Michael Smith – Director of Investor Relations Kenneth Hunzeker – Chief Executive Officer and President Matthew Klein – Senior Vice President and Chief Financial Officer.

Brian Ruttenbur – Sterne Agee Bill Loomis – Stifel.

Good day and welcome to the Vectrus Incorporated First Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mike Smith. Please go ahead, sir..

Thank you, Christy. Good morning, everyone. Welcome to the Vectrus first quarter earnings conference call. Joining us today are Ken Hunzeker, Chief Executive Officer and President; and Matt Klein, Senior Vice President and Chief Financial Officer. Slides from today's presentation are available on our Investor Relations website, investors.vectrus.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 statement in our press release 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. We assume no obligation to update our forward-looking statements.

Also, we will be making reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures.

You can find the non-GAAP reconciliations and other disclosures in our earnings release and in our presentation slides, which are available on the Vectrus website at investors.vectrus.com. And, at this time, I’d like to turn the call over to Ken Hunzeker..

Thank you, Mike. Good morning, everyone. Thank you for joining us on the call today. Before we get started, I would like to highlight that although Vectrus is a new public company and we’re only in our first quarter of our first full year since the spinoff, on June 13 we will officially celebrate 70 years since our initial incorporation in 1945.

This reinforces our legacy in the services market space. It represents our long-term commitment to our customers and it would not have been possible without the hard work and dedication of our employees all over the world. Please to turn slide three. During the first quarter we reported revenue of $261 million and adjusted earnings per share of $0.47.

Our reported results were in line with our expectations and we are reiterating our 2015 guidance. The successful phase-in our contract is critical and we are encouraged by the progress we have made on our three large contract wins during the first quarter.

I’m happy to report that our $458 million Turkey/Spain Base Maintenance contract achieved four operational capabilities on March 28. Phase-in team of our $517 million Army Core of Engineers IT contract or ACE-IT is doing a great job and meeting the milestone schedule. We expect full operation capability on the program to be reached by the end of July.

As you may know, our $411 million Thule based maintenance contract was protested in the court of federal claims and we are still waiting the court’s decision. We’re currently phase-in the program is directed by the customer, due to the protest we’ve elected not to include the unfunded award and our backlog.

This is consistent without approach of only recorded an award to backlog once all protest are resolved. With all our phase-ins on track we expect to realize the previously communicated $150 million in new business revenue for 2015. Once all phase-ins are complete, the three contractors are expected to add over $200 million of annualized revenue.

We’re continuing to see stabilization and more predictable revenue flow in our non-Afghanistan business which we referred to is our core business. Specifically, our core business revenue in first quarter 2015 was $217 million, which is essentially flat year-over-year.

As reported last quarter in our guidance, we anticipate our core business to increase 10% in 2015. Our work in Afghanistan declined year-over-year but it is performing in line with our expectations. We still forecast revenue from Afghanistan base programs to generate $160 million in 2015. With that being said, the Afghanistan environment remains fluid.

Please turn to slide four. Re-competes are part of the normal business cycle for all government contractors. I would like to provide an update of our primary upcoming re-competes. Our largest re-compete on a revenue basis is the Kuwait base operations in Security Support Services program, also known as K-BOSSS.

K-BOSSS provides full spectrum, life support and base operation services for all U.S. army facilities in the Kuwait area responsibility. Our performance has been strong in this program which is demonstrated by our exceptional government ratings.

As it currently stands, proposal for K-BOSSS are due in the second quarter with an award anticipated later this year. Other re-competes in 2015 include our Army Prepositioned Stock Kuwait or APS-5 Kuwait, Army Prepositioned Stock Qatar or APS-5 Qatar and our Maxwell Base Operating Services contracts.

It was recently announced that the current APS-5 Kuwait and APS-5 Qatar contracts will be consolidated into a single solicitation with anticipated proposal due later this fall. An award on the contract is currently expected in 2016. This consolidated contract is expected to be re-competed under the enhanced army global logistics enterprise IDIQ.

Also offer re-compete in 2015 is our Maxwell Base Operating Services program. Our performance has been strong as demonstrated by our exceptional government ratings. Furthermore, we achieved a grade of outstanding for two consecutive years on the logistics compliance assessment program.

Overall, these re-competes remain a critical focus for the management team. We have excellent customer performance ratings and in-depth operational and customer knowledge to position us well for success. New business continues to be a high priority for Vectrus and we currently have $1 billion of bid submitted and waiting potential award.

Please note that due to the uncertainty regarding the contract awards, we have not included any of these bids in our 2015 guidance. We expect to submit proposals for an additional $3 billion in new pursuits throughout the remainder of 2015. Subsequent to the first quarter, we awarded two IDIQ contracts, on is a prime and one is a subcontractor.

The IDIQ vehicle is increasingly popular with our customers and important to assess past quarters in IT as well as infrastructure and logistics. We gained prime contractor seat on the Navy Seaport-E contract.

Seaport is an important Navy IT vehicle, we have all – and we already have customer relationships and past performance on the contract via one of our current programs. The second IDIQ is a subcontractor position on the U.S.

Army’s Information Management Communication Services III program which has an $850 million sea link value over the next five years. The customers net comp with whom we have good track record, this is also a U.S. based program.

We have additional IDIQ bids in the works this year, depending upon the timing our piece we may have as many as six more IDIQ bids to submit this year. As a remainder, only specific IDIQ past quarters are included into our pipeline, a potential proposal to be submitted and for all of our financial projections.

Now I’d like to turn the call over to Matt and he will go through details of the first quarter and then we’ll open up the line for questions..

Thank you, Ken, good morning, everyone. Please turn to slide five. Today I will be discussing our first quarter 2015 financial results.

The table of the top of page five reflects the generally accepted accounting principle financial results which includes the Tethered Aerostat Radar System program, and separation costs required to become a standalone company. The TARS program was retained by Exelis as part of the spin. The separation costs are non-recurring costs to the business.

I’ll address the financial results on an adjusted basis which we believe better reflect the ongoing business trends. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP.

I’d like to turn your attention to the chart shown on the lower half of slide five, which reflects the adjusted financial results for the first quarter of 2015. Adjusted funded orders were $144 million. Orders were up by $27 million compared to the first quarter 2014 which is a reflection of timing of funded awards in our business.

Adjusted revenue for the quarter was $261 million, $36 million lower when compared to the same period of 2014. I would like to note that our first quarter revenue does not include any contribution from the three new contracts we are currently phasing in.

Afghanistan contracts contributed $44 million of revenue, down $37 million compared to the prior year’s quarter. This demonstrates that our existing non-Afghanistan contracts are continuing to stabilizing and provide a strong revenue base for 2015.

We anticipate growth in our core business to continue for the remainder of the year, attributed to the stabilization of existing programs and the ramp up of new contract revenue. We expect the previously communicated $150 million of new contract revenue to commence in Q2 and progressively increase through Q4.

First quarter adjusted operating income was $9.5 million or 3.6% operating margin, which is $9.3 million unfavorable when compared to the same period of 2015. Afghanistan contracts contributed $2.7 million in the quarter, which were down $9.8 million compared to the prior year.

This unfavorable variance was anticipated and is due to lower service requirements on Afghanistan contracts. We are happy to report that our first quarter 2015 operating margin was at the top end of our annual guided range of 3.2% to 3.6%.

While we certainly would like to remain at these levels, the margin reach in the first quarter is not indicative of future performance. Looking to the balance of the year, there could be some variance and overall we’re still projecting full year margin in 3.2% to 3.6%.

We remain committed to improving operating margins through operational excellence, program performance and the anticipated changes to more incentive base contract structures as existing contracts and their contractual period of performance.

Free cash flow with the use of $28 million for the quarter compared to a use of $57 million during the same period of 2014. While the first quarter resulted in a use of cash, consistent with normal seasonal patterns, we demonstrated a year-over-year improvement.

The adjusted diluted earnings per share for the first quarter was $0.47 per share compared to a $1.15 per share for the first quarter of 2014. Largely due to the mix of a business as we diversify our business space and replace with the client Afghanistan contract activity. Please turn to slide six.

For the first quarter the total backlog was $2.6 billion with approximately $700 million funded. The first quarter total backlog continues to exclude the Thule Base Maintenance contract. We are moving forward with the phase-in as directed by the customer, we expect to add Thule to backlog once the court of federal claims resolves the protest.

Total backlog represents firm orders and potential options on multiyear contracts, excluding IDIQ contracts. The first quarter backlog adjusted to include the Thule contract award would represent $3 billion. Please turn to slide seven.

With the first quarter financial results tracking to our full year guidance, and phase-ins of the new contracts progressing as planned, we are confirming 2015 guidance. We are forecasting revenue from $1.1 billion to $1.2 billion.

We expect to start booking revenue from the new contract starting in the second quarter and gradually increase the year as the programs are fully phased-in and fully operational. We are seeing some favorability as it relates to revenue, and if it continues, we’ll address any potential changes to guidance next quarter.

We continue to estimate adjusted operating margins in 2015, which as a reminder only exclude minimal, spend cost to range from 3.2% to 3.6%. For operational visibility purposes, adjusted operating margins, less non-recurring Founders’ Grants will range from approximately 3.5% to 3.8%.

The guidance for adjusted diluted earnings per share is estimated from a $1.76 to $2.23 per share, and free cash flow is estimated to range from $15 million to $19 million. Now, I’d like to open the line for questions..

Thank you. [Operator Instructions] And we’ll take our first question from Brian Ruttenbur with Sterne Agee..

Thank you guys very much, couple of questions. First of all, DFOs working capital and those are should be some easy questions to start off with.

DFOs rose 10 days and can you talk a little bit about that and what you anticipate going forward?.

Yeah, so the first quarter we typically see some pressure in cash flow Brian. You can see on the last couple of years we’ve seen we’ve experienced that, some of that has to do with insurance payments that are prepaid at the beginning of the year. As far as DFOs, we expect us to come back pretty quickly and there is no risk to our receivables.

And we saw that same behavior last year and we expect to see that improvement in the second quarter and really optimize that in the third quarter..

Okay.

And then I assume that it was the $15 million insurance financing cash inflow was all around that end of the year, beginning of the year situation, is that right? Or is there something unique going on with the $15 million insurance financing cash inflow?.

No, no. So what we decided to do this quarter was rather than prepaying user cash, we financed our insurance obligations which are due in the first quarter. And those costs will be applied through the programs in the coming quarters of being reimbursed through the course of the year.

So it’s a little bit of a timing, so we see pressure in the first quarter and then that comes back in the second and third quarter..

Okay..

Does that answer your question?.

Yeah, it sure did, thank you.

And then there was no debt repayment in the quarter, what’s the timing of your debt repayment throughout the year?.

Yeah that’s – there was a little bit of a timing issue, our debt payment was due March 31, our quarter fiscal period ended March 27 so we did pay at March 31. We’re still on track to meet our mandatory obligations of $11 million roughly, and then we plan to accelerate payments in the $5 million to $10 million.

If the second quarter shapes up well we would start to do that acceleration in the second quarter but definitely in the third quarter..

Okay. And then SG&A seem to be low as at least as a percentage revenue as a dollar amount too.

Is this a run rate level or was there something extraordinarily low in the period?.

Nothing extraordinary low in the period, what we talked about in the last call was we expect 8% to 10% SG&A savings in 2015. That has to do with proactive management of standalone cost, so we’ll get a full savings in 2015 from that.

It also has to do with actions we took at the end of last year as it relates to corporate staffing levels, so we realized those savings in 2015. We said that we would really project around $60 million of SG&A in 2015 at $15 million in the first quarter is trending to that number, so it’s exactly what we expected.

It may not perfectly align each quarter like that, but we expect to be in that $60 million at the end of the year..

Okay.

And then some additional questions on the ramp up Turkey/Spain, I assume that you’ll start for the second quarter having that full, if I took $488 million and divide it prorate you would start recognizing that full amount in the second quarter?.

Yeah, and Turkey/Spain since it’s started in the beginning of the quarter we would see a full tranche of full quarter with the revenue on Turkey/Spain.

Little bit different on ACE-IT, ACE-IT is still on phase-in, it will take over for operational capability in July, so you’ll see a slower ramp on ACE-IT and then Thule is in the fourth quarter assuming Thule goes on the current path..

Okay. And then some questions I’ll get Ken on or I mean you can keep answering, and whoever wants to answer is a takeoff.

I think you just mentioned that it’s probably going to be award for 2016, I hope I got that, I know that it contract expires in September but is K-BOSSS now going to be awarded in 2016 is that the anticipation or did I mishear that?.

No Brian, so the award – the proposals are due this month in May, and the award – we’re on contract till September. The award timing would be sometime between May and September, it’s getting pretty tight. It wouldn’t be unusual to see a delay, but right now they’re still on track. They haven’t announced any delay in award..

Okay.

And then Maxwell, what’s the timing of the award of that?.

It’s the – RFP is out, it’s expected to award later in the year and we’re on contract to really the fall this year. Again that can build on..

Okay. Yeah, no, no I’m sorry. Go on..

Well our re-compete is just kind of somatically, our re-compete activity is building proposals and prices and offers now submitting them in. And then towards the end of the year almost all of them will be awarded and decided towards the end of 2015, so we’ll take as most of the ways through 2015 before we’ll get decision..

Yeah, if you could remind me on the size of Maxwell, I know the size of K-BOSSS but the size of Maxwell?.

We haven’t – Brian to be honest, we haven’t really talk about specific contract size. I will say that when contracts were up for re-competes, if you look at prior announcements on option years, you typically see some reduction in price just because of the competitive landscapes that we’re in..

Okay, thank you very much..

Thanks, Brian..

We’ll go next to Bill Loomis with Stifel..

Hi, thank you, good morning..

Good morning, Bill..

Good morning, Bill..

Good morning.

If you – I know you’re not giving values for the individual contracts but can you just tell us as a percent of revenue what the $3 at K-BOSSS, APS Kuwait and Qatar and then Maxwell in total as a percent of revenue in 2015?.

Sure, Bill. So….

I don’t think we ever communicated that Bill as far as, well how those sum up..

Yeah, I’ll shape it this way for you. The last option year for K-BOSSS was awarded over $400 million on an annual basis. Again if you go back to what I said before on a re-compete is likely will not be at those levels, but that was the last option year exercise for us. APS-5 Kuwait is roughly over a $100 million a year..

And then the other two?.

Qatar and – what was the other one?.

Qatar is very small to be honest, yeah and we talked about Maxwell, on an annual basis Maxwell is pending on their – the construction projects they have on this contract. It’s maybe $30 million to $50 million..

It’s in that range..

And then just on the – I missed the IDIQ that APS Kuwait, Qatar would be consolidated under which one was that?.

That’s eagle, that’s the one that run out of army systemic command in Rock Island part of AMC, Arm and Material Command. It’s big IDIQ that most of their contracts are going through now, its replacement for the old first..

Okay.

And are you prime on that?.

We are, but there is a – in the BOWA has a lot of other primes on it. It’s about one-third large and about two-third small..

And is there anything going to change with the new re-compete in terms of – is it going to be full and open or is it going to be small business prime on that?.

We’re fully anticipating full and open..

Okay.

And P&L now $1 billion in proposal submitted in pending, so you have no re-competes, I know the three big ones you haven’t submitted your bid yet but I mean other than that there is no other re-competes right now going on?.

In the pipeline, no, those were the three big ones that we’ve communicated. It was really a pretty light – there was light award activity in this quarter and we didn’t announce any new awards.

The bid submitted pending is still stand at about $1 billion, and again we expect to submit about $3 billion worth of awards throughout the rest of the year, Bill..

Okay.

And then on Afghanistan you said it’s stabilizing, what could change that, let’s say the trip levels stay or even go up a little bit, I mean how confident are you that – was that stability, we had some others report that also, we saw some stability much different than the year ago and Afghanistan seems to be changing like it’s really kind of finding a bottom or slowing down, is that what you’re seeing?.

Well basically, with the programs we have there in Afghanistan, we’re actually seeing them – I don’t know, let’s say go steady state. We haven’t seen any plus ups or any large decreases in the workload going forward.

So based up on running the network and what we’re doing on long cap, working with four and then what we’re doing to support of core of engineers is pretty much gone steady state. And really we’re still forecasting the annual revenue of about $160 million..

Okay. And then on Thule what – so let’s say, what – so can you just tell us what the risk is there, I know you guys are confident that you’ll prevail on that but you’re starting to phase-in, you’ve committed resources there.

What happens if it goes – if it does not go your way, I mean you’re obviously reimbursed for all your costs, right, there is nothing that gets – that you get hung out forever?.

Correct. So, we’ve got the authority to proceed on this contract, it’s a long phase-in because of the environment that we’re dealing in. So we’ll work through that most of the summer and you’re right, so I hope it goes different way then it will be reimbursed for costs.

There is no financial risk, the risk is probably more impactful to 2016 revenue potential..

And we both – we all read your last post on it, as well..

And then on $150 million since you’re not accounting this one until fourth quarter really contributing, is it pretty small amount of that $150 million?.

Yeah..

Yeah, it’s immaterial and small. There is a little bit in there but not much..

Okay. Great, thank you..

Thanks, Bill..

Thanks, Bill..

That concludes today’s question-and-answer session. At this time, I would like to turn the call back over to Ken Hunzeker for any closing or additional remarks..

Thank you for joining us on the call today. As I look back, I’m proud of what Vectrus has been able to accomplish. The foundation of any structure is important and our foundation was laid 70 years ago. As I look forward we will continue to build our strong foundation and I believe the future holds great things for Vectrus.

We have a culture and commitment to our customers that are differentiated and enduring. We continue to make great strides in executing our vision of being the customer’s first choice and most trusted partner. Our employees and senior leadership aligned in a unwavering dedication in growing our business and building value for stakeholders.

Thanks again and we look forward to updating you on our progress next quarter..

This concludes today’s conference. Thank you for your participation..