Good afternoon. Welcome to the Jefferies 2023 Industrial Conference. I'm Greg Conrad, Senior Vice President of Equity Research at Jefferies, and very excited to have Vectrus with us today, and Susan Lynch, CFO. With that, I will hand it over. She will give a quick presentation, and then we'll go to questions.
All right. Thanks, Greg, and thank you, everyone that is here today. Really appreciate it. Just a little bit about V2X. As you can see, we are very diverse, not only from a geographic contract and customer perspective, but also from a human capital perspective, with over 40% of our employees identifying as veterans. I would be remiss if I wouldn't, if I didn't thank our more than 15,000 employees for everything that they do day in and day out for us, because we are a services-based company. So just a little bit of history about V2X. We do have a storied past. Vectrus, our legacy company, was born in 1945.
We were part of ITT Federal, which later became Exelis, which Vectrus was then spun out in 2014 to be a public stand-alone company. The company that we merged with last July was Vertex. They also have a storied past. They were part of Beech Aerospace and later became L-3. And then you also know about Raytheon TTS was the asset that Vertex acquired in December of 2021. Also came from a very successful parent company, Raytheon Technologies. So the three of those, plus a handful of acquisitions, it's what makes V2X today. So just a little bit about our dashboard and who we are. We're about a $3.9 billion revenue company with about $300 million of adjusted EBITDA.
We have total backlog as of the end of June, Q2 2023, of $13 billion, which represents more than three times revenue coverage, and we have about 15,000 employees. The contract and client and geographic diversification, you can see in the lower left. That's something that we've worked very hard on, and it is a wonderful attribute of our company. You can see the geographic diversification there on the right. We have three main business areas: Aerospace Solutions, Advanced Technology, and Global Mission Training and Sustainment. We have a sell-through and a sell-to business model with a total addressable market of $160 billion annually. Just to give you a little bit more about our business areas, you'll see the Aerospace Solutions at a glance. We support the KC-130J, which is a fuel tanker.
We actually do avionics upgrades and defensive systems installation for 46 aircraft. We also support the data link pod on the AN/AWW-13. That is for the F/A-18C aircraft. And a contract that has been long-running is, we call it LAU-115/116, but LAU stands for a launcher. It's a missile launcher or weapons launcher, and that has been a long-running production and sustainment effort to repair and overhaul and manufacture new launchers for the missiles on the F/A-18. So a really cool business that whose legacy mainly comes from Vertex, but also there is a little bit of legacy from the Zenetex business that we acquired in December of 2021. Advanced Technology, there's a couple cool businesses there. You'll see the OMDAC-SWACA, which is the largest Army cyber center outside of the United States that we run.
The cool thing about that is we were just awarded the regional cyber center for the U.S. Army in CONUS, and when you combine those two businesses, we will have a business of significance in cybersecurity of roughly $300 million a year. We also support Cobra Dane, which is the exo- and endo-atmospheric data. It captures the exo- and endo-atmospheric data in early flight. It is in the Aleutian Islands, which is the easternmost tip of the United States up in Alaska. And then we also have the Spectrum Management Next Generation and 5G Smart Warehouse that we are managing for the U.S. Navy. Finally, we'll finish with Global Mission Training and Sustainment, which is largely the legacy Vectrus business, as well as some significant parts of the TTS Raytheon business with the defense training.
Some of the things that we do there that are really cool are the virtual reality training people how to use a missile launcher and how to shoot things in virtual reality. We also do training, not only for commercial, but for defense. One of the neat things there is we teach mechanics how to repair the V-22 Osprey in a virtual reality situation. Other things that we do in training is we support the Neutral Buoyancy Lab, which is it teaches the astronauts how to walk on the moon so that they're prepared when they go there, and how to repair the space station, if needed, while in space.
We also, one of our or two of our biggest task orders are LOGCAP V CENTCOM and LOGCAP V INDOPACOM, where we operate out of Thailand, Philippines, Guam, and Kwajalein. And then we also do work on the AFCAP program globally, and the U.S. Navy on the GCS-MAC contract. So we are very proud of the life cycle that we support of the U.S. warfighter. If you start in the upper left, the high-consequence training, we actually train warfighters before they go off into theater. We prepare them for readiness. As you follow around the circle here, we prepare them for readiness, we give them their logistics, we get all of the equipment that they need, and we help them deploy.
And then, as you go into mission infrastructure support, we do basic life support, emergency services, airfield management, and civil engineering, and then we provide battle connectivity and communication. So one of the things that we mentioned in our last call was the GMR- 1000, which provides battlefield connectivity between a helicopter pilot and their, and their weapons. And we've now modernized that to provide connectivity with the land vehicles and their weapons. And then you come over to maintenance, modification, repair, and overhaul. So once the warfighter breaks something or has used it and it needs to be modernized, it comes back to us. We retrofit it. You know, we have upgraded cockpits and digitized cockpits.
If a rocket launcher or some type of weapon has been used too hard and it can't be retrofitted, we will store it away and make sure that nobody can get access to it and use it. But if it's possible to repair something, we'll repair it and then ship it back to the field with zero hours and zero miles on it. We've also do the upgrades and modernization, like I spoke about, the LAU-115/116, the launcher program, that has gone through numerous modifications and upgrades over the past almost 20 years. And then we're back to the high-consequence training. So when a warfighter comes back and they need to be retrained or trained on new technology, we do that also in augmented reality, virtual reality, or a live-based training.
So key takeaways about investing with V2X, we're well-aligned with the U.S. federal budget priorities. We have long-standing relationships with our diverse client base. We have a significant contract backlog, which drives high-visibility revenue. We've got a scaled platform, and we've got growth potential from expanding addressable markets, and we have a strong and attractive financial profile with strong cash flow. So Greg, with that, I think I'll turn it back to you.
Thank you. And then I also want to just introduce Mike Smith,
... VP Treasury, IR. Skipped him before because the presentation. But I'm gonna kind of start backwards and just... I mean, you were here a little bit over a year ago, right after the Vertex and Vectrus transaction. You know, I think at the time, you had targeted greater than $60 billion in contract pipeline through 2026. Maybe just kind of update us on what you're seeing in terms of that pipeline and some of the benefits of that transaction.
Yeah, so it has actually grown. We see a pipeline or a total addressable market on an annual basis of about $160 billion. We have a pipeline that we're gonna be submitting in the next 12 months of $19 billion, and we've had three awards just this past quarter that were not in our original pipeline when we did the merger, that have come out of the combined efforts of the company. Mike, was there anything you would want to add to that?
No. Well said.
And then, you know, the other part was that I, I think you talked about reaching greater than 8% on a, a pro forma basis, with room for further expansion. You know, maybe what's kind of driving that and, and what you're seeing in, in the core margin of the business?
Yeah. So with the 50% of the business being largely cost plus, we take a look at areas where we believe that they're low risk, that we can provide, you know, greater service to our client at a reduced cost, but where we can get higher margin and share in those profits. And so we see a lot of opportunity there for us as we go forward. Also with the aircraft MRO business, you know, we've been able to win Navy Test Wing Atlantic and Navy Test Wing Pacific, so we're supporting 49 different types of aircraft and about 149, 150 aircraft in totality. And so we're getting greater scale, where we can leverage our fixed cost base, and that, in turn, will enable us to have those higher margins.
Then maybe just moving to the top, I mean, it was a pretty big merger. I mean, how do you think about how the competitive landscape has changed and kind of who you think about as your primary competitors in across each business unit?
Yeah. So we have a lot of great competitors that, you know, we really respect, but the thing that we focus on is not our competitors, but that $160 billion pipeline and how we're gonna allocate resources to it.
And I think within that, I mean, you think about the broader pipeline today, you know, where are you maybe gaining the most traction? Customers, kind of back to some of those incremental pipeline opportunities and, you know, where are you seeing kind of the biggest tailwinds?
Okay, I'll take a stab at that, then I'll turn it over to Mike. Where we have seen the biggest tailwind so far is in INDOPACOM. We grew 300% in Q1 and 41% in Q2. Now, part of that was driven by the fact that we went full operational capability, which, you know, means that we were, you know, full force, had taken everything over from the predecessor. So we went FOC last April. So some of that year-over-year growth is due to, you know, that transition. But I will say, when we did the LOGCAP V Kwajalein bid, which was LOGCAP V INDOPACOM, we estimated revenue to be $120 million a year. Right now, for the first half of the year, we are running $130 million just for the half.
Now, some of that is, you know, due to some of the INDOPACOM exercises being pulled forward, but not all of it. You know, there's just been a large portion of being in INDOPACOM, being there, being tapped on the shoulder, saying: "Hey, could you do this? Could you do that?" And when you think back about that geographic globe that you saw, like on slide three, because we are so many places, we are getting tapped on the shoulder to do a lot more than what we expected. So I think that's been a big tailwind for us. You know, I, I think the aircraft MRO, you know, now that I think we've got scale, has been a big tailwind for us.
You know, also being in CENTCOM, you know, being partnered with, you know, our client and the big Department of State win that we had in the quarter, you know, was really just affirmation of everything we've been working towards.
And then maybe just thinking about a couple of new opportunities. I mean, I think you've talked about the Aerospace Advanced Technologies portfolio in the past. I mean, how do you see that contributing to segment growth and maybe margin expansion opportunity over the coming years?
Yeah, it's actually pretty neat. I'll mention again the GMR-1000, which we had built 10 years ago. We had designed it, produced it, you know, it was all of our technology that was really designed for helicopter pilots and their situational awareness. We are now seeing, you know, a customer and we continued to develop that technology over the 10 years. We are now seeing land vehicles, and the Army want to utilize that same technology, you know, for land vehicles. And so that's where we see that really, you know, benefiting the company and the customer.
Then, I mean, you had touched on GMR-1000, so I'll kind of skip that. Just you've had really good success securing some of your recompete contracts in recent quarters. You know, what, how do you think about win rates and, and maybe also outside of recompetes, and how do you think about that differentiation?
Our win rates are really high. You know, I think we are—we've never published a win rate, and we've never published a recompete win rate, but I can say that, you know, they've been really high. We had $2.1 billion of awards in Q2, $500 million of recompete awards also in the quarter.
Then I'm just looking at your key takeaways and, you know, the U.S. federal budget. I think a couple of quarters ago, you talked about the current bidding environment maybe being a little bit labored, and then it seemed like maybe that opened up a bit recently. I mean, how are you thinking about kind of the rest of the year and what you're seeing from a more macro perspective?
Yeah, I think, you know, when you take a look at the interest rate environment, you know, everybody's talking about that. You know, that's gonna put pressure on capital deployment. And, you know, the whole political environment, you know, the fortunate thing, we have been pretty immune from all of those things, except for the interest rate. I don't think anybody's immune from that. But from the political environment, we've been pretty fortunate because we run and we protect enduring bases. We protect, you know, the aircraft that's out on the airfield. We protect the men and the women that are on those bases. And so you can't just shut down or cut back staff, you know, on feeding the US military or protecting them, you know, in CENTCOM.
And so we've been very fortunate, and I think, you know, our guys like to say, our aerospace guys like to say, "We love old metal." Because, you know, if when you go... Like, a Lockheed develops a new plane, Northrop, Boeing, whatever, you know, that is a huge investment by the DoD. So it saves them money to keep aircraft going, and that's one thing that, you know, we do really well. You know, a lot of these platforms have been in existence and running for 40 years, and that's our job, is to keep them running. And so I think we've done very well in the economic and political environment.
And just to add to that, Greg, I mean, the budgetary environment, you know, tough to predict, right? But it looks like we've got $886 billion-$895 billion, so we at least have some schematic of the way that it's gonna look. The way we look at it, to what Susan said, we generally are somewhat insulated from the political cycles, budgetary pressures, given the mission-critical nature of what we do. But when we look at the budgets, what's really interesting for us is that we have historically operated in the O&M side of the budget, right? The operations and maintenance aspect of the budget, clocking in at over $300 billion+ per year.
What the merger with Vertex and then TTS brought to the business was now access and capabilities to tackle parts of the budget that we didn't have, weren't addressable to us before, such as RDT&E, Research, Development, Test, and Evaluation. So we talked about some of these cool things that we're doing, some of these technologies. Those don't necessarily always fall in the O&M bucket. They fall into the RDT&E bucket as well, and the RDT&E spending is north of $100 billion per year. So that kind of goes to that expanded addressable market that we're talking and how some of these technologies and this roughly 1 million sq ft engineering manufacturing center of excellence we have in Indianapolis can be applied to this potential addressable market.
So, regardless of the budgetary outlooks, if it's single digit or even if there's continuing resolutions, we believe that our capability set and what we're doing, how we're serving the war fighter and our clients, will allow us to continue to grow at a, you know, even in line with budgets, if not above.
I mean, just because you brought up the manufacturing center, I mean-
Mm-hmm.
How do you think about where you are in terms of converting that capacity or any metrics around, you know, what the, the future opportunity is, you know, around that? Because that's, you know, we've seen other services companies kind of touch on that. Like, where do you see the biggest opportunities, which I think you touched a little bit on in the presentation?
Yeah, that. So our sell- to, sell-through model, when we think about that, is leveraging the 900,000 sq ft that we have in Indianapolis. We are doing cyber hardening there, for cockpits, for products, for solutions. We have environmental testing labs there. And you think about what we're doing in the electromagnetic spectrum engineering space, that dovetails nicely with that. It's essentially an engineer's playground, and that's what we're leveraging it for. We're taking our capability sets in GMTS, we're taking the capability we have in aerospace, and we're pushing what we know are requirements by our clients, through that facility. And so we're making things, you know, better, faster, and cheaper. For example, we have additive manufacturing there.
So, a big issue is potentially counterfeit parts, or is trying to get parts, supply chain. We can manufacture to the client's spec in that facility. So we are just now scratching the surface on that, and we talked about in the first quarter three new programs that came into the business that were not part of our, you know, pipeline that we believe was gonna be materializing at the time of the merger. These were incremental, which was great news. In addition, we are supporting a whole new platform with a new product that is being designed and developed in that facility, and that has legs to stand for the next decade or two. And then finally, we talked in the last call about things like our F-16 digital cockpit display upgrade. So we are getting...
You know, we have been notified that the government wants to upgrade 300 of these CDUs to digital displays that we've been doing for a while now, and this aircraft is gonna be in the inventory for another 20+ years or so. And what we've been able to do is take what we've been able to do instead of replacing an entire cockpit, but actually very intelligently replacing certain aspects and components of it without jeopardizing the airworthiness of this cockpit, to upgrade it, modernize it, high-res displays, all the functionality that our fighter pilots need today.
And so with that, now we—the client has seen it and said, "Well, now we'd like you to apply that technology to a bigger part of the fleet." So there's 1,000 of them out there, and that's only in the U.S. When we think about our opportunity for military sales as well, when we think about where we are geographically, where Vectrus had a heavier presence in four deployed locations, the Middle East, Europe, et cetera, we see a ton of opportunity to introduce content into that.
And then maybe transitioning to cash and capital allocation. I mean, you had solid free cash flow in Q2. You know, what drove this, and, you know, how do you think about the guide for the year? And then in this context, I mean, how do you think about delevering going forward?
Great question. So we were very pleased to drop below the 3.5x leverage in the second quarter. We had about $11 million of adjusted OCF, excluding the master accounts receivable program that we put in place and M&A and integration cost. So when you think about the full year, we've guided, I think, $115 million-$135 million, something like that. And, you know, I think when you walk that down from our adjusted EBITDA of $300 million, approximately at the midpoint of the guide, $120 million-$125 million of interest cash payments, and about $20 million of cash tax payments, and then maybe about $30 million of working capital and other stuff, you come pretty close to where we are at our midpoint.
So that's kind of the simple walkdown.
I mean, how do you think about capital deployment going forward, whether it's opportunistic, M&A? I mean, how do you kind of evaluate these different options?
Yeah. So we've made a commitment to get our leverage ratio down below 3 times. We really wanna live in the 2-3 times leverage ratio. So, you know, with this interest rate environment, all hands are on deck to pay down debt, you know, until the cost of capital gets down to a more reasonable ratio. But, you know, we continue to look at M&A. We have to stay active. We have to, you know, know if something goes to a cash buyer, you know, when is it gonna come back to fruition? When will, when will it be available again? Both the Vertex asset and the Raytheon TTS asset, we had looked at originally when it was carved out from its parent company.
At that time, the timing was not right to buy either assets, and we were really excited when they went to private equity because we knew that they would be coming back to market again. You know, we were really happy that we waited.
With that, we'll leave it at that. Thanks, Susan and Mike.
Thank you.