Q1 2020 Earnings Call

Greetings welcome to the V. S. C Corporation first quarter 2020 results conference call at this time off just what sort of listen only mode.

If anyone should be car operate assistance during the conference. Please press star zero on your telephone keypad.

At this time I'll now turn the call over to Elizabeth Huggins, corporate Vice President of strategy and Chief of staff you may now be it. Thank you Hello, and welcome to be asked me Corporation's first quarter 2020 results conference call.

During the call today, our president and CEO, John Cuomo, and Chief Financial Officer, Tom loved it.

Thank you in advance for bearing with US if we make this call all from remote working locations and for your patience with any delays we've experienced in the transition thank you and <unk>.

Financial performance and strategic overview presentation. We're sharing today is on our website and I encourage you to follow along accordingly.

Please note that during the first quarter 2020 of the company renamed its reporting segments to reflect the strategic focus of each business moving forward.

The Aviation group was renamed Aviation segment, the supply chain Management group was renamed we segment and the Federal services group was renamed Federal and Defense segment.

Today's discussion contains forward looking statements about future business and financial expectations.

Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SBC, 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 will hurt a year over year progress except as noted.

At the conclusion of our prepared remarks, we will open for questions. Please email your questions to question DSP Corp. Dot com and we will answer as many as possible. During the allotted time again, that's question I'd be a C Corp, dot com with that I would like to turn the call over to John Coleman for his prepared remarks. Thank.

Thank you Elizabeth welcome everyone and thank you for taking the time to join our call today, we will begin by providing an overview of our recent results.

Including an update on our cobot 19 mitigation strategy.

Tom Loftus, our CFO will then provide a detailed update on our financial performance.

I will that introduce our new corporate strategy a framework that we believe positions our company for a long term profitable growth as Elizabeth noted, we will conclude with a question and answer session.

We will begin on slide three other conference call presentation.

The if you reported strong first quarter results highlighted by year over year growth in revenue margin capture and profitability.

Total revenue increased 4.4% year over year, ending the quarter at $177.4 million.

Our total adjusted net income increased 32% year over year to $9.8 million or 89 cents per adjusted diluted share.

Adjusted net income excludes the $6.5 million or 59 cents per share of nonrecurring items related to the sale of prime turban sell the property and performance earn out related to our first choice acquisition.

We ended the quarter would total adjusted EBITDA at $22.7 million up 15.4% year over year.

Despite the market challenges, resulting from Kogut 19, we expect to be both profitable and free cash flow positive for the full year 2020.

At the end of Q1, we had $176 million in cash and liquidity and total net debt of 273 million or 2.9 times trailing 12 month adjusted EBITDA.

Before we discuss our first quarter financial and operational performance in more detail I'd like to share. The recent action taken by our management team in response to the Cobot 19 pandemic.

Turning to slide four.

During this global health crisis, the health and safety of our employees remains our top priority.

Our team has adapted to ensure business continuity and operational readiness at our facilities.

All of our operations are considered critical in a central services and our operational facilities remain open for business.

To date, we experienced very limited disruption to operations or to our supply chain.

We are regularly monitoring this specific needs of each of our business segments and responding accordingly.

We have implemented remote working everywhere feasible created social dusted thing adhere to personal protective equipment guideline and changed our work ships as we continue to follow the guidance that federal state and local health authority.

In spite of cold at 19, we anticipate customer demand to remain relatively stable within our fleet and federal <unk> defense side.

That said, we already see you get decline and the bad for aviation products and services reflective of the decrease in global Air travel.

As you see on page four we have taken decisive action to reduce costs throughout the organization.

Importantly, most of these reductions have targeted our aviation segment.

Given expectations for continued weakening demand for aftermarket parts and tomorrow services for the remainder of 2020.

In April we implemented a reduction in force and broad based cuts and discretionary spending resulting in annualized cost savings of approximately $13 million.

We expect to realize partial benefit from these reductions beginning in the second quarter with a full benefit aboard than 3 million quarterly beginning in Q3 2020.

Along with our recent reductions in cost we have also taken steps to reduce inventory and capital expenditures, while continuing to reduce working capital requirements.

As previously announced Paul go Freddie President of the Aviation segment will leave the company I made first effective today I will step in as interim president of that segment.

This is a business I know well given my nearly two decades as a senior leader of a publicly traded aerospace company.

As we will highlight later on the call. We believe aviation remains a significant area of opportunity for VFD.

One that we expect will become a core growth engine for the business in years to comp.

I am supported by a deep bench of experience executives, who understand both the near term challenges and the longer term opportunities for our business.

As we look to the remainder of 2020, both our federal one defense and fleet segments, which represent approximately 70% of trailing 12 month revenue are expected to provide a stable base of business that should offset near term softness in the aviation segment performance.

These businesses serve a combination of federal and military agencies and heavy duty cycle commercial trucking customers all of whom represented a steady book of business for VIP to that end within the last 30 days, we've announced more than $116 million in contracts and awards with customers in both segments, which will contribute to result bigger.

Getting in Q2 2020.

Although our aviation segment achieved significant market share gains in the first quarter. We anticipate the performance of this segment to be adversely impacted for the balance of the year.

Bookings and inputs have declined since March and we do not anticipate a recovery in 2020.

That said, even though we are a market leader in terms of performance in quality. We currently own a very small piece of a very large market.

Looking ahead, we see the opportunity to grow our global market share within both aviation product distribution and repair.

That I turn the call over to our CFO, Tom Love to discuss our first quarter financial performance Tom.

Thanks, John.

Turning to slide five our first quarter revenue grew 4.4% year over year, primarily driven by organic growth in our aviation and fleet segments.

For the trailing 12 months, our revenue was up $70 million or 10%.

Illustrated on slide six and seven.

Our total adjusted EBITDA was 22.7 million up 15.4% in Q1 2020 compared to the same period of 2019.

And our trailing 12 month, adjusted EBITDA was $94 million up 17%.

Driven by growth from aviation and improved profit margins and our federal and defense segment.

No I will discuss each of our three operating segments, starting with slide eight.

Maybe Asian segment revenue increased 18% to $58 million in the first quarter of 2020 through balanced contribution from both our distribution product sales and MRO services.

Excluding noncash or nonrecurring costs related to the sale of crime turbine and other assets aviation operating income increased 49% to 4.5 million in Q1, well the aviation segment adjusted EBITDA increased 21% to 7.6 million.

The year over year increase in the first quarter adjusted EBITDA was attributable to organic revenue growth in both the aviation distribution and repair entities.

Turning to slide nine.

Revenue for our fleet segment increased 3% to 53.2 million in the first quarter of 2020, well operating income.

Decreased 1% to 6.9 million.

This segment continues to successfully execute on its customer diversification strategy with commercial revenue growing $4.8 million or 122% into first quarter on a year over year basis.

Fleet segment, EBITDA decreased 2% and Q1 2020 to 9.6 million. The decrease in operating income in EBITDA was primarily attributable to lower margin customer and product mix and investment associated with the expansion of our commercial portfolio.

Slide 10.

Our federal and defense segment revenue declined 4% year over year to $66 million in Q1, 2020, but our operating income increased 45% of 4.9 million.

EBITDA for this segment increased 34% in the first quarter to 5.7 million.

The increase in operating income and EBITDA in the period resulted from improved performance on existing contracts and an increase in fixed price work for our government clients.

In the first quarter total federal and defense segment bookings increased 31% year over year to $67 million, while total funded backlog declined 28% year over year to 201 million.

The decline in funded backlog was attributable to the expiration of a large army contract in January.

For the quarter, our book to Bill ratio was 1.0.

The new segment, President and business development team are already revitalizing does business with an emphasis on growing backlog and developing a channel of new customer activity in the current year.

There has been good progress in the first quarter, including our recent announcement of approximately $90 million an award on contract and delivery orders for the department of defense.

Turning to slide 11.

As of March 31st 2020, we had $176 million in cash and unused commitment available under our 350 million dollar revolving credit facility that matures in January 2023.

Our existing credit facility includes $100 million of accordion provision.

We ended the quarter with total net debt outstanding of 273 million and 94 million of trailing 12 month adjusted EBITDA.

As John highlighted earlier, despite the current economic environment, we remain highly focused on liquidity conservation and debt reduction for 2020, we finished Q1 strong by paying down our debt by $30 million in March 2020.

With that I'll turn it back over to John.

Thank you Tom I.

As I complete my first year, leaving this organization I want to spend the remainder of today talking about our business strategy.

You can follow along beginning on slide 17.

Do you see is 60 year old aftermarket business with proven past performance and service excellence.

Our new strategy will seek to take the core of that service excellence and expand on it with unique differentiated value proposition capable of driving above market growth and returns and each of our segment.

Turning to slide 18, we report and operate under three business segments Aviation, which includes park distribution and MRO services fleet, which includes part distribution and supply chain management services, and federal and defense, which provides logistics and Sustainment services along with EM.

Pro services, and I T and energy consulting.

All of our business segments support aftermarket activity and our associated with supporting customers with extending the life of their critical aging transportation assets.

We have a strong balance of stable multiyear government contracts and long term customer relationships, representing approximately two thirds of revenue.

Balanced with higher growth potential commercial customers.

Turning now to slide 19.

Yes, the offers a unique value proposition the market first we are pure play independent aftermarket provider of parts and services that is important because our singular focus the supporting our customers and suppliers, our attention and resources and capital are not diverted to other strategies for example.

As a core manufacturing company maybe.

Second we are specialist not generalists.

We have highly technical teams to support all the transportation assets, we help sustain and parts and repair capabilities we provide.

We further specialize in end of life assets, which provide higher margin opportunities.

Third we have created business units that are agile lean in empowered to quickly support both customers and suppliers with industry, leading service and bespoke offering.

Turning to slide 20.

A key component of our strategy and growth comes from organic activity.

Previously this organic growth will be driven by the following.

Increased market penetration of our current offerings to new customers, specifically, a new region.

Product and service expansion with existing customers.

Targeted new product addition to our distribution portfolios.

And expanding our repair logistics and capabilities service offerings.

We will speak about inorganic growth at a later date for now it's important to highlight how we will migrate from the historic practice of acquiring portfolio companies to a model of focused disciplined acquisition strategy targeting product customer service or geographic expansion.

Full integration into existing business segment.

And a financially accretive approach in process.

Turning to slide 21 to through 23, which will include the deep dive on both strategic and tactical element for each segment.

Do you see aviation provides MRO services and parts distribution supply chain services component engine accessory repair services and Rotable to the global aftermarket aviation customer base.

Our aviation segment brings a unique value proposition through independent aftermarket repair and distribution, which allows for greater agility without compromising capacity quality or support.

Our distribution product offerings represent the strongest OEM partners in the market our repair capabilities ranged from low technical interior repair two highly technical and you an accessory repair with a full range of component repair capabilities in between.

Through this segment's recovery and beyond our growth will come from surface expansion through the addition of new at MRO capabilities.

Distribution product expansion through the addition of new OEM in commodity product offering.

And market expansion through targeting new international on defense customers.

Turning now to slides 24 through 26.

Our fleet segment through our Wheeler brothers subsidiary provides parts inventory management ecommerce fulfillment logistics supply chain support and other services to support commercial and aftermarket truck fleet. The U.S. postal service and the U.S. Department of defense.

We live is uniquely positioned to provide stocking distribution services proprietary technology solution and just in time part delivery to a wide range of high duty cycle and vocational vehicle and fleet owners.

Wheeler offers high margin private label parts and utilizes the technical expertise of in House Engineers for reverse engineering design analysis short run production and testing.

While this segment continues to progress on its customer diversification strategy with strong commercial growth. We continue to maintain high service excellence with our government customers and remain prepare to support these customers every way possible to ensure their success.

Our growth for this segment will come from expansion of our just in time inventory management solutions and E Commerce fulfillment.

For new commercial customers.

Product line expansion, including expansion of our own private label products.

And focused on U.S. geographic expansion as our commercial distribution is highly regionalized today.

This segment continues to successfully execute on its customer diversification strategy for example, and the full year 2019, and first quarter 2020 commercial customer revenue increased approximately 20% and 50% respectively supported by increased activity with E commerce and commercial parts distribution costs.

Yes.

In 2020, you will see us refresh our brand identity for this business as we target clearly segmented commercial markets with our renewed value proposition.

Turning now to slide 27 through 29.

Our federal and defense segment provides aftermarket maintenance repair and overhaul am or MRO and logistics services to improve operational readiness and extend the lifecycle of military vehicles ships and aircraft for the U.S. armed forces federal agencies and international Defense customers. We also provide both <unk>.

T and energy consulting services.

This segment brings more than 60 years of proven past performance and program execution across Lanci, an EHR platforms.

We offered deepest subject matter in tech technical experience and legacy transportation assets.

This year, we're focusing on broadening our offerings and customer base.

We're focused on building our backlog, while improving our contract mix and balancing our traditional cost plus contracts with higher margin fixed price contracts.

Our two consulting businesses within this segment energy and IP services are focused on aggressive organic growth.

In closing the remains a stable investment opportunity in an otherwise volatile market.

Our diversified revenue mix includes stable long term government contracts and higher growth potential commercial customers that coupled with our strong balance sheet and ability to generate positive free cash flow in the current year will help us to whether the current environment.

Despite the market challenges, we expect to be both profitable and free cash flow positive for the full year 2020.

This strong foundation together with the opportunity is outlined today positioned us for profitable growth in the years ahead.

Operator, we're now ready to the question and answer portion of our call.

Thank you I'll now turn the call over to lose a tuck ins for today's <unk> session.

Okay.

Thank you so ever see several questions about the Kogan 19, let's start there for each segment could you provide an overview of the coven 19 and talk to you currently see in each segment what part of your work is considered essential and what isn't.

Thanks, Elizabeth I'm first all of our business units are operating more consulting businesses are fully remote unless they're on citing a customer our base operations repair and distribution businesses have not experienced any downtime and we continue to support our customers. What do you know, we're not going to give guidance Nonetheless by segment, but I'll go.

If you a little color on each of the business segments first let's talk a little bit about federal and defense. This was a plan transformational year for us with both new leadership and a focus on rebuilding our brand business development backlog and future pipeline.

Business is relatively stable, but most importantly, the performance is exceeding our internal expectations. You know, we announced a business wins this quarter and we anticipate continuing to announce new business went throughout the year.

Our fleet business, our Wheeler brothers subsidiary, our de Odeon U.S.P. <unk> U.S.P.S. business are steady as expected I'm also you know we did announce a onetime opportunity this quarter to support one of our customers through this crisis, our organic commercial customers you know their growth is expected to continue in 22.

20, we had a strong Q1.

We do expect Q2 to be little softer, but most of our customers like our threepl truck providers utility customers sanitation customers and alike are all performing quite well and we do expect a full rebound by the third quarter.

Aviation is clearly the don't impact you know airlines around the world of grounded fleets.

Suspended root sense like our business is directly our commercial business I should say is directly correlated to revenue passenger miles, but we also have a significant amount of business in general aviation customers.

Since we support these customers and can't create demand our opportunity is really about market share gains. When you look at Q1, we organically grew that business, 18%. So we're heading into this downturn, having both grown capabilities and our repair business and taking share and added new products and our distribution businesses to help mitigate what will definitely be.

And unavoidable decline.

Thank you. John next question have you encountered any material part shortages within your supply chain do you have sufficient inventories on hand.

Yes, I mean first the answer is no there's been no material part shortages and yes, we have sufficient inventory on hand, you know as always there's a few minor parts that were closely managing we are stocking distributor with industry, leading planning organizations are we did procure additional product and we were pretty proactive at the beginning of year to get ahead of any supply chains concerns. So.

We do not see supply chain issues or any product shortages impacting our operations going forward.

With regard to the $13 million or so in cost reductions that you mentioned can you help us understand a the types of cost reductions and de where most of the cuts landed by segments.

Yeah, Tom why don't you a jump in an answer this question for US Okay sure John.

Of the 13 million an annualized cost reductions. Unfortunately, most of the reductions came from our existing workforce about 65%.

The rest was from travel consultants and other incentive compensation reductions.

Part two of that question.

Our aviation segment was impacted the most with about half of the workforce reductions coming from that segment.

Our other two segments were also impacted as well as the corporate team.

We will start to realize the benefits of these reductions in Q2.

Thanks, Tom.

Okay, how do your government facing businesses perform in the next 12 months do you anticipate additional contract when similar to the ones that you recently, so I know you touched on this John but if you care to elaborate.

Yeah, I mean, you know we talked about this year being a year rebuilding but I can tell you it will be a year of not only the progress but definitely result.

Quarter or the New awards, we announced had 31% a year over year bookings with those does new business awards and although revenues declined about 4% operating earnings were up about 45%. So the mix and is really supporting you know a strong profitable year for us we support large.

Enable an army logistics and repair program. That's the majority of our business on the federal defense side, what you'll see in 2020 as us growing some capabilities, including more defense aircraft maintenance programs I'm really proud of the progress.

That the team is having and look forward to sharing more details throughout the year and announcing more awards as well.

Okay quite a few questions about the aviation segment, so I will try to good these short together.

John assumptions leadership of the aviation segment could you expand on his experience in the previous downturns and how the ethylene might take advantage of any dislocation.

Oh sure I mean, I was with an aviation distribution business for about 18 years. So I went through both the 911 and 2008 financial in aviation downturn, so I've experienced than kind of the two sides of what you need to do here, which.

Managing a capital requirements and adjustments as needed to support the business and.

Supporting strong balance sheet through these times as well as the vision on how to execute strategic initiatives. So we exit the downturn much stronger than our peers. You know we highlighted today in our strategy presentation, you know the key.

Areas of growth for our aviation business, we haven't adjusted that presentation or that strategy based on cobot 19. So we feel very grounded in our strike was it the principles of our strategy and look forward to aggressively focusing on executing that even through this downturn.

Okay can you talk about how you're aviation segment is exposed to the current airline fleet and if we do see broad based retirements of older planes, how that may impact your growth.

Sure I mean, our repair business is or.

Our component repair business I should say supports mostly commercial aviation our engine accessory repair business supports mostly business in general aviation our commercial aviation exposure. You know, we do have a significant amount of cargo business, which is obviously performing quite well for us right now.

And we do support all of the new platforms. So we know we are watching you know as everybody else is the the retirement of the fleet, we don't anticipate that having a negative impact on our business or we just see the total revenue passenger miles trends really are driving the impact on the business.

Okay.

Aviation again as the airlines grapple with these cost pressures do you believe they will outsource more work to independent Mros in an effort to further cut costs or lean out their cost structure.

Yeah, I think there's two reasons that you know the independent Mros will perform well I think number one is yes. They will look for opportunities on how to leaner cost structure and and independent Mros traditionally are able to do that in a more competitive.

And it can way than their internal shops. The second thing I think that is important to highlight is the technical talent that the industry doesn't want to lose.

So I think you're going to see both from the Oems as well as the aftermarket.

That you know did the desire to keep independent team is both supporting stocking distribution as well as technical repair is critical and important for the industry and I believe our airline and aftermarket partners will continue to support us to make sure that that were around that as well as our competitors in the future.

Right.

Okay and aviation again compared to your peers you are in a unique position with the aviation segment, where they're all pretty much a 100% in aviation and for you. It's obviously less than a third of revenue do you see ways to use the situation for your advantage to grow market share when others aren't retrenching.

I mean, the answer is yes, but first I just want to may be clear, although we're not giving guidance I don't want to diminish the unprecedented industry decline and the impossible hub on our business I mean airlines are reducing capacity between 70, 90% everyone will feel field, both near and a kind of long term midterm I should say impact.

That said, we do see if you opportunities in front of US not only are we well diversified with our military and truck fleet aftermarket customers, but we're also you know as I mentioned earlier pure play aftermarket business.

In recent years, many Oems and others have entered what was at that time, a robust aftermarket opportunity we see many of those businesses.

On a contracting to focus on their core while aftermarket is our core in the near term I would say distribution represents the most and the greatest opportunities for near term market share gains.

I don't being kind of qualitative today and the conversations we will share these wins and be more qualitative or quantitative I should say in the future. You know I mentioned on our last earnings call. Our first earnings call that we'll have a renewed focus on investor transparency and you'll see some more of that both and how we communicate going forward, but also as we file our 10-Q this.

Week, you will see a little bit more detail on both our our distribution and our repair businesses. So you can see how they'll perform separately throughout this market downturn.

Okay I'm not entirely sure. If this question is segment specific I will ask in general terms. What are you seen in the month of April in terms of MRO and parts demand should we think of revenues tracking down whats capacity do you have any repair work currently in your facilities that may provide some buffer.

Yeah, but I'll answer it in terms of all the segments, we're not seeing any impact on and the MRO activity in our federal and defense business. Our fleet business doesn't do any repair that's the supply chain, you know parts distribution and logistics business in aviation when you look at revenue passenger miles on the commercial side roughly in the month of eight.

Overall, we're seeing our business declined by about half of that so we do have significant backlog and again, we also entered into that market.

With an 18% organic growth. So we believe that will you know that we know where performing better than the market today. It remains to be seen how long that will continue but we do have you know a good pipeline, we're still winning new business.

Obviously, the you know the work and significantly impacted but right now our business is tracking better than revenue passenger miles at this time.

Okay. Thanks, John this is about our fleet.

In recent quarters, we know Wheeler has grown its non U.S. postal service business, which represents approximately 20% of segment revenue help us understand the opportunity around the commercial customer expansion and the margin profile of this business.

Sure I'm you know, we're highly focused as we mentioned last quarter on our fleets I had been customer diversification strategy and penetration into this commercial market, we have such a great distribution business as a stocking distributor great proprietary systems in terms of our just in time technology and great E Commerce fulfillment.

Opportunities. So we're investing in that organic growth opportunity and very pleased with the strong margin in inventory turn profile of this new market for our Wheeler brothers subsidiary. It is slightly dilutive to our legacy business margins specifically as we entered this market and we are investing more in headcount and other investments to supply.

For the the initial organic growth that said, it's a multibillion dollar market, which we have a very very small share. We do see this as a profitable you know.

And cash generating growth engine for the segment.

It's hard not being next deal has been.

Yes, so I thought I think we're getting great [laughter] on let's talk to catch up on the cash flow outlook to be positive for the year, what does the quarterly cadence of cash flow look like.

Tom you want to take us one Oh, yes.

Well, we expect to be cash positive for the year the timing between quarters, sometimes is impacted by certain transactions.

For example, like second quarter, our cash flow might be impacted by the timing of our recently.

Announced 26 million dollar award.

But that will be collected in early Q to Q3, if it's not collected.

At the end of Q2.

Perfect. Thank you.

What are the foremost strategic priorities for BSC under your leadership John over the next 12 to 24 months, where you allocating capital and resources to grow the business.

Well I mean, I highlighted a strategic plan today and I know, we kind of went through that.

Pretty quickly as we were reporting to the results as well, but we'll continue to be transparent and share more details with it each quarter and talk about the progress on that plan as we go through a quarterly results.

But when I started with the at the year ago. The first thing I notice that the company's outstanding program a customer execution company did the near term focus has been on how do we take those core competencies and organically grow them through three different ways versus pure market share gains, which it's from new customers and that's for all of our business segment. So it's really a renewed effort.

It really targeted business development to sell what is unique about what we do in our business to a two new customers. Our current capabilities. The second thing is you know about that capability expansion. So if you look at.

What we did what we offer in the federal and defense space again, you'll see us enter more into that military aftermarket aviation aftermarket repair in our aviation business, you'll see us expand our core component repair capabilities. So you'll see us consistently focus on maybe some ecommerce system expansion and the.

Like so really how do we take our service offering and focus on some core capability development there.

Some of that will require some capital as well and last but certainly not leases new products. So this is you know a customer recall its share of wallet gain how much. They are spending on either commoditize are proprietary product that fall within you know our market basket of products that we don't sell today. So how are we going to attack that market.

And and add additional products bowl sole sourced proprietary product through new OEM partnerships.

As well as high margin and fast turning kind of Commoditized products, we feel a relevant for our portfolio's. So in addition, our fleet business you know we have our private label product growth as well so although we're reducing capital spending we will continue to allocate capital to support the future whether their products or requirements to support new service.

Yes.

Okay, John Tom that concludes that we have time for today.

Okay. Thank you Elizabeth and thank you everybody I'm you know we remain available by phone and look forward to conferences in person meetings in the future with that thanks for your time today and your continued support and interest in VNC.

They say if everybody. Thank you.

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