in our campaign to diversify our portfolio. We are continuing our positive traction working with the Navy and were recently awarded a follow-on contract for spectrum management valued at $60 million over five years. The award continues our work that helps the Navy in solving a float, electromagnetic interference, and compatibility challenges for the fleet while maintaining spectrum dominance. Becker's ensures that all components, platforms, systems, and equipment on a ship or an aircraft can operate without interference. Our support for this program dates back to 1987 and development of the original spectrum management tool. We also want an effort as a subcontractor to continue performing electromagnetic test and evaluation engineering that supports the mitigation of electromagnetic interference on airframes and aircraft instrumentation. Finally, We were awarded a position on a $250 million five-year IDIQ vehicle that provides rapid deployment, prototyping, and systems integration to the Navy, joint and coalition forces worldwide, utilizing numerous platforms and integrated capabilities. Vectris will focus on embarkable systems that include cyber hardening, new technology insertion, and retrofit of existing systems. These key wins demonstrate our capabilities in engineering and operational technologies and our commitment to delivering a more integrated and comprehensive suite of solutions in support of the converged environment. Vectris has worked diligently over the past several years to expand its presence in the intelligence community. And during the first quarter, our team were successful in securing several wins that enhance our footprint. These awards continue our support of IT and integrated security services that protect physical assets, IP, and computer systems for the intelligence community. Our first quarter results are demonstrative of Vectris' realization and execution to strengthen and grow the business through outstanding program execution, capability expansion, and diversification of our geographic and client footprint. Now, I'd like to turn the call over to our Chief Financial Officer, Susan Lynch, for a review of the financials.
spk00: Thanks, Chuck, and good afternoon, everyone. Turn with me now to slide seven to discuss our first quarter results. First quarter 2022 revenue was $456.5 million, up $23 million, or 5.2% year-on-year. Our solid topline growth was boosted by the transition to full operational capability on Log Cap 5 programs in Iraq and Kuwait late last year and Kwajalein this year. In addition, revenue benefited from transitioning the Fort Benning program and volume associated with rapid response and contingency efforts. Importantly, we were able to grow the top line despite the headwinds of the withdrawal of U.S. military from Afghanistan. Operating income was $5.2 million and was impacted by the occurrence of $9.1 million of M&A and integration related cost. Adjusted EBITDA was $18.2 million or 4% margin as compared to $20.7 million or 4.8% in the prior year. Adjusted EBITDA margin was influenced by the significant amount of revenue and contracts that are in the early stages of their life cycle. We believe margin on these contracts will improve over time as we apply our process improvement and enterprise vectors initiatives. Margin was also affected by our increased support of our clients' supply chain needs which is driving an increase in material and pass-through content that typically carries a lower margin. In aggregate, on average, and over time, we expect to see improvement in the margin profile as we drive operational efficiencies and diversify into higher margin scopes of work. Net income for the first quarter of 2022 was $2.9 million. The effective tax rate in the first quarter of 2022 was 19.7% compared to 17.5% in Q1 2021. The effective tax rate this quarter was higher than anticipated due primarily to the accounting treatment of certain M&A transaction costs related to the Vertex merger. Adjusted net income was $12 million compared to $14.2 million in the prior year. Fully diluted earnings per share for the first quarter of 2022 was $0.24. Adjusted EPS, which adds back merger, integration, and amortization of acquired intangible assets, was $1.01 compared to $1.20 in the prior year. The change in adjusted EPS was primarily due to the aforementioned change in adjusted EBITDA. Turn now to slide eight. Cash used in operating activities in the first quarter was $26.4 million compared to $21.7 million in the prior year. Cash used in operating activities included an approximately $8 million repayment of CARES Act tax deferrals and a $2 million payment to support merger activities. Cash at quarter end was approximately $23 million. Total debt was $119.8 million down $57.2 million from Q1 of 2021, as we continue to pay down the debt tied to the acquisitions of Zonetics and HHB. The company's total leverage ratio was 1.4 times, down from 2.0 times in Q1 2021. Please turn to slide nine. Our backlog remains solid at $4.5 billion and is nearly two and a half times revenue. a unique attribute of our business providing visibility into the remainder of the year and beyond. The amount of urgent, rapid response, and contingency task orders that Vectris has been awarded over the past 12 to 18 months is higher than the levels we've witnessed over the past several years, driven in part by Log Cap 5. We believe this pattern will continue for the next several years and are expecting a greater volume of task orders that could quickly materialize As revenue in the same period, the order is booked. Turn with me now to slide 10. In 2022, we are maintaining our focus on program execution while driving expansion associated with our campaigns and new business pipeline. In line with these efforts and our solid Q1 results, We are reiterating our full-year 2022 guidance ranges for revenue and adjusted EBITDA and adjusted diluted EPS and net cash provided by operating activities, excluding M&A-related activities. Revenue guidance remains at $1.82 to $1.86 billion, reflecting year-on-year growth of 2% to 4%. With the accelerated phase-in of Log Cap 5 in Kwajalein, successful startup at Fort Benning, remediation efforts in Hawaii, and work supporting the Air Force in Europe, we are tracking towards the high end of guidance on revenue. As a result of the significant amount of contract wins in startups and the complexion of material and pass-through content, We expect adjusted EBITDA margin to be in the low to mid range of our guidance of 4.5 to 4.7%. Given our visibility and momentum, adjusted EPS is likely to be above the low end of our guidance range of $4.57 to $4.93. Due to merger activities with Vertex, we are not providing GAAP guidance or a reconciliation due to the difficulty of forecasting the transaction timing and quantifying certain amounts that are necessary for the reconciliation. Excluding merger and integration-related payments, we expect net cash provided by operating activities to continue to be $50 to $53.5 million. I'd like to now turn the call back over to Chuck.
spk06: Thank you, Susan. Now I'd like to give you an update on the merger we announced on March 7th with Vertex. On April 27th, 2022, we issued the special meeting proxy, which provides shareholders with more information pertaining to the specifics of the transaction. Additionally, today, we filed a supplemental investor briefing with the SEC that contains information regarding the merger with Vertex, much of which was contained in the proxy. For the remainder of the call, we will cover several of the slides contained in this investor briefing. Please turn to slide 12. The combination of Vectris and Vertex creates a stronger, more diversified company and a leading global provider of mission essential solutions and technology to national security, defense, civilian, and international clients. The combination provides a significant value creation opportunity for our shareholders, broader and deeper capabilities to our clients, and greater opportunities for the people of the combined company. There are many benefits to this combination, several of which are being identified on this slide. Performer revenue and adjusted EBITDA for the combined business is approximately $3.6 billion and $290 million, which includes $20 million of previously disclosed run rate synergies. This equates to an adjusted EBITDA margin greater than 8%. This should not be construed as 2022 guidance. We plan to issue 2022 formal guidance after the merger closes. The visibility and long-term contracts of the combined company is an important attribute and differentiator. Inclusive of Vertex's recent $850 million Navy test wing Atlantic wind, the combined business will have over $12 billion in backlog. Please turn to slide 13. Many of you know that Vectris has a proud history going back to 1945 as Federal Electric Corporation, which was a service arm of ITT. However, it is also worth noting that Vertex has a 45 plus year legacy stemming back to Beach Aerospace Services, which was originally formed from the Beach Aircraft Company that was founded in 1932. The Vertex business was acquired by Raytheon in 1980 and later by L3 until eventually being purchased by AIP in 2018. In December of 2021, Vertex acquired the technology and training solutions business from Raytheon, ultimately creating what is known today as the Vertex Company. As can be seen on the page, Vertex and Vectris have decades of experience and history, but also share a value-based and client-focused culture that is built on a shared mission and the key principles of integrity, respect, responsibility, and professionalism. Please turn to slide 14. As mentioned, Vertex has a long legacy operating in the aerospace and defense market and a capability-rich portfolio that spans over 125 locations across the globe. Key capabilities of Vertex include engineering and logistics, aerospace and defense services, modernization and sustainment, training solutions, sensor and platform integration, and mission support. Vertex's agility, rapid deployment capability, and client optimization have been key components in distinguishing the company from its competitors. With revenue approaching $1.8 billion and adjusted EBITDA margins of approximately 11%, Vertex is a leader in its markets. Please turn to slide 15. The table on this page shows exactly how complementary Vectris and Vertex are. As can be seen, the combination creates a truly unique comprehensive set of capabilities across the operations and logistics, aerospace, training, and technology markets. Please turn to slide 16. The strategic benefits associated with a combined company's capabilities are significant. We see meaningful revenue synergies and opportunities to leverage the portfolio of technologies and solutions to better provide full life cycle support services to critical and enduring missions. However, the diversification benefits of the combination are also material. As you can see on the right-hand side of the page, the combined business will have a much more balanced portfolio of clients and contract types across an expanded geographic footprint. We will not only balance our client portfolio with our concentration in the Army, moving to 41% from 64%, but also added several new clients that increase our route to market and cross-selling opportunities. Additionally, the diversification of our portfolio helps provide top-line resiliency through various economic and political cycles. From a contract perspective, the overall portfolio is much improved as we will have over 300 contracts with no task order estimated to make up more than 11% of revenue. Furthermore, both Vertex and Vectris have been successful in winning significant new and re-compete contracts that are in the early stages of their life cycle with notable periods of performance remaining. For example, In March, Vertex won a new $132 million five-year task order to provide Air Force Global Strike Command with rotary wing maintenance. The Air Force Global Strike Command is responsible for providing combat-ready forces to conduct strategic nuclear deterrence and global strike operations. Moreover, in April, Vertex announced it was awarded a new $850 million seven-year contract to provide aircraft maintenance to the Naval Test Wing Atlantic, which has five squadrons comprising of a range of fixed-wing, rotary, and unmanned aircraft. The aircraft supported by this contract perform a variety of test and evaluation missions. While the award is currently under protest, this is a significant win for Vertex that demonstrates the momentum of this business. The strong velocity of awards resulting in a total backlog for the combined company that is over $12 billion, including Naval Test Wing, this equates to approximately 3.4 times the combined company's pro forma 2022 revenue. Please turn to slide 17. The results from our previously mentioned wins are visible on this table, with both Vertex and Vectris having many contracts that extend into 2025 and beyond. Several contracts represented in this table extend into and beyond 2028. Importantly, the contracts listed on this page comprise over 40% of the pro forma 2022 revenue and we believe provide substantial visibility over the next several years. With a significant portion of our recompete behind us and a solid amount of revenue under contract over the next several years, We believe the combined company is well positioned to aggressively focus on addressing new opportunities to further grow the business. Now, I'd like to turn the call back over to Susan to discuss some of the financial attributes of the merger.
spk00: Thanks, Chuck. Please turn to slide 18. The pro forma financial profile of the company remains compelling with improved scale, strong margins, with significant cash generation. Revenue for the combined company is expected to be approximately double where Vectris is today and provides enhanced scale and ability to compete. Additionally, pro forma adjusted EBITDA and margin is expected to improve markedly from the midpoint of Vectris' 2022 guidance of 4.6%. Inclusive of $20 million in run rate synergies, EBITDA margin would exceed 8%. An important characteristic of both Vertex and Vectris are the very low capital requirements to operate the business. We believe that normalized capital expenditures of the pro forma business would be less than 1% of revenue. As we mentioned during our last call, there are also several attractive tax attributes that lower the effective tax rate and generate cash tax savings for the combined company. The tax attributes are $1.1 billion in aggregate and are estimated to yield $18 million in annual cash savings over the next 12 years. Please turn to slide 19. As Chuck mentioned, both companies have won a substantial amount of ReCompete and New Business, which provides excellent visibility over the next several years with a solid platform for growth. We believe the combination of revenue growth strong margin, and high cash generation will result in significant value creation for shareholders over the next several years. The left-hand side of the page shows our opportunity to potentially achieve materially higher revenue in the future. While revenue growth is subject to timing of awards, protests, budgets, and other factors, we believe that looking ahead, top-line growth can yield strong adjusted EBITDA and margin. This is expected to be achieved through business mix, supply chain, contract, and business efficiencies, the automation of core processes, technology insertion, and operating leverage from fixed cost. I'd like to point out that the 2022 adjusted EBITDA includes $20 million of run rate synergies, which are anticipated to be fully achieved in 2024. The associated costs to achieve synergies total $20 million over the next three years and are not included in adjusted EBITDA. Vertex also anticipates approximately $18 million of additional annual net cost savings tied to its 2021 acquisition of the technology and training solutions business from Raytheon, and with full run rate savings achieved by the end of 2023, partially phased in in 2022 and 2023. These cost savings are incremental to the previously disclosed 20 million of synergies related to the combination of Vectris and Vertex. The associated cost to achieve synergies total $18 million through 2023 and are not included in adjusted EBITDA. We anticipate total net synergies to make up approximately 1% of combined revenue, a conservative target when comparing to relevant transactions in our sector. Please turn to page 20. We believe there are combined revenue growth and margin opportunities in conjunction with our low CapEx requirements will drive substantial cash flow generation. The cash generation capability of the combined company is illustrated in this pro forma walk from adjusted EBITDA. This illustrative bridge assumes adjusted EBITDA of $290 million, which includes $20 million of run rate synergies. Interest expense of $72 million is based on the capital structure outlined in the proxy. Cash taxes of $28 million assume an illustrative 23% tax rate and include the previously mentioned $18 million cash tax benefit. Capital expenditures are currently estimated at $20 million. Working capital is estimated at $25 million, and stock-based compensation is $15 million in this illustrative scenario. Please note this scenario does not include one-time merger and integration cost. Please turn to slide 21. We believe the powerful cash generation capability of the combined business will support the ability to rapidly delever from the anticipated 3.8 times pro forma net leverage at close. We see a clear path to achieving a net leverage ratio of approximately three times within 18 months of close. Now, I'd like to turn the call back over to Chuck.
spk06: Thank you, Susan. Please turn to slide 22. We remain confident that the merger with Vertex will create significant value for our shareholders while further exemplifying our leadership in the emerging converged market and creating larger, more balanced, and differentiated business with greater growth opportunities for our people. In terms of timing, since announcing the intent to merge with Vertex on March 7th, we have been working several actions required to close the transaction. Myself and the members of the senior leadership team have had several integration planning meetings with Vertex leadership. We are unanimous in our feeling that our cultures could not be more complimentary, and we are eager to work together post-close. We remain on track to close this transaction in the third quarter as noted on slide 23. Now, I'd like to turn the call open to questions.
spk07: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
spk03: Our first question is from Joe Gomez with Noble Capital. Please go ahead.
spk02: Good afternoon, Chuck and Susan. Nice quarter. Thanks for taking my questions.
spk03: You bet. Thank you, Joe.
spk02: So the first one I have here is, revenues in the quarter were up 5.2% above the 2% to 4% guide. I was just wondering, for the quarter, was that in line with your expectations, better than expectations? What kind of drove the, for lack of a better word, outperformance on the top line in the quarter?
spk06: There are a couple of items, Joe, and thanks for identifying that. We were very successful in the case of the INDOPACOM quadrillion task of moving the full operational date to the left by about six weeks, as I noted in my remarks, which was a portion of that overperformance. Secondly, there were some aspects of an exercise in INDOPACOM, again, that were initially planned for later in the year that occurred earlier in the year. And finally, the water remediation effort in Hawaii actually went a bit longer at a slightly larger scope than we had anticipated.
spk03: Okay. Thank you for that.
spk02: And then you've talked a couple times on, you know, the margin improvement, that we're in, you know, early days of a lot of the contracts, and as the contracts mature, you know, you should see some margin improvement. Is there a way to, you know, quantify or provide color as to, you know, at what point? I mean, you were saying 18 months, I think you mentioned a number, I don't have it right in front of me, of what percent of revenues are within the first, two-thirds of revenues within the first 18 months of their contract. I mean, is it At 24 months, 36 months, when do you think you really start to see margin improvement? Is it longer than that? Just trying to get a little better sense of when we should start to see some more margin improvement.
spk06: I would say at the every year mark of each of the contracts. So the way things typically work is you'll have a base year that the lowest margin, if you will, which is where the pricing reset is. that we always talk about occur. And then what will happen from there is we'll see some margin improvement going in to the first option year or the second year of the contract. And then from there, the second option year and the third option year is where we really get to a full kind of operational realization of the margins in those particular contracts. And if we look back over history at some of our wins over the last five or six years, you see a very similar ramp to that. I will tell you that having two-thirds of our revenue in the first 18 months, which would be the base year and a portion of the option year, is highly unusual. It's a great thing, by the way. Don't get me wrong. We're very fortunate to have that situation. But again, I like the way our teams are working together with our clients to, again, reposition work that could have been fixed price initially. I'm sorry, I strike that. It could have been cost type initially to more of a fixed price orientation.
spk02: Okay, thank you on that. And kind of switching gears a little bit here, you know, three of the major contracts, that you guys are on, KBOS, LogCap Iraq, LogCap Kuwait, all come up for, I think KBOS expires in August. The LogCaps go into, I think it's the first option year for those. Can you kind of walk us through how that all plays out? KBOS was about a $280 million revenue opportunity in 2021, does that bulk of that revenue just flow now into the log cap Kuwait contract construct? Or maybe you can just, you know, kind of illustrate how that all will work going forward.
spk06: Yeah, that's exactly right, Joe. So we continue to wind down the historical KBOS task. The vast majority of that work moves into the Kuwait task under LogCap. And as you know, and as we've talked about over time, there are components of the KBOS, the original KBOS contract, that are not part of LogCap, but specifically the security portion of KBOS. So we should get to a kind of a standard run rate, if you will, on the new Kuwait task without KBOS here. in the second half of the year, and that should be then very visible to everybody. Susan, anything to add?
spk00: No, I think you're right on. The last two quarters we've been at about $98 to $105 million, so I think we're probably right in that range going forward.
spk02: Okay, great. Thank you for that. You know, If we could turn to the Vertex acquisition for a moment. Obviously, you went through a timeline here. You just filed the proxy. Chuck, in your discussions with your stakeholders, your shareholders, how have they come across to you about the acquisition or any concerns being expressed by some of your major shareholders? And if so, how do you address them?
spk06: Yeah, this is a transformational merger, to be very clear. And early after the announcement, we had many conversations with our current investors, other analysts like yourself. And as the logic became clear, our investor base at that point in time became comfortable that the strategic objectives of the acquisition, such as the increased profitability margin, the increased diversification of both contracts and geography. So the industrial logic becomes very clear. So, you know, while I hesitate to predict the future, at this point in time, I feel that that there is a general understanding of the strategic benefit of the acquisition, and we look forward to moving into the shareholder vote.
spk02: Good. Thanks. And maybe I can sneak a couple more quick ones in here. So you were talking about, Susan, the cost synergies, and you always talked about the $20 million when you announced the call, and then you had the $290 million. of adjusted EBITDA number, and then today you're mentioning about 18 million more cost synergies from the Vertex acquisition, I think, of the Raytheon assets. Is that additive to the 290, or how does that all play out?
spk00: Yeah, thanks for the question. So there is a small portion of the $18 million that is already in that 290 or the $193 million specific to Vertex, but it kind of ramps in 2023 and then it is all in the 2024 numbers, you know, and beyond that you see in the proxy. So it's already kind of feathered into the plans that you have in the proxy.
spk02: Okay. And two more quick ones, if I may. You know, the last couple years you had a lot of base restrictions due to COVID. Is any of that remainder left? Are they all pretty much gone? And two, Obviously, one of the key items that's brought up here in the entire earnings season has been employee attraction and retention. I'm just wondering how you guys are faring in that area. Thank you.
spk06: I would say that the bulk of the COVID-related operational realities are behind us, but we still have pressure staffing around the globe, like you would imagine. So, again, I would not attribute our current staffing tension, if you will, to only COVID, but COVID obviously set a stage that now needs to be continued to improve over time. Secondly, there are supply chain realities and supply chain operational realities out there that I would say would have their root. in COVID, but again, operationally, I think we're behind most of those situations.
spk03: Great. Thanks for taking my questions. I'll get back in queue.
spk07: The next question is from Toby Summer with Truist Securities. Please go ahead.
spk01: Thank you. With respect to the merger, I was wondering if you could comment on the revenue synergy opportunities. And I have in mind one of the slides you have that has the checks of capabilities on one side versus the other and where there isn't overlap. Where do you see the best opportunities?
spk06: Thank you, Toby. How are you? Yeah, you know, one of the great things about this acquisition that we've talked about on several occasions as that we are two very complementary businesses. And we do not see much what we call revenue dis-synergies at all because of the fact that we are focused on different segments within the operational aspect of the federal services marketplace. Having said that, we do believe strongly that there will be revenue synergies that are combined capabilities and our combined scale will be able to address. And we see this in areas that have not been in our traditional markets, such as the international markets and certain foreign military sales markets, as well as within our core markets, or as I've already stated, the combined capabilities, I guess, make us a larger, more capable, offering to our clients. So we do believe strongly that there will be revenue synergies. And as we get through the vote and into operating as a combined company, we fully expect to update you and the investor base in general about where we see those opportunities.
spk01: Could you maybe give us a sense of the cadence of within the quarter and then here so far in 2Q about maybe off-tempo and what that's been like because we clearly have a major conflict in the world and some of your customers may be responding to that. And then from a pure budgetary standpoint, we then got a budget mid-month in March, and I'm curious, what it was like sort of before and after from an award perspective?
spk06: I would say from an award perspective, the first quarter or the first four months of the year are always have traditionally been, I should say, a bit slower for us. But in terms of the op tempo around our existing program base, as well as we discussed in the prepared remarks, those contingency contracts we have, that op tempo has been very high and very strong across the globe for obvious reasons. You know, we obviously talked a bit about the European activities, but, you know, there are still activities in the Middle East dealing with the particular changes that occurred in Afghanistan. And we had talked about, again, in the prepared remarks, activities in Indopaycom that actually moved to the left in terms of exercise support. So it's a bit of a long winded way of answering your question. The op tempo around our current installed program base and in our contingency contracts is been a tailwind for us here in the first quarter of the year. And as you know, we kind of held our guidance, but tilted toward the top end of the range for revenue. We'll be able, I think, to provide a little bit more clarity on that as we get through the first half of the year and the next time we talk to you in August.
spk01: Thanks. My last question is also kind of a broad budgetary one, but what are you hearing from your contacts on Capitol Hill with respect to uh, president Biden's budget request, which is kind of a marker and the different, uh, in the different, uh, branches of the military and their sort of budget, uh, You know, outlook as we look into fiscal 23, and I know we just got a budget for fiscal 22, but you know, it's always onto the next thing.
spk06: So, well, our focus, as you know, have traditionally on the O and M, uh, lines of the budget. And we continue to see strong demand maintaining the infrastructures and the operations that we support. And I would also mention, although not part of the combined business, yet at this point in time, the older platforms in the aerospace market fall into that same category. So, yeah, I think there will obviously be Given the amount of spending in the various national security operations globally, there's always pressure on that funding. But I would also say that that actually tilts favorably to the O&M components of the budget. And it's really up to us at this point in time to work with our clients in value-adding ways and ways that we can demonstrate how we can improve the O&M operations thus making things extend longer and ultimately providing a higher value and the total lifecycle cost of, again, the operations and the platforms we support.
spk03: Thank you very much. Thanks for calling in. The next question is from Bert Subin with Stifel.
spk07: Please go ahead.
spk08: Hey, good afternoon. How are you? Good. Thank you. Thank you for the time. Chuck, if we strip out log cap five, what's the best way to think about organic growth for the rest of the business? And maybe just a follow-up to that, what should we expect the full run rate for log cap to be as a percentage of Vectors' revenue?
spk06: I think that what we have talked about here publicly is that log cap is as a vehicle is significant to our business. I will indicate very clearly that the exercises and so forth that we continue to perform on and when we're not a part of the original award. So log cap as a route to market for us is significant and will continue to be significant. With regard to, very specifically, the Quadulin task, which, as you know, was new to Vectris, and the Kuwait task, which was protective of our base, we see the Kuwait task very similar with the security scope as we encountered in the prior KBOS activity. Kwajalein, we see looking not dissimilar to the prior incumbent that was in Kwajalein. And with regard to IRAK, IRAK's current run rate, as you can see in the prepared materials, is much more significant in terms of dollar run rate than we had originally bid and announced initially. So not an exact answer to your question, but log cap as a route to market is substantial, and we continue to leverage with new wind activities under the log cap contract. I can move to other contracts, like the spectrum work that we had just talked about today, like the ASCAP work, which is addressing additional contingency operations globally, as well as the continued string of wins we've had in the Navy as a way to demonstrate that we continue, I believe, to be very successful in both protection of our base and new wins in not only log caps, but across the various areas in the operational space that we support.
spk08: Would you say it's fair to say that outside of log cap, you know, it's excluding that contract vehicle, the underlying business is organically growing? I know you've highlighted several, you know. The short answer to your question is yes.
spk06: Okay. The short answer to your question is yes.
spk08: And then maybe just digging deeper on the non-LogCap stuff, you noted in the release increased activity during the quarter that was coming from EDI, European Deterrence Initiative. The funding there, if we go back a few years, had been cut and seems to be growing again. It looks like the budget request there is getting better. Can you help us frame what opportunity you have as a company there maybe this year or next?
spk06: When it comes to the various European activities, the demand signals we've seen to date have been predominantly through the Air Force and in parts of our client sets that we can't spend a lot of time talking about today. I will say, however, that the juxtaposition to the activities, not just in Europe, But the other exercises and I just call it up-tempo enhancements that we've seen in Indopaycom is also significant. We talked a bit about in the prepared remarks the startup of Benning, for Benning. That startup was very quick. It was very seamless. That contract did not go through a protest. and the ability to bring net new contracts like that online quickly, you know, at the cost profile that we projected, is a big deal. And, again, we continue to demonstrate an opportunity. We continue to demonstrate an ability, I should say, not just to continue to take scope competitively in the marketplace, but then to get that scope transition in, to full operational capability in kind of a very efficient way.
spk08: Just to clarify, I know you said Air Force, and it sounds like some classified customers there in Europe. You noted in the release that it's sort of immaterial now with the Air Force. Do you expect that to become material, or is that sort of too hard to say right now?
spk06: I would say it's obviously too hard to say, but, you know, my experience has been if you arrive in support of a mission and you perform at a very high level, the likelihood of that mission expanding is good, right? And, again, as we normally do, as our teams normally do, as we demonstrated in Hawaii earlier this year at the end of last year, That is the proof point that we always fall back to with our clients, and that's ability to execute seamlessly, to execute with agility in support of their various missions.
spk08: And thanks for that, Chuck, but just one last one from me. Have you noticed or have you noted any change in the competitive environment for the contracts you're bidding on? It seems like the largest competitors that you used to historically go against have started to move up the higher tech end of the spectrum, but they do still do operations logistics work. It just seems like they're doing less of it. I'm curious if you're seeing any change in the competitive environment for contract bids.
spk06: I think we are. I think we are. As you know quite well because you've covered the space, the consolidation that has occurred in the operational aspect of the federal services marketplace has been significant. We've seen that, and Vertex has seen it in the aerospace business as well. So as a result, that doesn't mean competition is any less. That just means our competitors are that much more kind of focused and coordinated. We continue to execute our go-to-market strategy. We stay very much focused on the campaigns that matter to us. And as When any industry consolidates, it actually provides some opportunities, but it also provides some challenges. And we're very aware of both the opportunities and the challenges in a converging marketplace. Thanks very much, Chuck. Thank you.
spk07: This concludes our question and answer session. I would like to turn the conference back over to Chuck Pro for any closing remarks.
spk06: Thank you very much, everyone, and thank you for joining us on the call today. We look forward to reporting back to you both on the status and progress on the merger as we move through this quarter and to the next time we talk in August. Thank you very much, and we'll talk to you soon. Goodbye. The conference is now concluded.
spk07: Thank you for attending today's presentation. You may now disconnect.
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