Q2 2020 VSE Corp Earnings Call
The commercial sales during the second quarter, driven by strong growth in our ecommerce business and new fleet commercial customer additions.
Although our aviation segment has been impacted by a decline in air travel we've continued to take share through new business wins positioning us to perform better than our industry peers, despite near term softness in demand.
As we look to the second half of 2020, we are already seeing results from our business development efforts as evidenced by the recently announced distribution agreement with Honeywell.
We have already engaged in supporting our business in general aviation customers with products from that distribution agreement and the month of July.
Together with new business development. We also remain focused on Rightsizing, our business and cost structure with the current demand environment.
As disclosed last quarter, we expect to remove approximately $13 million an annualized cost mainly within the aviation segment by the end of the third quarter 2020.
We expect to realize approximately $6 million and cost benefit reductions in the back half of 2020 from these actions.
Further during the second quarter, we progressed with our plan to integrate our aviation business units and reduce our go to market entities from seven to two including market leading business units that serve both distribution and MRO services.
As part of this program, we consolidated work into centers of excellence and closed or in the per or in the process of exiting three facilities.
Consistent with our strategic focus on higher margin business with greater barriers to entry, we continued to rightsize, our asset portfolio, while divesting of noncore assets.
During the second quarter, we completed the sale of assets related to Ctr space, a provider of engine acquisition and leasing spare uninsurable part inventories importantly, we sold these assets for the full book value.
Looking ahead Aviations go to market strategy will concentrate on higher growth component in engine accessory MRO and parts distribution to support the commercial and business in general aviation markets.
Finally, we remain highly focused on maintaining balance sheet discipline, while continuing to pay our quarterly dividend and preserve capital to help fund high return growth opportunities.
Given the low capital intensity of our business, we consistently achieve high free cash flow conversion.
During the second quarter, we generated $14.9 million and free cash flow up from a negative 2.7 million in the prior year period.
This year over year growth and free cash flow generation resulted in more than $13 million and debt reduction during the quarter, bringing our net debt to the lowest level and nearly two years.
Moving to slide four.
The reported total revenue of $168.7 million down 10.8% year over year.
Revenue from core commercial customers is down 32% year over year to $40.2 million.
Primarily due to the softness in our aviation segment.
Revenue from our federal and defense customers was relatively flat down 1% year over year to 128.6 million for the quarter.
We ended the quarter with total adjusted net income of $6.6 million or 60 cents per adjusted diluted share.
And with total adjusted EBITDA of $17.2 million down 27.1% year over year.
For the business as a whole commercial customer revenue is recovering at a healthy rate versus June levels.
We currently anticipate sequential quarter over quarter growth in the aviation segment revenue and earnings during the third quarter of 2020 as compared to the second quarter.
We continue to make strong progress with respect to new business development wins across each of our reporting segment.
Positioning us to leverage share gains as an offset to what we expect will be a gradual multiyear recovery in the aviation aftermarket.
I'm pleased with our second quarter results, particularly given the macroeconomic challenges facing the aviation industry.
While we have significant work ahead of us we've repositioned the company has a leaner and more scalable business than it was 12 months ago.
Positioning us to win in higher margin markets over the long term.
We expect to be both profitable and free cash flow positive for the full year 2020.
With that I'll turn the call over to our CFO, Tom office to discuss our second quarter financial performance in more detail.
Thanks, John turning to slide five our second quarter revenue of 168.7 million decreased 10.8% year over year, primarily driven by decreases in our aviation and federal and defense segments.
For the trailing 12 months, our revenue was up 30.7 million or 4.3%.
As illustrated on slide six and seven.
Total adjusted EBITDA was 17.2 million down 27% year over year in Q2, and our trailing 12 month adjusted EBITDA was approximately $88 million up 5% year over year.
In the face of global pandemic, our aviation segment was adversely impacted by lower revenue passenger miles, which resulted in lower demand for aftermarket parts supply as well as MRO support.
Additionally, revenue from our federal and defense segment decreased due to the completion of a contract with the department of Defense in January 2020.
Our fleet segment benefited from $19.5 million of revenue from a nonrecurrent order for cobot related PE supplies from a government customer.
Despite the challenges we've experienced this quarter, we expect to be both adjusted net income and free cash flow positive for the full year 2020.
Now I will discuss each of the three operating segments, starting with slide eight.
Excluding the sale of Prime turbines aviation segment revenue declined 31% year over year to 32.2 million in the second quarter.
Our operating income decreased approximately 39.6 million for the second quarter of 2020 compared to the same period of for the prior year.
The primary components of the decrease were $33.7 million of noncash impairment charges of $678000 loss on the sale of Siti aerospace assets and a decline in revenue of prop and profits precipitated by the pandemic.
Adjusted EBITDA decreased to 1.2 million in the second quarter of 2020.
Turning to slide nine.
Revenue from our fleet segment increased 32.4% year over year to 71.2 million in the second quarter, while operating income decreased approximately 8% year over year to $7 million.
This segment continues to successfully execute on its customer diversification strategy with commercial revenue growing 3.4 million or 67% in the second quarter on a year over year basis.
Fleet segment's adjusted EBITDA decreased 7.7 million year over year in the second quarter to 9.6 million.
Revenues of $19.5 million from a nonrecurring p. order from a government customer had an adverse impact on margin.
Excluding the onetime order adjusted EBITDA margin was 18.6 for the quarter.
On slide 10.
Federal and defense segment revenue declined 18.7 year over year to 65.3 million in Q2, 2020, but operating income increased 33% year over year to 6.8 million.
Adjusted EBITDA for this segment increased 29% year over year in the second quarter to 7.5 million.
In the second quarter total federal and defense segment bookings decreased 37.5% year over year to 45 million.
While total funded backlog declined 36.4 year over year to 171 million.
The decline and funded backlog was attributable to the expiration of a large army contract in January and delays in new business Awards.
The company continues to focus on revitalizing this business with an emphasis on growing backlog and developing a channel of new customer activity in the current year.
The third quarter is off to a strong start with the recent announcement of $42 million and new bookings so far in July.
Turning to slide 11.
As of June Thirtyth, 2020, we had $184 million in cash and unused commitment available under our $350 million revolving credit facility that matures in January 2023.
Or existing credit facility includes 100 million dollar accordion provision.
We ended the quarter with total net debt outstanding as of 260 million and 88 million 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.
Lastly on June 29th we successfully amended our existing loan agreement with our Bank group.
Under the terms of the amended loan agreement. The amendment provides financial covenant flexibility, which will allow us to successfully operate through the current economic environment.
Importantly, these amendments are not required.
We made the decision to amend the agreement to ensure a healthy cushion and conservative approach to debt during these uncertain times.
With that I'll turn it back over to John.
Thank you Tom in closing I'd like to thank our investors that employees for their ongoing support of the SEC.
During periods of great uncertainty strong businesses find a way to capitalize on market inefficiencies, while creating new opportunities for profitable growth.
Against the market Adversities I'm proud of what the Vmc teams accomplished during the first half of this year.
We are well positioned to manage through challenging times with our balanced customer product and service portfolio solid vision for long term growth and a strong balance sheet.
We are confident in our ability to emerge from the current crisis, even stronger more profitable and better positioned in our markets.
Operator, we're now ready for the question and answer portion of our call.
Thank you at this time, who will be conducting a question answer session with you will have to ask question. Please press star one on your telephone keypad.
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Our first question comes on line of Michael Ciarmoli with Suntrust. Please proceed with your question.
Hey, good morning, guys Nice nice results here given the current operating environment.
John just on aviation you know maybe you can you give us.
An update on on what the trends sort of look like.
It seems like across the industry April may have been.
Benefited a little bit from a backlog of repair work what did you see into May and June and do you think back about sort of weekends before it gets better just.
Given the reduced flying hours and utilization of the fleet.
Thanks, Mike Let me break the alpine MRO and distribution. So if we look at our MRO. We know we definitely benefited from some backlog and our MRO businesses in April.
So we had a definitely a little bit of a benefit upfront there. So if I break that up a little further if you look at business in general Aviation MRO <unk> positions. There may in early June really represented a bottom for us, although we're really far from pre cobot revenue levels. He ended June and July recovery trends.
Appear to be hopefully for the commercial MRO.
Just as we have more backlog in April to start the decline, we do see that recovery coming a little slower.
What we were looking at kind of the bottom there being June July and we're starting to see inputs increase towards the end of July which will all bode for a stronger recovery in the month of August from our distribution business. You know we ever really short book to ship. So virtually all the revenue somewhat organic in that quarter. So for.
That business there was no benefit of drilled backlog in April.
And we are seeing.
On a consistent improvement in the month of June July and that business as well.
Got it and then even on their from like a if I were to look at an inventory standpoint inventory for you guys up sequentially.
On the distribution side I guess, specifically what are you seeing in sort of.
I just a product velocity you know out there in the marketplace. You know do you think theres going to be a lot of de stocking that happens you know for some of your customers across the.
You know commercial Bizjet General Aviation, you think it's going to be a little bit harder to use that inventory and converted to cash.
Okay. A couple of things first when it comes to the inventory we have on hand, we did do a significant amount of rescheduling in the quarter pushing isn't much work out into 2021 beyond as possible. Obviously, there's some with where the manufacturers that we have some commitments. So we did receive a significant amount of inventory in the quarter based on.
Trends that were trending much higher in Q1.
The good thing here in this business is that most of our inventory really very heavily OEM proprietary part centric and it's not.
Products that customers traditionally stock heavily so with that means as they're not sitting on a lot of inventory regardless of the trend and we should recover faster and have much less of the de stocking risks than many of our competitors or other suppliers out there.
Got it got it and then just shifting quickly to a federal you guys talked about the.
The new bookings the new wins here in July.
And it it sounded like you are getting out there more into the marketplace I think the numbers throughout your bidding activity was up 30% focusing on that pipeline what else you know aside from maybe blanketing the market with with more bidding activity you know what else is kind of helping you. When this business can you talk maybe about your.
Value proposition or what else is.
Attracting customers do you guys.
Yes. So if you know it's a business that as the former leadership really focused on creating this three segment aftermarket business. It's a business that that suffered a little bit with a lack of investment. So when we look at kind of the stays strategy over the next three years phase one was revitalizing the team we have.
Has tremendous core competency in technical engineering maintenance repair and overhaul and other type of capabilities inside the team and making sure that we were getting those capabilities out in the marketplace. So so so candidly the first phase of it was all about just taking that base operations working at the same.
Aimed at work and make sure we're bidding more to win more the second phase of it is now extending those value propositions, specifically, you'll see us focus over the next six to nine month on the supply chain capability and doing a much deeper dive we restructured that team in a quarter brought on a new leader in that team and you'll see us that'll be a core focus of bars on the maintenance.
Since Sustainment programs, we were traditionally more on kind of the army and the the naval vessel type work and we launched a you know a greater initiative to focus on that aircraft Sustainment work for Air Force that even for the other on forces that are flying aircraft and we just we had one when earlier in the year and that May.
Able program went live officially in the month of July in Jacksonville.
Got it perfect and then I know you're not going to get bought last one I know you're not going to give guidance you didn't talk kind of directionally about some of the the trends improving as you're exiting the year or anything else. You can give us you know from a revenue standpoint, obviously I am assuming suites are going to have the fall off of you know the onetime.
Order, but any other color maybe you could provide on.
Secure for Fourq, you from a growth or even profitability perspective.
I mean, you know what Weve consistently said is if you break out the segments. You know the federal group. This was kind of a shrink to grow and kind of a build up keep the core and revitalized that business. This year. So that business is actually performing to our internal plan and they continue to to achieve our internal.
Plan and we expect that to continue throughout the back half of the year.
From a a fleet perspective, you know we had a strong quarter in terms of of commercial demand as we focus on diversifying that customer base, but but that quarter was really strong with our E commerce customers and a little bit less strong with our just in time customers. So we didnt have the ability to get in front of customers into.
And to focus on that growth. We are seeing you know a better performance in that that commercial side of the business. The non E commerce side in the third quarter as they start to the third quarter and then from an aviation perspective, I think we're breaking this out by quarter over quarter, one quarter at a time right now and we are comfortable to say that you will see.
Sequential quarter over quarter, both revenue and earnings growth.
Q3 over Q2, which I think you know not or if everybody else's, saying that in the market at this point, but we feel comfortable with that that guidance got it.
Helpful I'll jump back Mick you guys. Thanks.
Okay. Thanks, Mike.
Our next question comes online.
Josh Sullivan.
Please proceed with your question.
Hey, good morning, John No and nice quarter.
Just looking to deviate just looking at the aviation segment.
The competitive environment are you seeing competitors struggling you picking up market share from them.
At this point.
Yeah, I mean, if I kind of break out the aviation segment into distribution and MRO I think that from a distribution perspective, we are seeing more opportunities. We're seeing some of our competitors who play in the distribution distribution market, but arm pure play aftermarket distribution businesses, focusing on their core or whether that be.
I am or other type of core business and that's creating some opportunities for us. We're also seeing new business opportunities, where some of the traditional aftermarket players aren't in the financial position to invest organically in their businesses. So from a market share perspective, that's where we see a deviation distribution business right now.
From the MRO perspective.
The market was there's going to be a little slower to recover there on the commercial side.
Where we see the biggest opportunity is on it there's still a segment of really fragmented smaller emrose shops and.
There's a little bit of cares act support that will extend through the end of September to support some of those businesses, but we are seeing.
Decrease in technical talent that some of those businesses, which is creating some opportunity for us as well as that rotable parts trading business that exist in those businesses again, a little bit of a change in investment strategy, which has created some opportunity for us as well.
And then just on the fleet segment. Some impressive you have your growth there sounds like it was the other commercial side. So sounds like it was really driven by the E commerce offerings.
Particular product trends within that that's driving that growth just what is driving E commerce uptick here.
No. It's just it's really just solid execution by the fleet team on on the internal strategy of we're not going down that brick and mortar route.
Our play in the commercial space, there will be predominantly around that E commerce, and what we call ecommerce fulfillment strategy as well as that just in time strategy. So we sort of a stronger focus on E. Commerce in the quarter, we believe predominantly because people weren't physically getting out and we do think there's a little bit of benefit from.
How cold it is going to help shift.
Consumers thoughts around E commerce, and we benefited from that.
And then just on the post office some of the funding mechanics that are going on there. How are you feeling about that right now because this new leadership, some new funding because that change your outlook at all for how you're exposed there.
Well, we're happy to see the funding that's coming through as expected I mean, we're seeing more of a commercial approach right from the onset with the new leader, we're seeing in a slightly lower demand and maintenance activity. As you know costs are controlled and cost pressures controlled the benefit that we see is that our relationship with the U.S.P.S. is very commercial in nature.
It's a full just in time program, we manage about 70% of part content on the 231000 vehicles.
That are in the supply chain and effectively it's on a consignment program, where the U.S.P. It doesnt have any on hand inventory. So we believe that were ahead of the curve for where the new postmaster General wants to take that program into more of a a commercial business and we do see some potential opportunities for expansion another type of a part.
Ownership opportunities with the postal service as he moves forward with that transformation.
And just one last one an aviation with your exposure to plan replacement parts and as we think about how airlines are thinking about PTC in DHX any noticeable trend you can comment on that right now.
I think that you know a couple of things I think where are we kind of where we're not large in our markets. Yet today, we had strong position for a market perspective, but not from a market share perspective. So we try to break down kind of what we see in terms of demand and then how it actually relates to our businesses we think.
Our businesses are down 60% plus than we're outperforming those because of share of wallet expansion in our existing customers.
What I mentioned, a little bit earlier on the part sales industry and that we're a little better capitalize to support that part of the business rather than the smaller more fragmented players out. There. You know we are you know, we do see ourselves very well positioned and kind of the same logic applies to the MRO side, where we feel like our scale and the finance.
Total strangers to support the business through Cove, it where some of the smaller competitors did not as really going to position us best to come out of this faster.
Worst that were very aggressively focusing on that capability expansion. So the way that we're building our business model as you know assume that Theres a plateau at some point did Miss you know quote unquote recovery that we've seen through the bottom and how do we still growing that plateau and that has to come with share wallet expansion and capability in product expansion.
So it's kind of the way that we're approaching the strategy.
Got it.
Nice quarter, and again think your company.
Thanks, Josh Thanks, Josh.
Our next question comes the line on micro Trimble with Suntrust. Please proceed with your question.
Hey, Thanks for taking my follow up guys John just.
Can you disclose what percentage the postal postal service was in the quarter.
I don't know if you have the handy.
We don't traditionally so you know disclosed the specific customer in the queue, you will see kind of the federal break down and Thats kind of part of the federal the federal state, but they continue to be our you know our largest customer.
Got it and then you have that nice distribution announcement with Honeywell and I know you.
Yes, he's had a pretty long length the relationship there. It sounds like this is a two year exclusive can you can you just give a little bit more color on that did you to win. This competitively are there any you know upfront inventory requirements and then sort of what what can we expect from a from a revenue stands.
Good morning, I know you know it seems like a portion of those offerings are a little bit more discretionary in nature, and then maybe tied to sat com and connectivity, which no not really sure if there's going to be a lot of spending there, but maybe just a little more color on that deal.
Sure I mean first the relationship with Honeywell when I came into the assay about a year ago is really strong I've had.
Hi goals of the large customer minor in my past life as well don't have strong relationships with them back until 2008, so very happy to continue the partnership this wasn't a competitive offering it was a relationship that we expanded with this specific contract the deals worth about 20 million over the term we've already seen near term immediate revenue in the month of July although.
This discretionary.
It's on platforms in the business General aviation market, where upgrades are planned for 2020 in 2021, so it won't be flatline revenue over the over the period would you see it scaling up but we're already kind of exceeding our internal forecast for the month of July as we kicked this off and from an inventory perspective.
Scale in probably in a you know three or four a.
Purchases over the over the term.
Okay.
Last one and this probably maybe it pertains little bit more to your commercial MRO.
But as we think about the we both have retirements that are coming here.
What's likely going to be pretty big increased in used in service more material. How are you guys thinking about that obviously you don't traffic much in the parts trading but is there is there opportunity to participate from an accessory repair standpoint, if you know a products coming off old planes. If there is USM out there from certain of your.
Customers I mean, just trying to think about this it is it more of a risk gives an opportunity or is it just really on a net neutral for you guys.
Yes, I mean, it's probably net neutral for us I mean, you're less than 5%. Our parks are probably if some USM application out there.
From a competitive perspective, but I mean, it's the that's me even rounding up as it's such a small portion of where we would see an impact in the business from an MRO perspective, you know, we do see consistent opportunities out there even from some of the the Rotable pools, where the 80 went 30 tag need to be kind of refreshing, our our team's ability to do that through our.
You know ebay is certified shop, so we feel some opportunity, but I would say.
On par as probably net neutral.
Okay. Thanks, guys, Hey, Mike just follow up on your question on U.S.P.S.
We disclosed in the 10-K, you Sps is about 22% of the consolidated revenue for 2019, and that's if you exclude that onetime order, it's consistent with that number for last year.
Okay perfect. Thank you.
Thanks, Mike.
Ladies and gentlemen, we reached the end of our question answer session and then we'll let you turn the call back over to Mr., John Cool Clinicals remarks.
Great. Thank you. Thanks, everybody for your time, an interest today. We appreciate your support a VIP stay safe and we look forward to connecting with you on our next quarterly call.
Every day.
This concludes today's teleconference. You may now disconnect your lines at the time. Thank you for your participation from a wonderful day.
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