Q4 2019 Earnings Call
Greetings and welcome to the V. S. C Corporation fourth quarter 2019 earnings Conference call. At this time all participants are they listen only mode brief question and answer session will follow the fall presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone Keypad. As reminder, this conference is being worked.
It's now my pleasure to introduce your host Christine <unk> head of Investor Relations. Thank you you may begin.
Hello, and welcome to be a C Corporation fourth quarter and full year 2019 results conference call, leading the call today, our president and CEO, John Cuomo, and Tom Loftus, Our Chief Financial Officer.
Today's discussion contain forward looking statements about future business and financial expectations.
Actual results may differ significantly from those projected in todays forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the FCC.
Except as required by law, we undertake no obligation to update our forward looking statements.
We are using non-GAAP financial measures in our presentation the appropriate GAAP financial reconciliations are incorporated into our presentation, where available which is posted on our website.
All percentages in today's discussion refer to year over year progress except as noted.
At the conclusion of our prepared remarks, we will open up the call for questions.
Please email your questions two questions at the S. E C O Rps Dotcom. That's question <unk> V. S. E C O RP dot com and we will answer as many as possible during the allotted time.
With that I would like to turn the call over to John Cuomo for his prepared remarks. Thank.
Thank you Christine welcome everyone and thank you for taking the time to join our fourth quarter earnings call.
We will begin with an overview of our business in operating segments, followed by a summary of our 2019 financial.
Tom will provide more detail on our fourth quarter and fiscal year 2019 financial performance and.
And I will finish our Paul with additional detail on our operating segments and an overview of our strategy for 2020 before turning the call back your Christine to tell facilitate our question and answer session.
As this is the first ever quarterly earnings call on the company's history I'd like to take a moment to introduce myself, while providing a high level overview of our company and operating segment.
I joined DSE as CEO, just over nine months ago, having previously led a division of public Aerospace and defense company.
Under my leadership, they see intends to take a more active role in engaging with our key stakeholders, including our institutional investors and the broader analyst community.
Consistent with his mandate you can expect to see increase transparency and consistency in our public communications going forward.
With that let's turn to slide three of the Investor presentation.
At its core DSE as a global aftermarket provider of distribution repair and consulting services for land Sea and air transportation assets.
We report and operate under three business segments.
Our aviation group, our supply chain management group and our federal services group.
Our aviation group provides component and engine accessory repair parts supply and distribution and supply chain solutions.
For global aftermarket commercial and business in general aviation customers.
Aviation represented 30% of 2019 revenue.
Our supply chain management group provides parts supply inventory management ecommerce fulfillment logistics data management and other services to support the U.S. Postal service, United States Department of Defense and commercial aftermarket hi duty cycle trucking fleet customers.
Supply chain management group represented 28% of 2019 revenue.
Our federal services group, which represented 42% of 2019 revenue provides aftermarket refurbishment services to extended maintain the lifecycle a military vehicles.
Ships and aircraft for the U.S. armed forces federal agencies, and international military and defense customers as well as provides energy consulting services health care I T and IP data solution.
Early in my tenure as CEO, our objective has been to refocus each of the business groups on improved operational performance market differentiation and targeted business development, all while investing in each business to establish a clear value proposition and from foothold within our served markets.
Looking ahead, the collective focus of our leadership team, it's a generate above market revenue growth in total returns over the long term.
Turning to slide four.
Our financial performance reflects stable year over year growth in revenue margin capture and profitability.
Our revenue for 2019 was 752.6 million approximately 8% over 2018.
We ended the year with net income at 37 million up 5.5% year over year and our diluted EPS was $3 in 35 cents per share, which was a 4.4% increase over 2018.
For the fourth quarter, our revenue was 195 million up approximately 8% compared to the same period of 2018.
We recorded net income of $10 million up 8% compared to the fourth quarter of 2080.
Finally, we ended the fourth quarter with diluted EPS of 90 cents per share up 7% as compared to the same period of 2018.
Well go into more detail on our operating segments. Shortly but you can find a general overview of the segment performance on slide five.
I'll now turn the call over to our CFO, Tom office to discuss our 2019 financial performance.
Thanks, John welcome everyone on the call today.
Turning to slide six seven and eight.
Our business generated stable revenue and operating income growth for the fourth quarter as compared to the fourth quarter of 2018.
Revenue grew approximately 8% in the period, driven by both organic and inorganic growth and our aviation group.
For the quarter, our total adjusted EBITDA was $23 million up approximately 16% compared to the same period of 2018.
Driven by contract mix and our Federal service group.
For the full year, we had an increase of 8%.
Primarily driven by the Aviation group, which are just previously mentioned aviation group was up 54% year over year, partially offset by a decline of 7% and our federal services group.
Our supply chain management group was essentially flat year over year.
Our adjusted EBITDA margin improved 90 basis points year over year to 12.1% to 29 team.
Now I will give a little more detail on each of our three operating segments, starting with slide 10.
Maybe Asian group revenue increased 42% year over year to $61 million in Q4 of 19.
Well full year 2019 revenue increased 54% to 224.5 million.
After adjusting for the increase.
And the earn out obligations of $1.9 million in the fourth quarter of 19 related to the success of our first choice acquisition operating income increased 1.2 million.
Or 32% and the full year operating income increased 62% to 17.9 million.
Aviation group EBITDA declined 3% year over year into fourth quarter, the 5.8 million due to product and customer mix well full year 29, teen EBITDA increased 53% to 30.3 million.
The year over year increase and full year 2019 operating income was attributable to a combination of contributions resulting from our first choice acquisition closed in January 2019.
Together with organic growth in our global aviation distribution business.
This week, we closed the divestiture of our prime turbines subsidiary in Texas.
Moved that is expected to position us to focus on higher growth aftermarket component and accessory repair and parts distribution opportunities to serve the global commercial and general aviation market.
Turning to slide 11 and 12.
Supply chain management group revenue increased 2%.
Year over year to 53.6 million in Q4 of 19, well the full year 2019 group revenue was essentially flat at 214.5 million.
Operating income increased 5% year over year to 7.4 million in Q4 2019, while full year 2019 operating income declined.
3% to approximately $30 million.
Supply chain management, EBITDA increased 2% year over year in Q4, two approximately $10 million.
Full year 29, teen EBITDA declined 3% to approximately 41 million.
The decrease and the full year 2019 operating income was mainly attributable to a class a decline in demand related to the U.S. postal service.
This group continues to focus on diversification beyond the U.S. Postal service managed inventory program with non U.S.P.S.
Group revenue growing nearly 20% as John mentioned earlier on a year over year basis in 2019.
Supported by increased activity and E commerce and commercial parts distribution.
Turning to slide 13.
Our federal services group revenue declined 5% year over year to 80.6 million in Q4 of 29 team well full year 2019 group revenue declined 7% year over year to 313.6 million.
Operating income increased 47% year over year to 5.2 million in Q4 of 19, while full year 2019 operating income increased 15% to 18.1 million.
Federal services group EBITDA increased 28% year over year, and Q4 to <unk> approximately $6 million, while the full year 29, teen EBITDA increased 5% to approximately $21 million.
The year over year increase in operating income for the fourth quarter and a full year 2019 was related to improve sales mix, resulting from more fixed price work with government agencies.
In 2019 Federal services group bookings declined 29% year over year to 228 million well funded backlog declined 27% year over year to 213 million.
The decline in bookings unfunded backlog was attributable to a combination of minimal new business development activities together with the loss of a contract.
As John will cover shortly.
We are actively engaged in building both bookings and backlog in this segment through new business development initiatives.
We recently hired a new group President who is highly focused on adding BD staff and revitalizing this business with an emphasis on developing the pipeline and customer activity in the near term.
Turning to slide 14.
At December 30, Onest 29 team.
We had net debt of approximately 270 million and trailing 12 month, adjusted EBITDA of $91 million, implying a net leverage ratio of 2.9.
That leverage has now declined for the fourth consecutive quarter.
Following the completion of the first choice acquisition in January 2019.
In December we announced an amended loan agreement with our bank group under the terms of the amended agreement our bank group increased total availability on the company's term loan and revolving credit facility by a combined hundred million dollars.
Following the close of the transaction.
Total committed capital under the amended loan agreement increased from 373 million.
To 473 million.
At year end.
We had a total cash and unused commitment on our credit facility of nearly 200 million.
With that I'll turn it back over to John for his closing remarks.
Thank you Tom turning now to slide 15, and 16 2020 will be a transformational year for VIP.
We are focused on creating a lean corporate structure to support each business group, we're refocusing each business unit strategy to provide sustainable and differentiated value proposition and their respective markets.
We are investing in each business group, including business development in order to support the execution of our strategies and to generate above market organic growth and returns and 2021 and beyond.
We are focused on increasing free cash flow to both pay down debt and support strategic investments in growth.
In addition to our investments in organic growth, we will consider inorganic growth opportunities for each business.
Our acquisition strategy will be different than what you've seen in the previously.
We will no longer look to add portfolio companies to our business.
You can expect to see us deploy a disciplined approach to M&A focusing on bolt on accretive transactions that seek to expand our customer base, our product offerings, our service capabilities or geographic presence within the existing business groups.
As it relates to our go forward strategy I intend to provide greater detail during our first quarter earnings call.
However, I will touch on a few high level points today.
Our federal services groups revenue in backlog decline is from an under developed business channel.
This year, you'll see us be more intentional as we allocate resources toward growing this business.
We will seek to build backlog, while focusing on a combination of traditional cost plus contracts balance with higher margin fixed price contracts.
As Tom mentioned, we have a new group President Rob more onboard for about 100 days, Rob has made significant organization changes renewed the teams focused on pipeline growth in business development, and we're already seeing progress and wins.
With regard to our supply chain management group and 2019, we grew non U.S. postal service revenue by approximately 20%.
And we will continue to focus on diversifying our customer concentration in 2020 with incremental revenue growth in the commercial space.
And our aviation group, we grew our business, 54% in 2019, or 11% organically and anticipate continuing to outgrow our markets organically in 2020, while staying highly focused on quality component and engine accessory repair and aftermarket distribution services.
I'm very pleased with the overall performance for 2019 and look forward to sharing more granularity on our strategy with you on our first quarter 2020 call.
I'm excited about the future of via the and the significant opportunity that we have for value creation for our customers suppliers employees and shareholders.
Operator, we're now ready for the question and answer portion of our call.
Thank you we will now begin our question and answer session. This caintic. Please go ahead.
Thank you as a reminder, please email questions to be assay at.
[laughter] questions at the assay Corpus Dotcom and the management team will answer them in the order their received we've received our first question.
Can you provide an update on the U.S. postal service fleet replacement impacting your supply chain grip and Newfleet requires far fewer parts and then older ones. So how do you see the impact on market share as the old fleet is replaced as the primary growth in this segment coming from commercial vehicle parts support.
Thank you Christine a few points a clarification before I actually answered. The question first there is no specific timing yet on the completion of the RFP process or on the fleet replacement vehicle further once the process is complete production needs to begin and then the U.S.P.S. is estimating about a timeline of seven.
Years for the rollout of the vehicle more importantly, I think it's important to highlight that when we talk about fleet replacement, we're only talking about the Ll. These which is the long light vehicle I'm, 40% of the U.S.P.S. fleet has already been replaced over the last number of years, you can see from our public filings the consistency of rather.
Do you in profit from our supply chain business over that time. So once these new vehicles are out of their warranty period. The parts supply through VNC continues finally, I encourage you to refer to slide 12 of our investor deck with regard to our commercial business growth and our successful customer diversification strategy to replace both.
Revenue and earnings from any decline in the U.S.P.S. business and you will hear much more about how we plan to accelerate this growth during our Q1 earnings and strategy rollout.
Yes.
In previous quarters, you used free cash flow to repay debt and invest in the midst Hari what sort of return on equity do you think you can get in the current <unk> current inventory investment what are the risks associated with us holding inventory longer than planned.
Thanks, Christine is a few questions kind of rolled into one here I'll first inventory turns our priority for the for the business I mean, I want to be very clear on that as the largest asset in our organization and although we're not giving free cash flow guidance on this call you will see free cash flow improvement in 2020 driving wishes.
Driven by better inventory management that said, where stocking distributor with a disciplined approach to investing in new growth programs to support our growing aftermarket business and the the fleet of aircraft I ran a large successful public distribution business for almost 20 years I'm confident our approach to both improved free cash flow and drive the correct inventory.
Stocking strategy to support our customers.
[noise] what impact do you anticipate the Corona virus, having on your business.
So at this point in time, we are obviously evaluating it just as most of the market is on a daily basis, we do not see an impact to our Q1 financials, our forecast or earnings.
We have a very small portion of our business that is customers that are in Asia Pacific region. Most of our supply for both our federal services business and our aviation business. Our domestic sources of supply that said as the issue continues to become more of a global issue. We will obviously continue to reevaluate.
Any impacts we think it may have to the business.
Okay.
We've seen several references to the success of your first choice Aerospace acquisition can you add more detail what did first choice at Cvs see from a strategic perspective, and what drove the revenue growth at first choice sure a little clarity on the business first a first choices in MRO business.
Essentially we repair high flow nomadic starters and valves.
Fuel electronics electromagnetic accessories avionics Chrissie.
And some cargo equipment as well so why first choice a first it fit our strategy and we look at strategy for M&A as well in this instance, its repair for aviation repair for accessories and components. The business was a market and is a market leader. It supports high margin growing aftermarket for predominantly the commercial aviation market.
2019, as you can see from our result was a great year.
Business exceeded both our deal forecast for both revenue and profit.
It it grew strong double digits and well over market from 2018, and the business has been recognized for both service and repair excellence by both.
Customers and other agencies that kind of rate. These repair shops were very pleased with the acquisition and how it fits into our future aviation strategy.
[laughter] with debt at around three times EBITDA could you talk about the reason behind expanding the debt facility by $100 million do you see us going over three times.
Hey, imbalance seat to balance sheet discipline remains a priority and will always be a priority for the business that said increasing the balance sheet Optionality is always a good thing for a growing business are currently we remain slightly below three times net leverage but for the REIT transaction, we would to considered increased temporarily increasing that leverage.
The long term objective to remain at about three times are below.
Okay. Thank you John.
That concludes.
Okay.
Oh, we have one last question can you tell us about the strategic rationale behind the sale of prime turbine.
Oh, Thanks, Christine Yeah, while I mentioned a minute ago about first choice and how will that business fit into our strategic focus area. The prime turbines business did not fit our strategic.
No.
Kind of criteria for the business the business was not a market leader it didn't meet our merch margin expectations and the engines, we service to our not in a high growth market you will see us again apply a more disciplined approach to M&A and organic growth to make sure things meet our investment criteria as we move forward.
Okay. Thank you I believe that concludes all of the questions that we have John would you like to say few closing remark you sure. Thank you Christine and thanks, everyone for taking the time to listen to the first ever via the Investor call and the overview of our strong Q4 and full year 2019 results I look forward to sharing the companies go forward strategy with you in late April.
So when we report our Q1 2020 earnings we've a very exciting and compelling vision for vs. These role and transportation aftermarket distribution and service as markets and I'm confident and excited about what's ahead. Thank you everybody.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.