Good afternoon, everyone. I'm Greg Conrad with the aerospace and defense equity research team at Jefferies, and welcome to the, Jefferies Industrial Conference. Thank you everyone for coming. Very excited to have v two x with us today and, Sean Morell, CFO. We're gonna do a fireside chat, but he's gonna start ahead of time giving a a quick briefing on the company.
Great. Thanks, Greg. Pleasure to be here. Let me give you a little bit of an overview of of who we are and what we do. So we're, you know, a government services provider.
We provide mission support capabilities around the globe for our customers. We have a wide range of offerings, mission support, maintenance, repair, and overhaul of aircraft, modernization and sustainment of assets, and training. We're very happy with, our position in the marketplace. Like I said, about a 4 and a half billion dollar business came about as the result of a merger from a couple of years ago with two companies, Vectrus and Vertex. And here's a little bit of a breakdown of who we are and and kinda what we do, from 2024.
So about $11,000,000,000 in backlog that we have coming out of the coming out of, q two gives us great revenue visibility, into the next couple of years, but a little over two and a half years worth of, pretty pretty good visibility. Very heavy concentration and focus with the US Army. We work on, several contracts with the US Army in, Asia Pacific region as well as The Middle East predominantly. Like I said, delivering mission support capabilities for them. And we have a lot of growing activities here in The US.
So we were recently awarded a couple of, I'll call them franchise type programs. One's called Warfighter Training Readiness. That is a, we are the premier provider for the US Army's training program. We won that in, I guess it was August we started. So our first full year of delivering capability actually began, here in the third quarter.
So really excited about that for the next, four years. We also won a program where we're supporting, an aircraft called the f five. We won that in October, and so we're getting a full run year a full year run rate on the f five program. And then, in July, we were awarded a program called the t six, so a training platform. It's, it was a takeaway.
It's a ten year contract valued at over $4,000,000,000 for the, for the period. So that will start up. Assuming things go well, that'll start up next year. We're really happy about the positioning in the company, the types of contracts, the support that we deliver to our customers. So with that, Greg, happy to take any of your questions.
Yeah. Maybe just to to start, I mean, you know, we're coming off of q two. You delivered strong results of 1,080,000,000.00 of of revenue and 82,400,000.0 of adjusted EBITDA. Can you maybe just talk about the the drivers of that performance, how sustainable it is, and and maybe just a little bit on the the current environment?
Yeah. Yeah. We were really happy with our, with our second quarter performance. We saw growth exactly in the areas we expected to. The the teams delivered exceptionally well in in all areas providing, I'll say, contingency support in operations, but also enduring missions, which is, fantastic.
From a profitability standpoint, if you looked back at our historicals, you'd see some, I'll call it, seasonality to our profitability. We did have a bit of a onetime benefit for some activities that were adjudicated in the second quarter. They were contemplated in the total year guide that we had established, but the team did a great job of taking care of those things and working through them there in the second quarter. So that's why you see a little bit of a bump in the margin. No change to the total year because we expected that to occur.
Relative to the overall environment, I I've gotten questions before on, you know, our our our backlog you see at $11,000,000,000. It is in fact down from where it was. I joined the company in the fall of, 2023, and the backlog was right around 13,000,000,000. Today, it's at 11,000,000,000. There's seasonality to our to our bookings and to our backlog.
I'll say from a overall performance standpoint, we're almost exactly where I expected or better in all of our financial metrics from a year to date standpoint. Right? So we will always be back half or typically be back half loaded in our bookings, in our cash flow, as well as our profitability. And that's just the kind of the the the natural cyclical flow of, activities in the portfolio.
And then maybe just kind of related to that, you know, fairly solid financials to start the year. I think that the stock itself has underperformed the S and P, A and D, ETF. I mean, what do you believe is driving that disconnect? Or, you know, what what do investors, you know, maybe are asking about the most?
So a couple years ago so, about 32% of the stock is owned by a private equity firm, American Industrial Partners. They owned part of the, they owned, Vertex that came together to form the merger in 2020, '2. About a year ago, they owned 60% of the company. So, you know, there's a little bit of an overhang there. I think as they've done four sell downs, one each quarter for, you know, call it the last year now.
So a bit of an overhang there that I think has been a, a bit of a contributing factor. We've seen how the market's performed whenever they have sold down. I was really encouraged by how the market responded in the last sell down. The price that had it was a bought deal. The the price that was agreed upon, the stock never never went below that.
Whereas this in in the in a couple of the other deals, we had seen a a dip previously. I think that speaks to the solid fundamentals. We had a very good q two, as you pointed out, you know, at both the top line and the bottom line across the board. So, you know, I don't I think the fundamentals of the company are very, very solid. I think there's it's taken some time, one, to get our message out, two, to get some clean financials.
So now we've got, you know, a couple of years of your post merger. The adjustments in our EBITDA have are are dramatically down. You know? So you're seeing the business perform, and I think people are getting, you know, aligned with where the story is, and that they're seeing it show up in the performance.
And then, you know, maybe transitioning a little bit to to m and a. I mean, recent acquisition of a a federal IT services business, you know, adds offensive cyber capabilities. Can you maybe talk about the plan to integrate those capabilities into the core offerings and how you think about the the margin profile of that segment.
Yeah. Yeah. So it was funny. I was, we we had a lot of objectives here in the third quarter, when we talked about capital deployment. And, in the last earnings release, rolled out kind of a covenant approach to capital deployment.
And I think we accomplished all of them by the August. We did a share buyback, in early August, and then we did an acquisition, as you mentioned. One of the things that was very attractive about that acquisition was access to customers. So we have some classified work, albeit modest, within within the company, but not access to this particular customer, and that's what we sought out. Now what attracted us to this particular, acquisition also was it has a very unique capability.
It was one of one for this particular customer. So so that made it more valuable to us, admittedly, relative to the capability that we could bring one to that customer, but then bring the rest of the portfolio, and everything that we do as a company to that customer. So we're we're very happy about the positioning for that. From a you know, I I think there's probably also some capability that we have to now take this activity set, and I I'm being careful, to to talk around it a bit. But like I said, it's a unique capability and then bring it to other either classified customers or unclassified customers.
There's already been some traction on doing those things. So, you know, we're I think we're pretty encouraged about what this can do. Think the second half of your question was around margins. You know, this type of work, I expect to be, you know, right around what our composite is, which call it seven to seven and a half, maybe slightly accretive. It depends.
This is, you know, predominantly labor, you know, that we're, that we're using to execute this, you know, activity set.
So assuming that means it's mostly cost plus work?
Yes.
And then maybe just kind of broadening out that a little bit. I mean, with the acquisition, how do you think about positioning within the the broader intelligence community and and maybe just some of the competitive advantages within the broader cyber operations area?
Yeah. I think, you know so so we've had we have a modest footprint. You know, Jeremy Winziger, our CEO, myself, Roger Mason, all come from a background within the intelligence community with the respective firms that we that we worked with previously to, to our rival there at v two x. So it's something that we know. It's something that we understand, and we think the broad capability that is the company can be leveraged, you know, into that area.
I think we're pretty excited about the opportunity set. Now it's not something that is going to grow leaps and bounds overnight. That's just not the way this will end up working. It will be we're we're in this for a duration. All of these customers buy exactly what we offer to other, customer sets.
They just buy them differently. Okay? And and we probably don't talk about them very much for obvious reasons. But but from a capability standpoint, we're pretty excited about the worldwide reach that we have to deliver mission critical capabilities, logistics, mission support, modernization, upgrades to platforms, extending the life of assets, and making them relevant, you know, in the very near term. And so we think we deliver, significant value to the customers for doing that.
And then maybe just stepping back, you know, for '25 guiding to 3% year over year, growth. I mean, how do you expect that to evolve through 2026 and beyond? And any kind of detail around, you know, some of the the drivers and and puts and takes in that growth rate?
Sure. Yeah. Our our growth this year is very back half weighted. If you looked at our first step financials, you'd see, you know, flat fundamentally. We had some headwinds, in the first half of the year with a couple of platforms that were retired.
So the t one a and the k c 10. Those are platforms that, our customers are sunsetting. The growth that we're gonna have here in the second half is on the the contract I mentioned before, the WTRS program. Really excited about what that's delivering. And for that program, as well as another one that I'll mention in a minute, we hired about 1,100 people in about forty five days.
So one, that speaks to the scale and the capability that we have to onboard people. One, to locate them, you know, bring them onboard, get them outfitted with everything that they need to do to go be successful. So we're really happy with that. That's gonna drive a fair amount of the growth. We also announced back in, this is in the second quarter, an award, on the f 16 for support in Iraq.
K? So, there's a there's a base, North Of Baghdad. It's called Balad. We we now, help support the the Iraqi customer maintaining their f 16 fleet, on their base. It's a foreign military foreign military sale contract for us.
That $118,000,000 award that that we announced will ramp ramp here in the back half of the year. So those are two of the things that are, you know, having some step functions, I'll say, in, in the '25.
And we'll come back to that FMS point, but just, kind of looking at that slide, $11,000,000,000 backlog, 4,300,000,000.0 revenue seems like pretty high coverage. Can you maybe give some details around funded versus unfunded? And how much visibility do you have in terms of the conversion or timing of that being recognized?
So our average contracts are between five and seven years, typically. There's always some outliers to that, but, typically, it's five to seven years. The funded amount of that backlog today is about $2,300,000,000. Now that, you know, some of our customers fund on a weekly basis, believe it or not. Some will fund annually.
So there's always some puts and takes to those things. The funded backlog has grown throughout the year, very typical to the patterns that we see, and it won't shock me if we see that here again in the third quarter. Right? The end of the government fiscal year ramps, you tend to get more of your funding in the back half of the government fiscal year. So, you know, I I I think we have very good revenue visibility into what we're seeing in '26.
There have been some, you know, some of the things that we didn't see earlier in the year may have been some on contract growth type of activities that we may have previously, thought we'd see. There may have been some just some changes with, you know, different priorities, the administration. I'll be very modest, to be honest with you. But, you know, again, I think that that that the the the visibility that we have going into the back half of this year and next year is, we we feel very solid about with a couple of these franchise wins that we've won in the last, you know, call it eighteen months or so.
And then maybe going back, you mentioned the the FMS and f 16 support contract in Iraq. I mean, how do you assess the the scalability and profitability of of the FMS business? And I feel like on services, we don't hear about as as much FMS sales, maybe just opportunity more broadly internationally.
Yeah. This has been a growth area for us. So we started in The Middle East with an FMS program several couple years ago now. The FMS work that we do comes about comes to us as a result of the geography and the footprint that we have as well as the capabilities. So in both cases, that we have today, customers sought us out.
They've seen what we've we've delivered. They see what we're able to do with supply chain, with logistics, with maintenance, all of those capabilities that we bring, and they come to us by name. Now these things don't you know, for for those of you that might not be familiar with foreign military sales, they they take a while to come to fruition at times. Right? Previously, I've I've had FMS cases in my five year in my five year plan for, like, a decade at times.
But I I think these programs are will will, again, be franchise, hallmark type things that the business does. Margins are typically accretive, you know, to where the company's composite is today. And this is like I said before, this is a case of where the footprint and the capabilities that we have around the globe really matter.
And I guess just some follow-up for maybe people who aren't as familiar with the FMS process. I mean, it's generally government to government versus directly to you. I mean, how supportive is the US government in terms of that? And and there's always some benefits on their side.
Yeah. Absolutely. So in this case, the the Iraqi government contracted with the US Air Force. The US Air Force is then contracting with us to to provide this support, for both the aircraft as well as the, the base in The Middle East. That does a couple of things from a contract standpoint.
One, it's cost it's cost plus work. It's cost reimbursable. And the the bill payer to us is the US Air Force. And, you know, so there's some assurity, if you will, right, from a from a risk standpoint in terms of how that will, how that will work. The US government, of course, vets, vets everything.
Our proposals are to the US Air Force, that sort of stuff. But the day to day work we're doing on the ground, of course, is, is with our Iraqi customer.
And then I'll save capital deployment for a little bit, but, you know, to throw out maybe some buzzwords and and positioning and, you know, maybe things that have come out on some releases. Just how do you think about your positioning as we seen some shift towards stuff like autonomous systems, modular training environments, and, you know, the the buzzword of the day, AI enabled logistics? You know, how do you think about that kind of playing in the future?
Yeah. I'll tell you how we're I'll tell you how we're adopting technology today and and give you a couple of real world examples of what we're doing, specifically with our training activities as well as our maintenance repair and overhaul work. So, you know, I I I wouldn't call it bleeding edge capability, but I would call it making it relevant for our customers, quickly. So we download lots of data. So all the data that we capture, is our data, put them in repositories.
And what we've done is put an engine on top of it. Now why does that matter? What does it what does it look like for our employees? So when folks are doing repair of a vehicle or an aircraft, they have the ability to Google, search, if you will. Hey.
The front, you know, right brakes are squeaking. And the capability is such now that it will give us a likely cause. It will give part numbers, and it will give availability and inventory to the technician that might be doing that. What does that do? One, it saves going through multiple series of tests.
It saves going through a separate inventory management system and understanding exactly what will, you know, most likely be the cause. Now, you know, folks will go and and obviously check those things out. It's about speed and agility, and we think doing that's a very practical but tactical way that we're delivering value to the customers. Our employees are better prepared, better equipped to support the end result of the customer, which is making assets available quickly. In the end, that's what matters to us.
That's how we're adapting, I'll say, technology, you know, in several examples that, that we do for our customers today.
So I mean and then how do you get paid for that technology? Right? I mean, you're bringing efficiency and improvements. Is it that you're more likely to win the the next award? Is it, you know, that just just kinda how do you think about the the revenue behind that and whether it's awards or, you know, who who sit get some of that savings?
Yeah. So, you know, obviously, on fixed price deals, you know, we're deploying it, and and, you know, we we usually put in some opportunity sets for us to improve as our technology improves. On on cost type, listen, I I boil it down really simply. When I when I go to a we have a a really well defined gate review process as we look at all of our business opportunities. Gates one through four, gate four is the is is the one just before you submit to a customer.
Tried and true. Most of the folks in this industry do the same thing. But, you know, we think a discriminator that we have is is our price point. Okay? And so what is the value proposition that we're going to deliver to our customer?
We only end we sell three things. We sell labor, material, and subcontracted services. And so what we do is name that tune for less, in many respects, meaning we offer more value for the money by doing, you know, things like this. And that shows up in a variety of ways. It shows up as direct cost.
It shows up as indirect cost, things of that nature, you know, for our for our customers. And it's just the it's the way we're approaching all of our opportunity sets across the portfolio.
And then maybe that's a good tie in. You know, I was gonna go broad again, just asking about risk and opportunities in the current contracting environment. We haven't mentioned the word dose yet. How do you think about just the the general backdrop, whether it's the procurement model, which we're constantly hearing about changes or just broader environment of the federal contracting environment?
Yeah. You know what's, there's been a couple of interesting things. I I, as I was telling you before we got on, I flew up this morning from Florida. We have a proposal center down in Florida where we're doing some significant captures. One of the things we've highlighted is, you know, we're pursuing multiple franchise programs.
We have very few recompetes. So from a revenue standpoint, risk standpoint, you know, typically, you see, recompetes that are, call it, 20 to 30% of your annual revenue, and we're in the low, low double digits as I as I look into 2026. So, again, back to that revenue visibility and that backlog, we feel very good. Well, what do we do during that time? During this time, we're doing proposals.
We're putting out more franchise type, you know, proposals to go, capture more, capture more work and continue this acceleration of growth. So I think we feel very good about those things. But directly to your question on contracting environment, a couple of things. One, contracting officer resource availability. There are fewer today than there were.
That has an effect of delaying funding, of delaying procurements, things like that. Sometimes that happens with change orders that go onto a contract. The encouraging thing is that all new awards and new procurements that I thought would happen this year are on schedule. There's been lag in change orders to existing programs. That's a bit of an inverse from what I've historically seen.
Typically, I've seen new procurements get pushed, and I've seen change orders in we call them ECPs, engineering change proposals get pulled, get pulled in. So that's one thing. The other thing, there are very large procurements that the customers have let with sample task orders. So let me explain what that is specifically. So you write a technical proposal, and the technical proposal might be thirty, forty, 50 pages, whatever it is.
And it might be for a $58,000,000,000 contract, but you will only price sample task orders. And in that example, I might only price the task orders of a 120 to a $150,000,000. So our customers are making decisions on a fraction of the total cost. They're representative of what they will, what they will then ultimately end up buying, that's also a different, approach from what I've seen recently. Typically, I would have priced a five or seven or ten year full up bill of material, everything that could possibly have ever happened.
And I'm seeing changes in terms of how the customer acquisition process in terms of what they're evaluating from a from a total pricing standpoint.
That's interesting. Because, I mean, at least on, like, the procurement side, we we see a lot of times where they're maybe carrying two competitors where they carry one. Is that a a derisking mechanism to kind of see how performance is and how things work out, or what do you think the motivation
behind that is? One, think it's speed. I think costs always play out very differently, and it allows flexibility. When you're pricing three sample task orders, maybe one of which is in fact awardable, it gives the customer flexibility. And you're committing to fundamentally your indirect rates and your a lay a labor table.
So labor is gonna cost me x, and my indirects my indirect rates are gonna be y. And, there's a tolerance, you know, that the customers will expect, and they'll do their own modeling off of it. We do it all all in industry would do the same thing. I think it tells you that the weight on technical and past performance is surpassing cost. Because when you're only sampling, you know, a modest amount of the entirety of the contract value, the spread and the price difference is going to be minimal.
Right? It's gonna be less. You you will aggregate or look at things just you know, some some task order might be higher, some might be lower, but the odds would say you're going to be closer in aggregate in price when you're doing a fraction of what the total was. So, again, I think it's an interesting I've seen this on three three cases now, that have come out in the last probably since the April time frame.
And then one other thing you said I wanted to follow-up on is it seemed like maybe playing a little bit more offensive given the low double digits recompete into next year. Is that kind of there's a a set contracting or or bid and proposal team and by not having a a lower amount of recompetes, it kind of frees up resources? Or how do you think of the balance
between those two? Great question. So, yes. So we are we are surging in our, ability and capabilities to go, you know, pursue more more volume. You know, in most cases, we don't compete in a market that has new new starts.
Right? We're not launching a new product or a new variant or something like this most of the time. So, you know, in this market space, we're competing for some things maybe that some others currently have or defending our turf. And, you know, we're seeing the customers focus on readiness, which is a key discriminator that we think we have, and therefore, we think we're best positioned to go do it. So we're going to surge some of that.
We would call it BNP or bid and proposal investment that we're making in the company, in in some cases investing in ourselves because we think that we can facilitate, you know, additional market share, top line growth, and greater returns for shareholders.
And then maybe, you know, going to capital allocation, I think you've laid out a a four part strategy, acquisitions, share repos, internal investments, and debt pay down. Can you maybe talk about how you prioritize between those and, you know, how you think about that strategy evolving over the next three to five years?
Yeah. Like I said earlier, I was really happy that that that we did two of those four things, you know, just by by August 15, I think, with, with a modest acquisition and and and a share repurchase. You know, we have a leverage ratio that is you know, it's come down. When I first got here, it was 2.5 ish or 3.5 ish, somewhere in that range. You know, that that that made me nervous.
We target between two and three, and that's exactly where we are. We're slightly under three. There's always gonna be some ebbs and flows to it, but I'm comfortable being in that range. This this business and part of the part of the things that attracted me to it is it it's a lot of its value is in its free cash flow. We look to convert between 95 and a 105% on an annual basis, you know, cash conversion rate.
And so we feel, you know, there's always gonna be some cyclical nature to that to that debt pay down as a result of those things. But staying in that range, I think, is, I think, positive. You know, our stock today is is we think it's trading at a discount, so that's why you saw us, you know, buy $10,000,000 worth of it. We put a $100,000,000 buyback program in place in May. I won't say I'll prioritize it, but as as we continue to think that we're a good buy, you know, it won't shock me if we do more of those things.
And then I'm very happy with the with the opportunities in m and a. But some of the technology things and spreading that across the company. I also will not be surprised if in in 2026, you hear us talking about investing in ourselves, and that might look like some modest IRAD. We do some of it today. I'm not we'll never do step functions of things, but it might be some modest investments that we would make in ourselves in, in some technology discriminators centered around data and using the data that we have.
We think data is extremely valuable. Lots of people gather it. It's what you do with it and make it relevant, and we think that we're at the forefront of doing some of that on a very practical scale. Okay? We're not gonna we're we're we're not gonna write massive algorithms that are that are gonna launch spacecraft or anything like that.
That's just not what we do. But we think the very practical nature of our work lends itself to benefiting from technology insertion.
And then maybe just jumping back to to one thing you said before. You talked about that new program and hiring 1,100 people in forty five days, I believe it was. Yep. Can you is that just rebadging or or maybe any commentary on the broader labor market just given I know we've seen some shifts and some scale back maybe a little bit?
You know what surprised me about this? So some of it, yes, was rebadging. And, you know, obviously, that's that's a little bit easier. You have to you have a bit of, I'll call it, a captive audience. And so you go you go through that.
That's fine. In some other places, we actually have people wanting we have people waiting to go overseas, in most cases and largely in The Middle East. So we we we feel very, very few expats. You know, we we recruit third country nationals, things of this nature in places, and we have no problem identifying the labor, to go to those. Matter of fact, there's a waiting line, which surprised me.
And it's from around the globe to go to some of these, locations and do some of this work predominantly in The Middle East and Asia Pacific. So, you know, our teams have done a great job of tapping into those labor markets, knowing where to go get it, identify it, and and and put folks to work. The biggest hurdles we've we've had is visa processing for some of these countries. And, you know, the team works through it. That's that's a modest inconvenience.
You know, we measure it in a couple of weeks or or or maybe days, but but the team's done a nice job, and and it's again, it's just part of the nature of of, how we approach business.
And then I we have a couple minutes left if there's any questions from the audience. Think everyone's a little bit tired on that. Think too. And all the meetings that you've had already. So Yeah. Well, we really appreciate it. And and with that
Thank you. Appreciate your Thank you. Take it easy.