Q4 2023 V2X Inc Earnings Call

Participants

Mike Smith; VP, Treasury, Corporate Development and IR; V2X Inc

Charles Prow; President, Chief Executive Officer, Director; V2X Inc

Shawn Mural; Chief Financial Officer, Senior Vice President; V2X Inc

Tobey Sommer; Analyst; Truist Securities

Joe Gomes; Analyst; Noble Capital Markets

Trevor Walsh; Analyst; Citizens JMP

Steven Sackel; Analyst; RBC Capital Markets

Sanjay Singh; Analyst; Stifel

Presentation

Operator

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. (Operator Instructions) 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, Investor Relations and Corporate Development at V2X. You may go ahead, sir.

Mike Smith

Thank you. Good morning, everyone. Welcome to the V2X fourth quarter and full year 2023 earnings conference call. For joining us today at our pro President and Chief Executive Officer and Charles Morel, 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 2. 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 Prow.

Charles Prow

Thank you, Mike, and good morning, everyone. Thank you for joining us on the call today. Please turn to slide 3. Before we get started, I'd like to thank the over 16,000 VTS. 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 assist around the clock around the globe. Commitment to our clients that will drive our continued leadership and growth.
Please turn to slide 4. The transformation of V2 times continues organic and inorganic growth, which improved scale, profitability, diversification and capabilities that allowed us to emerge as a leader in the operational segment of the broader federal services marketplace.
Our company 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 our mission to 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 5. Top line 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 at $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 for Endo, Paycom continued to expand, reaching $71.2 million, a record for V2 times and was particularly impressive given the talent saver 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 outcome 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 states 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 of $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 V2 times in the quarter. Importantly, we recently demonstrated these capabilities through the successful design and fielding of 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 is designed, reduced and sustained by V2 times. 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 1,000 for GMR 1,000. 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. We do have continued to increase at the Army footprint by integrating on additional different air and ground sites.
During the quarter, we submitted our proposal for a sole source RFP, which included production for up to 3,000 geomarkets. In addition, we are seeing good traction with potential new clients that have big knowledge, GMR 1,000 capability and maturity for other applications.
Building on our momentum in the Middle East. I am pleased to announce that during the quarter the to us was awarded a new task order with the U.S. Air Force valued at $100 million over the next five years. Under this award, PQX will provide civil engineering and infrastructure support services in 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 traditionally be to actually recently achieved a significant milestone that Company's first substantial foreign military sales with by providing aviation support and training to an FMS client in the Middle East. Overall, our 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 through our existing contracts. However, we believe emerging requirements could result in new contracts or task orders.
Please turn to slide 6, where I will demonstrate our recent FMS win and multiyear 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 are 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 V2 times, representing a culmination over two years of planning and engagement.
The majority of the award is not included in our quarter backlog as a contractor, Zynga sanitize, our team is currently working on transition related activities and expect to have the contract operating at full run rate in the second half Importantly, our evolution as a company has been an enabler to participate in this market. With this new work that total awarded value of our SMS portfolio was approximately $700 million with accretive margins across eight countries.
Looking ahead, we see a near term pipeline of FMS opportunities by approximately $5 million. As such, we are continuing to invest in and pursue opportunities that leverage our geographic footprint, robust partnerships and enhanced capability or B, to execute, deliver differentiated cost effective solution.
Please turn to slide 7. Our ability to deliver unique and differentiated solutions is driving momentum in our business. It 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 our $458 million or a five anniversary 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 for our business development engine is geared to support future backlog and revenue expansion with a $15 billion pipeline of offers expected to be submitted over the next 12 months.
Finally, our visibility is enhanced by the limited recompete we are facing throughout the year. At the midpoint of our 2024 guidance, recompetes comprise less than 5% of our revenue mix.
To summarize, V2X with leading growth indicators, strong backlog notable recent awards and limited recompetes provides an excellent foundation and solid visibility moving into 2024.
Now I'd like to turn the call over to Shawn for a review of the financials. Shawn?

Shawn Mural

Thanks, Chuck, and good morning, everyone. Please turn to slide 8, 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. It 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 cash flow performance with adjusted operating cash flow of $75.9 million, representing a 195% net income conversion.
Please turn to slide 9, 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 days sales outstanding of 58 days.
Please turn to slide 10 to discuss cash and look great. 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 $1,084 million. 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 billion 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 recompetes. Adjusted EBITDA is estimated at $300 million 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 phasing of new business and the previously-discussed wind-down and completion of the KC-10 and T. one A. program. We expect adjusted net cash provided by operating activities to be $145 million 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.

Charles Prow

Thanks, Shawn. Please turn to slide 12. V2 electric made focus on creating value for shareholder support component by which we plan to achieve this include one continued focus on generating top line revenue, growth to backlog conversion, on-contract growth and execution of our 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 campaign three, continued strong conversion of profit into operating cash flow through disciplined working capital management and low capital intensive, and fourth, utilizing our high reoccurring cash flow to strengthen our balance sheet and further reduce interest expense and net debt.
In conclusion, P2M 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 2020.
For now, I'd like to turn the call open to questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Tobey Sommer, Truist Securities.

Tobey Sommer

Now that we have RERA, could you provide some incremental color on the SMS pipeline, including geographic breadth and in sort of describing new work versus takeaways from traditional competitors I'm sure we are in general, as the name would say, the majority of our FMS pipeline in incent Com and Endo Paycom and to a much lesser degree, I would say Eastern Europe of the most recent activity that we announced. And so I can't you have 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 and the remainder of the pipeline is really balanced between aerospace O&M as well as logistics flash operations management.

Charles Prow

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.

Tobey Sommer

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

Charles Prow

Yes, 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 IT. one A. It's relatively balanced throughout the year. As we've indicated, we'll see sequential growth two to make up for that wind down. So I would say a bit earlier weighted in the year, but extending but extending through the full year.
Sean, anything that know exactly.

Shawn Mural

Thanks, Chuck. Yes, we'll grow sequentially throughout the year, Toby. And yes, I would say it's first half weighted, meaning some of those headwinds as things wind down again, as we as we said and expected, that's a question we get from investors.

Tobey Sommer

If peace breaks out, which the news doesn't seem to convey is likely anytime in the near term, does the company have activities that would cease and if so, how much revenue is exposed?

Charles Prow

Yes, I would say yes, P4 to breakout. Yes, that's I guess we can operate for that. I suppose but by and large, the missions that we're maintaining. Well, I would largely, if not entirely and continue. I mean, you always know have risks like we saw in Afghanistan a couple of years ago, if we were to pull out of a country, 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 our Sampo today, we do have tailwinds with regards to both revenue and profit generation just because of the rate and pace of activities in both Senn Com or Eastern Europe and what you saw in the reported results in endo?
Yes, a lot of activity in the big data, as we mentioned in the prepared remarks, David, we actually had higher revenue the second half of the year and into Paycom, although the first half of the year to where the where the exercise actually occurred. So kind of a long-winded answer to your question. But as the military infrastructure continues to age, the airframes and ground vehicles continue to age, that actually creates more requirements for for V2 times. If I could just add quickly, could you elaborate on the GMR. 1,000 opportunity, including comment on the sort of size and scope of that? Thank you very much appeal.
What GMR. 1,000 represents as a as a as a new suite of capabilities that are really taking hold post the merger. We believed that the the untethered ring of the Indianapolis facility when it was acquired by Vertex and ultimately not part of BQX. would create opportunities because of the I see the organizational conflict of interest of being owned by a prime contractor going away. We are in fact seeing that and this whole suite of engineered solutions, GMR 1,000 being one is our 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 I'd say that as we've mentioned in the prepared remarks, this is actually a sole-source bid. We don't know whether or not we've won yet, but the attraction of the GMR 1,000 and other engineered solutions is actually progressing very, very nicely.

Tobey Sommer

Thank you.

Operator

Joe Gomes, Noble Capital Markets.

Joe Gomes

Good morning. Nice quarter. So first question, kind of a little couple of parts to it. Our book to bill was a little light in the quarter. And I'm wondering does that solely due to those the protested and then the forward contract that is still being definitive ties for the continuing resolution, which has gone on much longer than I think all of us had anticipated. Is that starting to impact you? You're 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 is having on you also?

Shawn Mural

Yes. Hey, Joe, this is Sean. Yes, so exactly as you point out, right. So the pending awards increased $3 billion in the quarter. It's a bit muted environment relative to the case and patent and then the cadence of the awards and nothing. Nothing of note. I don't think we're concerned about anything, but we are seeing a bit of a slowdown from from some of those things we would have liked to have seen it, but it doesn't change our wrap our outlook for first successfully capturing those that work took anything else I think, yes, you're right.
We as always, and continuing resolution, the rate and pace of a large flow, again, the op tempo that we're seeing and you see that in our revenue and our on-contract growth continued strong. So I think as we move through this year, we will see awards again, albeit a little slower than we would like, but up and we're very confident and confident in our guidance, some time expanded guidance on the adjusted EBITDA margin.

Joe Gomes

If I look at it on the mid point, it comes to be up 7.4% in 2014 should be flat with 23. And is that just that 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 project of year over year?

Shawn Mural

Yes. No, I'm not sure I'd say it's exactly as you described, right. So some of the 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 to mature those things and improve the profitability over time. And so throughout the year, you'll you'll see us do that kind of sequentially when we think about the margin profile of the business over the over the course of the year. But again, you're exactly right at the midpoint where we're probably right at a seven for that.

Joe Gomes

Yes. And one more for me on the guidance and maybe you can kind of give us a little bit of Cadence. You know, historically, you're kind of at that 45 in the first half, 55% revenue in the second half. But one of the things, Chuck, you had mentioned last year you benefited in the first and second quarter by the exercises in Indo Paycom. And 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 are should we still kind of expect that 45, 55 split on the guidance?

Shawn Mural

Yes, I'd say I'd look at it this way on the top line, Joe. I look at 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 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 kind of quarter as as we go throughout the year as new work comes on and as the teams mature, our execution, Chuck, anything else.

Charles Prow

And as you said 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. The the first half second half dynamic has been very consistent going all the way back to two Vectrus days. And again, we feel very comfortable with the guide and we vary. We are very comfortable with the ramp throughout the year.

Joe Gomes

Great. Thanks for taking my questions.

Operator

Trevor Walsh, Citizens JMP.

Trevor Walsh

Say at morning tea, and thanks for taking my question. And then I'll echo my congrats on a great finish to the year. Similar to the color 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 and you had just kind of just generally where that falls within the portfolio of products and how that how that looks in terms of what the mix is there, if you could?

Charles Prow

Yes, no, that's I 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 of that $9 billion, I would say there is a have a good mix of maybe call it a proportional mix between our core businesses, our logistics of base management and aerospace O&M, and then the the the newer converged technology and engineered solution pipeline where we really have a really nice up emerging pipeline in our intelligence community business as well. So again, the 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.

Trevor Walsh

Great. Terrific. And 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 just not finalized yet, but just curious how how technology driven that particular project was?

Charles Prow

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

Trevor Walsh

Terrific. Thank you for the perspective on maybe one more from me for Sean. The look 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 million to $30 million. It looks like from what I what I can tell in our model. Just curious where the added investment is going or kind of what you see kind of where that where that spend will be progressing throughout the year?

Shawn Mural

Yes. No, great. Great question. Thank you, Tom so we had we had mentioned at the end of last year in the third quarter release that we would we would 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, the business has we're investing in some engineering tools to help ensure that we have that data that capability, we enhance that going forward. So that's really all it is of Trevor's timing between years on those and those investments.

Trevor Walsh

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

Operator

Steven Sackel, RBC Capital Markets.

Steven Sackel

Ignoring all thank you for taking my question. I was hoping you could provide a little bit more detail around the Middle East exposure on maybe how fast can that market grow? And then maybe just you can kind of compare and contrasting that two Dopaco, if you said as David. Hello? How are you doing? Could you say you cannot say Middle East exposure? Yes. So yes.

Charles Prow

Okay. So yes, so we are net leases are and have been historically, Bart largest individual, non bonus area of operation. We've been operating in the region for really three decades now as you undoubtedly know there is a lot of activity in the Middle East. Now as we mentioned in the prepared remarks, the op tempo that is we are in fact, seeing in the region. And today it's being largely hand group handled through the existing contracts we have in the region, although we did note a new, a new win with the Tier four if it well, that will be that will be ramping here with regard to additional business, additional orders, we do believe when all the funding situations are finally resolved.
With regard to the congressional action. There are opportunities for new awards. We have several demand signals from our clients that we work diligently with our clients on. But again, we see our PIP tempo remaining high for the foreseeable future. And again, as the budget resolutions as it has, the budget situations I should say are resolved. The opportunity for new orders may may, in fact, arise.

Steven Sackel

Great to see you do that. And then maybe just 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 than what upside that has for the 24 guide as well.

Charles Prow

We have factored in a more muted award scenario for this year, as Sean indicated in his prepared remarks and 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 op tempo remains high. So I think balancing both new awards and on-contract growth agenda and the realistic. And then the realities, I should say of the current op tempo gives us confidence in the guide that we've that we've issued here today. I think you mentioned indoor Paycom to here are not there are not exercises named after sizes scheduled at this point in time. Because as we've indicated the past, those are done on on odd years. Having said that, we continue to see several demand signals and a higher degree of op tempo in their region. And we continue to provide where the modernized bases that were currently operating on, such as a quadrivalent and the Marshall Islands to pursuit Carew pretty quickly.

Steven Sackel

Thank you.

Operator

Sanjay Singh, Stifel.

Sanjay Singh

Good morning. I'm on for Bert. Are you going to do it? Well, I guess you've touched on it, but just to get some more color on it. Just curious about your view on MRO ramp life cycles. You sort of talk talked about pipeline, but what are you seeing in terms of new awards, how do you then see that impacting our normalized margins? And any color you could provide there would be helpful.

Shawn Mural

And as we talked last quarter, the F. five adversary award wasn't an important award and happens to be fixed price as well. It's still under protest. 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 the KC-10 and the <unk> and the T. one A., both of those are 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 in our portfolio of contracts. Okay. You asked, were there anything else to your question is there anything else that you wanted to add on? That was just the margin impact would be helpful.

Charles Prow

And then if I could add onto that, I guess thinking through maybe early days on Navy test, Wing Pacific and Atlantic, if you could touch there too curious, though, as John indicated, I mean we'll ramp through the year as the on the margins on the retiree programs are higher because there at the end of lifecycle and with such a large percentage of our backlog in the early stages and we're seeing the predictable ramp in the end, the profit margins post sale and into the into the base years. And frankly, we're thrilled at the rate and pace, but that's occurring. It's just again that 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 we're not talking to ourselves on this, as I'm sure you know, because you follow the industry very closely. The the development of pilots could be fully capable is a significant significant measurement. Our 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 and again, picking up the pace the rate and pace by which power that can be trained for.

Sanjay Singh

Thanks, Chuck. That's helpful on. And I guess following up on one of the questions that was asked on Endo Paycom and I was reading that the Pacific deterrence initiative should grow to about 14 bill and FY. 24, something around that. And just curious if you think there's upside to that if budgets are appropriate soon? And what do you think that could look like.

Charles Prow

I think the way to look at that is the performance that we posted in the second half of the year. The fact that we 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 attributable as to the the PDR, the Pacific deterrence initiative, again, the op tempo with high that budget is a reality because these are, in many cases new requirements. But again, kind of working through the the muted new award or what new award environment, but the ability to grow on contract, it's a good balanced and again, a bit of a long-winded way of answering your question, but we remain very bullish and now on the on the growth in the and then the breakout region.

Sanjay Singh

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

Charles Prow

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

Sanjay Singh

Well, thank you and congrats on a great quarter, guys, and we'll talk to you next quarter again, thanks.

Operator

(Operator Instructions) It appears that there are no further questions at this time. I would now like to turn the floor back over to Chuck Prow for closing comments.

Charles Prow

So thank you very much, and thank you all for your questions of. 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 if Kiala conferences here the not-too-distant future. Talk you soon. Bye.

Operator

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