V2X, Inc.

Thank you for joining us for the V2X fourth quarter and full year 2023 earnings conference call and webcast. Today's call is being recorded. My name is Maria 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 the call up for a Q&A session. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. And now, I'll pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations, and Corporate Development at V2X. You may go ahead, sir.

Thank you. Good morning, everyone. Welcome to the V2X fourth quarter and full year 2023 earnings conference call. Joining us today are Chuck Crowe, President and Chief Executive Officer, and Sean Morrell, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on the investor relations section of our website, gov2x.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 in addition to GAAP earnings, we will be discussing and reporting various adjusted non-GAAP metrics, including adjusted EBITDA and margin, adjusted operating cash flow, adjusted net income, and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials available on our Investor Relations website and in our press release filed with the SEC. At this time, I'd like to turn the call over to Chuck Probe.

Thank you, Mike, and good morning, everyone. Thank you for joining us on the call today. Please turn to slide three. Before we get started, I'd like to thank you over 16,000 V2X employees for their contributions, and in particular, their performance. during the fourth quarter to end 2023 on a high note. I just returned from a trip to the Middle East, visiting our clients and people. The feedback I received from our clients underscore the unwavering service, agility, innovation, and technology-enabled solutions that we are delivering in support of their most critical missions. It's this around-the-clock, around-the-globe commitment to our clients that will drive our continued leadership and growth. Please turn to slide four. The transformation of V2X continues. Organic and inorganic growth, which improves scale, profitability, diversification, and capabilities, has allowed us to emerge as a leader in the operational segment of the broader federal services marketplace. Our company is purpose-built across an expanded client, contract, and geographic footprint to deliver value in this market. Our market has witnessed significant structural changes in recent years and continues to rapidly evolve. We are advancing how missions are operated by leveraging converged and engineered solutions at the intersection of technology and operations. This includes modernization and sustainment support that elongates platform life cycles while enhancing capabilities. These improved outcomes yield greater value for our clients and shareholders while providing greater opportunities for our people. Please turn to slide five. Topline momentum extended into the fourth quarter with revenues once again exceeding $1 billion. This resulted in revenue growth of 6% year-over-year and 4% sequentially. Revenue for the full year increased 8% on a pro forma basis to $3.96 billion, which was also ahead of our guidance range. Revenue in the fourth quarter was driven by 31% year-over-year growth in the Pacific. and 18% in the Middle East. Our work in the Pacific, or Indo-Pacom, continued to expand, reaching $71.2 million, a record for V2X, and was particularly impressive given the Talisman Sabre exercises that occurred in the first half of this year. This is a testament to our team's ability to drive on-contract growth while further expanding our services and footprint in the region. Our growth in the Middle East was partially driven by increased scope and services with the Department of State. This expansion builds on our initial work awarded in early 2023 that at the time represented our most substantive win with State. I recently had the opportunity to meet with our client and team supporting this effort and I'm exceptionally pleased with how we have been able to deliver successful outcomes at speed and ahead of schedule for this critical operations and logistics effort. We remain excited about the opportunity to expand our relationship with this client through our global presence and capabilities that are ideally suited to support state's worldwide missions and strategy. The strong revenue performance in the quarter yielded solid profitability with adjusted EBITDA of $82.1 million or 7.9% margin. For the year, adjusted EBITDA was $293.9 million, or 7.4% margin. Cash flow was notable during the quarter, resulting in year-to-date adjusted cash flow from operations at $159.5 million, which was ahead of our guidance range. This strong cash generation equates to a net leverage ratio of 3.3 times. Our engineering, integration, and modernization and sustainment solutions are gaining momentum with approximately $70 million of awards to V2X in the quarter. Importantly, we recently demonstrated these capabilities through the successful design and fielding of a defense platform that leveraged and enhanced existing systems. This effort originally started as an engineering development prototyping effort with a new client and today has yielded a brand new product that's designed, produced, and sustained by V2X. We see substantial opportunity to further expand our revenue and market presence associated with these capabilities. For example, we continue to be optimistic regarding the growth prospects associated with our proprietary Gateway Mission Router 1000 or GMR-1000. As mentioned on past calls, this family of products is a fully ruggedized and cyber-hardened multi-domain router that provides cutting-edge situational awareness. B2X continues to increase its Army footprint by integrating on additional different air and ground platforms. During the quarter, we submitted our proposal for a sole-sourced RFP, which includes production for up to 3,000 GMRs. In addition, we are seeing good traction with potential new clients that have acknowledged GMR-1000's capabilities and maturity for other applications. Building on our momentum in the Middle East, I am pleased to announce that during the quarter, V2X was awarded a new task order with the U.S. Air Force valued at $100 million over the next five years. Under this award, V2X will provide civil engineering and infrastructure support services to the U.S. Air Force in the region. We are honored to have been selected to support such an important mission and look forward to building on our exemplary service with the Air Force. Additionally, V2X recently achieved a significant milestone, the company's first substantial Ford military sales win, which provides aviation support and training to an FMS client in the Middle East. The overall op tempo in the region remains elevated, and the demand signals from our clients remain heightened. To date, the majority of current requirements are generally being routed to our existing contracts. However, we believe emerging requirements could result in new contracts or task orders. Please turn to slide six, where I will demonstrate our recent FMS win and multi-year campaign. Over the past few years, we have methodically planned and invested in our foreign military sales campaign, which is now yielding results. As mentioned, we were recently awarded a long-term aviation support and training contract in the Middle East. The award is valued at approximately $400 million over the next five years and was an exceptional win for V2X, representing a culmination over two years of planning and engagement. The majority of the award is not included in our fourth order backlog as the contract is being definitized. Our team is currently working on transition-related activities and expect to have the contract operating at full run rate in the second half. Our evolution as a company has been unable to participate in this market. With this new work, the total awarded value of our FMS portfolio is approximately $700 million, with accretive margins across eight countries. Looking ahead, we see a near-term pipeline of FMS opportunities valued at approximately $5 billion. As such, we are continuing to invest and pursue opportunities that leverage our geographic footprint, robust partnerships, and enhanced capability where V2XK delivered differentiated, cost-effective solutions. Please turn to slide seven. Our ability to deliver unique and differentiated solutions is driving momentum in our business that is visible in our leading growth indicators. For example, total backlog at the end of the year was $12.8 billion, up from $12.3 billion last year, and provides solid top-line visibility moving into 2024. It's important to note that backlog does not include the full performance period of the previously mentioned FMS win or the $458 million F5 adversary program as the award remained in protest status. Our pipeline of bids submitted stands at over $9 billion, a company high, and is up substantially from $6 billion last quarter, reflecting the somewhat muted award environment. Our business development engine is geared to support future backlog and revenue expansion with a $15 billion pipeline of opportunities expected to be submitted over the next 12 months. Finally, our visibility is enhanced by the limited re-competes we are facing throughout the year. At the midpoint of our 2024 guidance, re-competes comprise less than 5% of our revenue mix. To summarize, V2X's leading growth indicators, strong backlog, notable recent awards, and limited re-competes provides an excellent foundation and solid visibility moving into 2024. Now, I'd like to turn the call over to Sean for a review of the financials. Sean?

Thanks, Chuck, and good morning, everyone. Please turn to slide eight, where I'll discuss our fourth quarter financial results. Performance across all metrics was in line or above our expectations for the quarter. Revenue of $1.04 billion in the quarter represents growth of 6% year over year and exceeded our expectations due to exceptional team performance, delivering milestones ahead of schedule, expansion on existing programs, and new business. Adjusted EBITDA in the quarter was $82.1 million, delivering a margin of 7.9%. Adjusted EBITDA and the margin increased sequentially as anticipated. Adjusted diluted EPS was $1.22, up 26% from the prior year. The growth reflects lower income tax and interest expense partially offset by higher depreciation and other expense. Interest expense for the quarter was $28.5 million. Cash interest expense was $26.3 million. The team delivered strong cashflow performance with adjusted operating cashflow of $75.9 million, representing a 195% net income conversion. Please turn to slide nine, where I'll discuss our full year results. Full year 2023 revenue was 3.96 billion, increasing 8% on a pro forma basis year over year. Adjusted EBITDA for the full year was 293.9 million or 7.4% margin compared to 278 million on a pro forma basis in the prior year. Adjusted diluted EPS was $3.74 based on 31.6 million weighted average shares. Interest expense for the year was $122.4 million. Cash interest expense was $113.4 million. Net cash provided by operating activities was $188 million for the year. Adjusted operating cash flow was $159.5 million, exceeded the upper end of our guidance range. The strong performance represents 135% adjusted net income conversion and contributed to a record day sales outstanding of 58 days. Please turn to slide 10 to discuss cash and liquidity. As mentioned, cash generation was strong and enabled us to reduce total net debt by $137.1 million in 2023. We ended the year with $70.6 million of cash on the balance sheet, excluding $2 million of restricted cash. Net debt was $1.84 billion. Importantly, the net debt to EBITDA leverage ratio was 3.3 times at the end of the year, which improved notably from 3.7 times at the end of 2022 and approximately four times at merger close. We believe the free cash flow generated by our business supports our ability to continue to delever and achieve a net leverage ratio at or below three times by the end of 2024. The company's balance sheet and liquidity position remains strong with over 550 million in capacity, which includes approximately 482 million of availability on our revolver. Please turn to slide 11. We are establishing 2024 guidance as follows. Revenue is expected to be 4.1 to $4.2 billion, representing 5% growth at the midpoint. Importantly, Guidance at the midpoint assumes approximately 90% of revenue from existing contracts and less than 5% from re-competes. Adjusted EBITDA is estimated at $300 to $315 million, representing 5% growth at the midpoint. Adjusted diluted earnings per share guidance, $3.85 to $4.20, representing 8% growth at the midpoint. Regarding the cadence we expect throughout the year, revenue and adjusted EBITDA will ramp sequentially. This reflects the phase-in of new business and the previously discussed wind down and completion of the KC-10 and T1A programs. We expect adjusted net cash provided by operating activities to be $145 to $165 million. In terms of cadence, cash flow should be in line with our normal seasonal pattern with cash generation occurring in the second half of the year. Cash interest and other expense is expected to be approximately $116 million. Capital expenditures for the year are estimated to be approximately $30 million and will be first half weighted. Now I'd like to turn the call back over to Chuck.

Thanks, Sean. Please turn to slide 12. V2X remains focused on creating value for shareholders. The four components by which we plan to achieve this include, one, continued focus on generating top-line revenue growth through backlog conversion, on-contract growth, and execution of a robust pipeline into new awards in our core markets. Two, increasing profit via revenue growth and operating leverage, as well as margin improvement through program performance, technology insertion, and campaigns. Three, continued strong conversion of profit into operating cash flows to disciplined working capital management and low capital intensity. And four, utilizing our high reoccurring cash flow to strengthen our balance sheet and further reduce interest expense and net debt. In conclusion, B2S continues to transform to deliver enhanced capabilities in an expanding market. We have strong momentum, robust backlog, highly aligned pipeline, limited recompete, and high free cash generation that provides an excellent fundamental profile to support value creation in 2024. Now, I'd like to turn the call open to questions. Operator.

Thank you.

We will now 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 tone will indicate that 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, while we poll for questions. Our first question comes from Toby Summer with Truist Securities.

Please proceed with your question. Toby, are you there? Yes, I am. Can you hear me?

Hey, Toby. Yeah, we can now. Toby, how are you?

Great. Could you provide some incremental color on the FMS pipeline, including geographic breadth and sort of describing new work versus takeaways from traditional competitors?

Thanks. Sure. In general, as the name would say, the majority of our FMS pipeline is in CENTCOM, in INDOPACOM and to a much lesser degree, I would say Eastern Europe. The most recent activity that we announced, and I'm sorry, I can't give all the specifics yet, was actually a new requirement, something that was not being done before by another provider. It is Aerospace O&M, and I will tell you that it is a combination of rotary wing maintenance as well as facility maintenance. The remainder of the pipeline is really balanced between aerospace, O&M, as well as logistics slash operations management. And it's a good question. I would just, judging from memory here, I would say we're probably about half takeaway and half net new requirement in that FMS pipeline.

Thank you. Could you describe the timing of the wind down of projects in contracts? We have some airframes being retired. Just thinking about from a modeling perspective, when the sort of most significant headwind to growth.

Yeah, I would say, and Sean, please feel free to chime in here. So this will be the final year of the wind down for both the KC-10 and the T1A. It's relatively balanced throughout the year. As we've indicated, we'll see, you know, sequential growth to make up for that wind down. So I would say a bit earlier weighted in the year, but extending through the full year. Sean, anything to add? No, exactly. Thanks, Chuck.

Yeah, we'll grow sequentially, you know, throughout the year, Toby. And yeah, I would say it's first half weighted, meaning, you know, some of those headwinds as things wind down again, as we said and expected.

Okay. Cool question we get from investors. If peace breaks out, which the news, you know, doesn't seem to convey as likely anytime here near term, Does the company have activities that would cease? And if so, how much revenue is exposed?

I would say if peace were to break out, I guess we can all pray for that, I suppose. But by and large, the missions that we're maintaining will largely, if not entirely, continue. You always, you know, have risk like we saw in Afghanistan a couple of years ago. If we were to pull out of a country, you know, we have no indications of that. We often talk about on these calls and when we talk to you and other analysts and investors about Optempo, today we do have tailwinds with regards to both, you know, revenue and profit generation. just because of the rate and pace of activities in, you know, both CENTCOM, Eastern Europe, and as you saw in the reported results in Indopaycom, you know, a lot of activity in Indopaycom. As we mentioned in the prepared remarks, Toby, we actually had higher revenue the second half of the year in Indopaycom, although the first half of the year is where the exercise actually occurred. So kind of a long-winded answer to your question, but as the military infrastructure continues to age, as the airframes and ground vehicles continue to age, that actually creates more requirements for V2X.

Thanks. And just quickly, could you elaborate on the GMR-1000 opportunity, including comments on the sort of size and scope of that? Thank you very much.

What GMR-1000 represents is a new suite of capabilities that are really taking hold post the merger. We believed that the untethering of the Indianapolis facility when it was acquired by Vertex and ultimately now part of V2X would create opportunities because of the the organizational conflict of interest of being owned by a prime contractor going away, we're in fact seeing that. And this whole suite of engineered solutions, GMR-1000 being one, is our really great engineers and capabilities in Indianapolis working with both new and existing platforms, in this case a router, and hardening those capabilities in such a way that they can be used for new and innovative military missions. So it's, you know, as we've mentioned in prepared remarks, this is actually a sole source bid. You know, we don't know whether or not we've won yet, but the traction of the GMR-1000 and other engineered solutions is actually progressing very, very nicely.

Thank you. Thank you.

Our next question... Our next question comes from Joe Gnomes with Noble Capital Market. Please proceed with your question.

Good morning. Nice quarter.

Thank you. How are you?

Good. So first question, kind of a couple parts to it, but both the bill was a little light in the quarter. I'm wondering, you know, is that solely due to the protested and then the foreign contract that is still being definitized? Or is the continuing resolution, which has gone on much longer than I think all of us had anticipated, is that starting to impact? You were saying that you have $9 billion in bids waiting for award up from $6 billion at the end of last quarter. Maybe you could talk a little bit about the continuing resolution and any impact it's having on you also.

Yeah, HR, this is Sean. Yeah, so exactly as you pointed out, right, so the pending awards, you know, increased $3 billion in the quarter. It's a bit muted environment relative to the case and cadence of the awards. And, you know, nothing of note. I don't think we're concerned about anything, but we are seeing a bit of a slowdown. You know, from some of those things, we would have liked to have seen them, but, you know, it doesn't change our outlook for successfully capturing that work. Chuck, anything else?

No, I think you're right. As always in continuing resolution, the rate and pace of awards flow. Again, the op tempo that we're seeing, you see that in our revenue and our on-contract growth continues strong. So, you know, I think as we move through this year, We will see awards. Again, it will be a little slower than we would like, but we're very confident in our guidance.

Okay. And speaking of the guidance, the adjusted EBITDA margin, if I look at it on the midpoint, it comes to be up 7.4% and 24 to be flat with 23. And is that just a kind of reflection of more of some of these newer contracts just beginning? Or is there anything else behind that fact that it appears to be flat projected year over year?

Yeah, no, Joe, I'd say it's exactly as you described, right? So some of the programs that are completion, right, so we've said all along our programs as they mature, they tend to move into higher margins. We're seeing the ramp up of new work will continue to mature progressively. to mature those things and improve the profitability over time. And so throughout the year, you'll, you know, you'll see us do that kind of sequentially when we think about the margin profile, uh, you know, of the business over the, over the course of the year. But, uh, but yeah, you're exactly right at the midpoint where we're probably right at the, at the seven four there. Yep.

Okay. One more for me on, on the guidance and maybe you can kind of give us a little bit of cadence, you know, historically we're at, you know, kind of that 45 in the first half, 55%, you know, revenue in the second half. But, you know, one of the things, you know, Chuck, you had mentioned, you know, last year you benefited in the first and second quarter by the exercises in Indopaycom. I'm assuming those don't repeat this year. Maybe you can give us a little bit of size, the impact they had on Q1 and Q2, and should we still kind of expect that 45-55 split on the guidance?

Yeah, I'd say I'd look at it this way. On the top line, Joe, I'd look at, you know, slightly less than 50% probably of the revenue in the first half, somewhere right between that 45 and 50 in the first half of the year. And then on the margin profile and the adjusted EBITDA, I'd probably look at that as being slightly below kind of 45% in the first half. Again, consistent with that ramp that we'll see sequentially, you know, kind of quarter by quarter as we go throughout the year as new work comes on and as the teams mature our execution. Chuck, anything else?

Now, as you said it perfectly, last year we did benefit from kind of extraordinary activity that happened in the beginning of the year. As you know, you followed us for a while. You know, the first half, second half dynamic has been very consistent going all the way back to vectorist days. And again, we feel very comfortable with the guide and we feel very comfortable with the wrap throughout the year.

Great. Thanks for taking my questions.

Thank you. Appreciate it.

Our next question comes from Trevor Walsh with Citizens JPM. Please proceed with your question.

Great. Morning, team. Thanks for taking my questions, and I'll echo my congrats on a great finish to the year. Similar to the color that you provided on the FMS pipeline, I was wondering, Chuck, maybe if you could do a similar type of rundown just on the $9 billion in bids submitted that you had, just generally where that falls within the portfolio of products and how that looks in terms of what the mix is there, if you could.

Yeah, no, thank you for asking the question because we're really thrilled with how we've been able to kind of curate or cultivate our pipeline over the last couple of years. You know, of that $9 billion, I would say there's a good mix. I'll maybe call it a proportional mix between our core businesses, our logistics, base management, and aerospace O&M, and then the – the newer converged technology and engineered solution pipeline. We really have a really nice emerging pipeline in our intelligence community business as well. So again, the new capabilities that we have introduced over the last several years are now importantly represented in that pipeline that we discussed, and we're actually thrilled with that progress.

Great, terrific. You mentioned a newer defense system or platform. I don't know if that's classified or if you're able to give a little bit more detail or it's just not finalized yet, but just curious how technology-driven that particular project was.

Yeah, it is. We cannot talk about it. It is finished. It's a wonderful story. It's a requirement. That one from inception to fielding and under a year, and it's highly technical. Again, falling back to the engineered solutions that we discussed here during the call and then the prior questions, you can simplify it this way or generalize it this way. We are taking existing platforms, some of them older, some of them more recent, and we are engineering ways for the older platforms to either work together and or to extend their capabilities. It's a really important part of our business because we can now approach both the military intelligence communities as well as prime contractors with new and different ways of, again, extending life cycles and or improving capabilities of military in many cases, platforms that have been out there for a long, long time.

Terrific. Thank you for the perspective. Maybe one more from me. For Sean, it looked like, based on the guide, that you've got a little bit of an uptick in the CapEx outlook for the year, going from about $25 to $30 million, it looked like, from what I could tell in our model. Just curious where the added investment is going or kind of what you see, kind of where that spend will be progressing throughout the year.

Yeah, no, great, great question. Thank you. So we had mentioned at the end of last year, in the third quarter release, that we thought CapEx would be around $28 million. We came in slightly under that, Trevor. Came in right around $26 million in CapEx for 2023. And so really what you're seeing is a carryover of that. Think of that as engineering tools. Again, just everything that Chuck just mentioned about the modernization and sustainment capabilities that the business has. We're investing in some engineering tools to help ensure that we have that capability and we enhance it going forward. So that's really all it is, Trevor, is timing between years on those investments.

Got it. Makes sense. Okay. Thanks for taking my questions. I'll hop back in the queue.

Our next question comes from Stephen Strackhouse with RBC Capital Markets. Please proceed with your question.

Hey, good morning, all. Thank you for taking my question. I was hoping you could provide a little bit more detail around the Middle East exposure, maybe how fast can that market grow, and then maybe just even kind of compare and contrasting that to Indopaycom.

Yeah, you said, Stephen, hello, how are you doing? Did you say you would cut out, but you said Middle East exposure?

Yes, I did, yeah.

Okay, okay. So, yeah, so we, Middle East is our, and has been historically, uh our largest individual you know non-conus area of operation we've been operating in the region for really three decades now uh as you undoubtedly know uh there is a lot of activity in the middle east now uh as we mentioned uh in the prepared remarks uh the op tempo that is uh we are in fact seeing in the region uh today is being largely handled through the existing contracts we have in the region. Although we did note a new win with the Air Force as well. That'll be ramping here as we speak. With regards to additional business, additional orders, we do believe when all the funding situations are finally resolved with regards to the congressional action, there are opportunities for new awards. We have several Demand signals from our clients that we've worked diligently with our clients on. But again, we see op tempo remaining high for the foreseeable future. And again, as the budget resolutions, as the budget situations, I should say, are resolved, the opportunity for new orders may in fact arise.

Great. Thank you for that. And then maybe just kind of following up there on the budget, maybe just the impact of the CR and kind of what is or isn't factored into the 24 guide. And then maybe also just kind of how importantly kind of the lack of any Ukraine supplemental might be or then, you know, what upside that has for the 24 guide as well.

So we have factored in and more muted questions. award scenario for this year, as Sean indicated in his prepared remarks in the prior question. Having said that, we will see some awards. Our teams continue to do an excellent job with on-contract growth, which is typically provided from existing budgets. And then the reality is that the out-tempo remains high. So I think balancing both new awards, on-contract growth, and the realistic and the realities, I should say, of the current op tempo, you know, gives us confidence in the guys that we've issued here today. I think you mentioned Indopaycom, too. There are not exercises, named exercises, scheduled at this point in time because, as we've indicated in the past, those are done on odd years. Having said that, We continue to see several demand signals and a high degree of op tempo in the region. And, you know, we continue to provide ways to modernize bases that we're currently operating on, such as Kwajalein and the Marshall Islands.

Great. Really appreciate the color. I'll jump back in the queue.

Thank you.

Our next question comes from Saj Singh with Stifel. Please proceed with your question.

Hey, guys. Good morning. I'm on for Bert. How are you?

Good morning.

Doing well. I guess you've touched on it, but just to get some more color on it, just curious about your view on MRO ramped life cycles. You know, you sort of talked about pipeline, but what are you seeing in terms of new awards? How do you then see that impacting or normalizing margins, just any color you could provide there would be helpful.

As we talked last quarter, the F5 adversary award wasn't an important award. It happens to be fixed price as well. It's still under protest. You know, we will, at the resolution of that protest, you know, assume that we'll get to be able to start that program here. in this year, probably closer to the second half of the year, I would assume. Really, the only two platforms we have in retirement now we've talked about are the KC-10 and the T1A. Both of those have been very predictably winding down. And other than those two, we have no other, at this point in time, we have no other known retirements in our portfolio of contracts. Okay. Was there anything else to your question? Is there anything else that you wanted to add on that one?

Just the margin impact would be helpful. And then if I could add on to that, I guess, thinking through maybe early days on Navy test wing, you know, the Pacific and Atlantic, if you could touch there too.

Sure. As Sean indicated, I mean, we'll ramp through the year. The margins on the retiring programs are higher because they're at the end of life cycle. And with such a large percentage of our backlog in the early stages, we're seeing the predictable ramp in the profit margins post-sale and into the base years. And frankly, we're thrilled at the rate and pace that that's occurring. It's just, again, that's such a large quantity of new wins over the last three years, which we're thrilled about, frankly. Both Naval Test Wing Pacific and Atlantic are performing exceptionally. I couldn't be more thrilled. I couldn't be more pleased with the team. We're hearing this directly from our clients. We're not talking to ourselves on this. As I'm sure you know because you follow the industry very closely, the development of pilots to be fully capable is a significant, significant measurement for both our Navy and Air Force clients. They can train pilots quickly enough to meet their needs. And again, we're pleased and privileged to play an important role in, again, picking up the pace, the rate and pace by which pilots can be trained.

Sure. Thanks, Chuck. That's helpful. And I guess, you know, following up on one of the questions that was asked on Indopay.com, and I was reading that the Pacific, excuse me, deterrence initiative should grow to about 14, Bill, in FY24, something around that. And just curious if you think there's upside to that if budgets are appropriated soon and what you think that could look like.

I think a way to look at that is the performance that we posted in the second half of the year. The fact that we booked more revenue in the second half of the year than the first half, even though the exercise was in the first half of the year, that is directly attributable to the PDI, the Pacific Insurance Initiative. Again, the op tempo is high. The budget is a reality because these are, in many cases, new requirements. But again, kind of working through the muted new award environment, but the ability to grow on contract is a good balance and, again, a bit of a long-winded way of answering your question. But we remain very bullish on growth in the Baytown region.

No, thanks. That is helpful. And then maybe, Sean, just one last one for you, just for the models. How are you thinking through interest rates, especially as it's considering, you know, the deleveraging process?

Yeah. So, you know, we've made tremendous progress in deleveraging. We're obviously very focused on that. You know, as we go into 24, you saw where we think we'll be at, you know, less than three at the end of 24. You know, from an interest expense standpoint, you know, it's, it's comparable to what we had in, in 2023. Uh, we will look at, you know, opportunities as interest rates change. And as, as that leverage ratio comes down, uh, we've taken advantage of, of, uh, improved grid pricing previously. We'll look to do that again, you know, kind of as, as appropriate and, uh, and improve upon our position, uh, as, as we go throughout the year team did a great job. Couldn't be more happy with, uh, you know, the cash that was delivered in the quarter. And we'll look to continue to do those things throughout the year.

Well, thank you. Look, congrats on the great quarter, guys. And we'll talk to you next quarter. Thank you. Thanks.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. It appears that there are no further questions at this time. I would now like to turn the floor back over to Chuck Pro for closing comments.

Thank you very much, and thank you all for your questions. We've just completed what we think to be a very, very solid year, and we look forward to talking to you again at the end of the first quarter. And we may see all the conferences here in the not-too-distant future. Talk to you soon. Bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.