Q4 2020 VSE Corp Earnings Call
Greetings and welcome to the Vse Corporation fourth quarter and full year 2020 results conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce the all Brian of Investor Relations. Thank you you may begin.
Welcome to Vse Corporation's fourth quarter and full year 2020 results conference call, leading the call today are president and CEO, John Cuomo, and Chief Financial Officer, Steve Griffin.
The presentation, we were sharing today is on our website and we encourage you to follow along accordingly.
Today's discussion contains forward looking statements about future business and financial expectations.
Actual results may differ materially and 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 SEC.
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.
All of percentages in today's discussion refer to year over year progress, except where noted.
At the conclusion of our prepared remarks, we will open the line for questions and with that I would like to turn the call over to John Cuomo for his prepared remarks.
Thank you welcome everyone and thank you for taking the time to join our call today.
During 2020 Vse successfully navigated the pandemic related disruption to the global aviation market, while continuing to execute on our multi year of business transformation plan.
We refined our strategic focus while introducing differentiated value proposition to the market with an emphasis on higher margin product and service offering.
During the year, we won new multiyear contracts increased our presence within existing markets expanded our product and service capabilities and grew our contract bidding activity and backlog.
Additionally, we divested of noncore assets.
Reduced overhead costs to align with current demand conditions and built the new leadership team capable of driving our strategy forward and generating above market returns.
In 2020, we generated $29 $5 million of adjusted net income, while growing free cash flow by more than $24 million on a year over year basis.
We also continued to pay our quarterly dividend and reduce debt by $19 million.
At the business segment level, our balance stable military and government customers and contracts offset the pandemic related impact of our commercial market.
We continue to see of recovery within our aviation markets during the fourth quarter with revenues increasing sequentially in the fourth quarter as compared to the third quarter.
Supported by improved business in general aviation and narrow body activity together with market share gains.
Although revenue passenger miles remain below historic levels. We believe the markets. We serve have bottomed and are poised for recovery during the second half of 2021 are.
Our business continues to outpace the recovery supported by a balanced commercial and business in general aviation customer mix.
And new business wins to offset the market decline.
And our federal <unk> defense segment bidding activity increased 37% versus the prior year.
This growth in bidding activity in bookings reflect a more aggressive focus on business development.
And our higher margin technical services focused strategy.
And our fleet segment commercial fleet and e-commerce fulfillment the ban remains strong.
Providing a complement to our core U S. P S business, but for me the stable source of earnings and free cash flow.
The diversification strategy for this segment is taking shape in 2020 non U S. P. S revenue grew 93 per cent compared to 2019.
Turning now to slide three in our presentation materials.
Before we share our thoughts on where we're taking the business in 2021.
It is important to highlight the progress we've made during the last 12 months, including those specific actions taken to advance our business transformation of corporate strategy.
New business in key account growth was the major area of focus last year and remain so in 2021.
Our Honeywell Awards announced in July our exclusive landing gear of distribution agreement with Triumph announced in October together with our recently announced exclusive life of program Apu of distribution agreement with Pratt <unk>, Whitney, Canada, where all major wins because of the team that validate our value proposition to the market.
And set the stage for both the segment revenue and margin expansion in 2021.
Another achievement in 2020 was within service and capability of expansion.
Where we expanded avionic MRO capabilities in our aviation segment.
Launched new commercial fleet and ecommerce fulfillment business units within our fleet segment.
And introduced the new logistics and supply chain management division within our federal <unk> Defense segment.
We took action to streamline operations during the past year closed non essential operations and reduce costs throughout the business we.
We divested of two non core aviation assets closed three facilities and consolidated operations into strategically located centers of excellence, while we're moving $13 million of annualized cost from the business.
At the leadership level, we made several important organizational changes.
Since I joined Vse, just under two years ago, we brought onboard a new group president of the aviation.
Our new group President of Federal and Defense services.
As chief Human Resource Officer, and most recently, Steve Griffin, our new Chief Financial Officer, who I am pleased to have joining me for his first vse earnings call today.
At the same time, we realigned our incentive structure to ensure of pay per performance model and keeping with our commitment to attracting top talent and supporting short and long term shareholder interest.
Moving now to slide four earlier this week, we announced the acquisition of Heiko special services or HFF.
HFF is the military aircraft maintenance organization, providing heavy checks to the United States Air Force KC 10 fleet, the strong backlog and contract revenue visibility into 2025.
These capabilities expand the S ease of existing U S Air Force program and contract P. L team programs.
This transaction provides vse with access to new capabilities and technical expertise and contract past performance required to provide end to end support for government aircraft fleet.
This acquisition will help support growth with new contract opportunities, including targeted prime and subcontractor roles on various aircrafts the statement of modification programs.
This transaction, which had a total purchase price under $20 million is the blueprint for the types of bolt on transactions we are evaluating.
The transaction was funded with cash proceeds from our heavily subscribed underwritten public offering of common stock completed earlier in January of this year, which resulted in net proceeds of $52 million.
We are very excited to welcome the 275 H S. S team members to the Vse family.
With that I will now turn it over to Steve Griffin, our CFO to introduce himself and comment on our fourth quarter and full year 2020 financial Steve.
Thanks, John and welcome to everyone joining us today.
Before I get into the financials I want to share my initial impressions since joining the company in November 2020 from GE aviation.
Both John and myself agree that the aftermarket is fragmented and inefficient, creating an opportunity for agile well capitalized suppliers to gain share vse.
<unk> is uniquely positioned to win in this market. Although we are a small organization we have the deep contract experience of the much larger organization, which provides credibility with the global commercial and defense customers we serve.
I view the as he is one of the best positioned small supplier of platforms in the market, which is the primary reason why I'm here.
I'm also here because of John's vision for the organization together with the high caliber management team he has assembled.
This is the team that understands the importance of driving culture change to achieve its strategic objectives color.
Culture change begins with personal accountability from the top down ours is the team that is committed to winning guided by shared purpose.
And my first several months with the company I've had the opportunity to visit several of our facilities and interact with many of our employees I've been very impressed with our in house overhaul and engineering capabilities as well as with our employees focus on exceeding customer expectations.
Within the organization my mandate will be the focus on building a data centric culture.
Driving financial accountability throughout the organization with a strong focus on margin rate expansion and cash flow generation and acting with the sense of urgency to implement measurable changes the support profitable growth.
Already in 2020, one we've successfully completed a secondary equity offering which added many new shareholders and increased our daily float in the stock we announced the new life of program Pratt and Whitney Award and we completed our first acquisition welcoming Heiko special services to be of C.
Internally with our employees I'm seeing that the speed at which we're moving is creating a positive force for change and is making our business that much more exciting to be of part of.
Across the finance function, we remain focused on delivering for our shareholders and helping to align our business priorities to our strategic initiatives.
Now moving into the financial results for the fourth quarter, starting on slide five we'll cover our GAAP results.
We reported total revenue of $150 million in the fourth quarter versus $195 million in the prior year period.
This was primarily driven by lower aviation in federal and defense segment revenue offset by slightly higher revenue from our fleet segment.
Our aviation segment reported sequentially higher revenue versus the third quarter 2020, and represents our second straight quarter of sequential revenue growth.
Our reported net income for the quarter was $6 million versus $10 million in the prior year period.
On slide six our adjusted net income was $6 $2 million and our adjusted diluted earnings per share was 52 cents versus $11 5 million and $1.04, respectively in the fourth quarter of 2019.
Adjusted EBITDA declined to $17 3 million in the fourth quarter versus $23 1 million for the same period in 2019.
Our profitability was impacted by the lower volume in our aviation segment. However, this was partially offset by margin expansion in our federal and defense segment.
On slide seven we detail the drivers of our revenue and adjusted EBITDA for the fourth quarter 'twenty 'twenty versus 2019 as well as for the full year 2020 versus 2019 start.
Starting with the fourth quarter, our overall EBITDA margin rate fell from 11, 8% in 2019 two of 11 five per cent in 'twenty 'twenty, primarily as a result of our aviation segment and the associated impacts from the COVID-19 pandemic on revenue passenger miles.
This was offset however by the margin improvement in our federal <unk> Defense segment, where the completion of certain U S Department of defense contracts. In addition to higher margin fixed price contracts helped drive incremental profitability despite lower revenue.
When looking at the full year 'twenty 'twenty results versus 2019, we see a similar story as in the fourth quarter, where overall EBITDA margins dropped 70 basis points from $12 one per cent to 11 four per cent.
For the full year aviation and fleet segment margin erosion was partially offset by improvements in our federal <unk> defense segment.
On slide eight we'll cover our aviation segment, where revenue excluding the previously divested the prime turbines and C. T aerospace assets declined 26% on a year over year basis as lower revenue passenger miles the major airline customers resulted in reduced commercial MRO activity.
Aviation segment revenue increased 7% when compared to the third quarter 2020 supported by a combination of market share gains within our parts distribution business together with the increased demand for higher margin technical sales from our business in general aviation customers.
We continue to invest in the businesses capabilities to gain incremental share of wallet and expect to see our margins increase throughout 2020 one.
On slide nine our fleet segment fourth quarter revenue increased 1% on a year over year basis, as our growth in commercial fleet and ecommerce fulfillment offset a slight decline in U S postal service related revenue.
We continue to see opportunities to grow in an outsized paced with our e-commerce and commercial channels, helping to offset reductions in U S. P. S revenue.
In the quarter, our non U S. P. S revenue grew 83 per cent year over year and for the full year, our non U S. P. S revenue grew 93 per cent year over year.
On slide 10, our federal and defense segment revenue declined 29% on a year over year basis, primarily due to the completion of a D. O D program during the first quarter of 2020.
Federal <unk> Defense segment continued the trend in 2020 of improving profitability. Despite lower revenue as we continue to diversify our offerings. We are continuing our business development efforts and so our contract bidding increased by 37 per cent for the full year 2020 versus 2019, which helped contribute to the 97% growth in <unk>.
Bookings for the fourth quarter 2020 versus the same period in 2019.
Now turning to slide 11 as of December 31, 2020, we had $175 million in unused commitments available under our $350 million revolving credit facility that matures in January of 'twenty to 'twenty three.
In addition, our total net debt was $251 million versus $269 million in the fourth quarter of 2019.
For the fourth quarter, our free cash flow was negative 900000. However, this included a $10 $7 million of disbursement for inventory associated with our new Pratt and Whitney Canada Apu distribution agreement.
Excluding the effect of this new business, our underlying business generated just under $10 million for the quarter.
Our ratio of net debt to trailing 12 months EBITDA was three three times.
Following year end 2020 in January of 'twenty 'twenty, one we priced the previously announced underwritten public offering of one 4 million shares of common stock at a price of the public of $35 per share.
The resulting in net proceeds to the company of $52 million after transaction related expenses.
We expect to use net proceeds from this offering for general corporate purposes, which may include among other things financing strategic acquisitions, such as the purchase of Heiko Special services announced earlier this week.
Working capital requirements for new program launches as evidenced by our recently announced Pratt Whitney Apu deal and repaying borrowings under our revolving credit facility.
With that I'll turn it back over to John.
Thanks, Steve it's great to have you here and I'm motivated by our quick chemistry and partnership.
Now turning to slide 12.
While 2020 with of year defined by the COVID-19, pandemic and our decisive response to changing market conditions.
We also remain focused on transforming the business culture.
The strategy.
And organization the.
This foundational work gives me great confidence that 'twenty 'twenty, one will be defined as the year of growth for vse.
We have tested our strategies of the market received positive market feedback and are prepared to accelerate both organic and inorganic growth opportunities.
Organic opportunities continue to center around aerospace distribution commercial fleet expansion and federal and defense backlog building.
Inorganic growth centers around bolt on acquisitions in our aviation and defense segments, specifically to support market niches and component repair.
Part distribution supply chain MRO and business in general aviation, all while applying a very disciplined approach to market accretive opportunities.
Moving now to slide 13.
The S. He is culture and business transformation continues into 2020, one with the focus on new customer wins market share gain per.
Further product and service line expansion and increased focus on margin expansion and the inorganic growth.
Within our aviation segment, we expect the outpaced the ongoing market recovery.
While driving organic operating margin expansion through a combination of recently award of distribution agreements expanded MRO capabilities together with new partnerships that position us to capture incremental market share.
We will also seek to make a deeper move into underserved niche market.
Where we can leverage our expertise and proprietary part distribution and component and engine accessory MRO.
Within our fleet segment, we seek to drive commercial growth to offset a relatively flat U S. P. S business with above market growth from commercial fleet customers.
New commercial products.
Just in time services, along with the acceleration of E Commerce proprietary technology and ecommerce I found myself.
Within the federal and defense segment.
We'll seek to increase our exposure to new and existing D. O D programs, specifically with respect to military aviation services, where we can leverage our existing capabilities and the new capabilities of our of our recently acquired businesses.
We will continue to build strong quality backlog from core capabilities and expanded supply chain logistics technical and aircraft maintenance and Sustainment offerings.
Finally, we will expand our focus on growing our share of wallet within existing army and Navy programs with a focus on more technical higher margin offerings.
While organic growth remains the top priority in 2021, we intend to become a more active acquirer of complementary businesses and accelerate our growth strategy.
Looking ahead, we anticipate 2021 will be backend loaded with approximately 40% of adjusted EBITDA being generated in the first half and 60% in the back half of the year as new contract activity accelerates.
We anticipate progressive organic involvement and revenues across all segments as we move through the year not including contributions from the Heiko acquisition.
While we expect to be both net income and free cash flow positive for the full year 2021.
We intend to invest aggressively in product inventory to support recent and future aviation program wins.
We believe these investments are necessary to support our entrance into higher margin businesses with the potential to support long term profitable growth as these markets recover.
In closing.
Want to thank our investors for their ongoing support of Vse.
2021 has started on strong footing supported by improved market conditions.
New business wins execution of recent awards and the acquisition of Heiko The special services.
As a management team we are excited by the significant opportunities for both organic and inorganic growth as we create value for all stakeholders. We look forward to connecting with many of you over the coming months as we share of what we believe is one of the most exciting stories and a 60 year history of the SC.
I want to offer a big thank you to our vse team across the globe, we pushed the team part of 'twenty 'twenty as we transformed and reposition the business for all of that has to come in 2021 and beyond.
Finally, I want to again welcome the outstanding Hff's employees to the Vse family and I look forward to building this business with you in the years to come.
Operator, we are now ready for the question and answer of portion of our call.
Thank you we will now be conducting a question and answer session.
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Our first question does come from the line of Michael Chair of Hollywood True of Securities. Please proceed with your questions.
Hey, good morning, guys. Thanks for taking the questions I suppose the old morning, Mike Sean.
Maybe you know you kind of went through all the detail in the prepared remarks, what what are the U S. Postal service you know obviously there during the process. They they bid out the new contract or how should we think of that in light of the current business and you know of course, it's probably going to take years for them to transition the new vehicles.
But how do we get comfortable with with your present supporting them and just maybe level set us on what the expectations could be there as you know as the postal service transition standard vehicles.
Right.
Sure I mean, a couple of things there. So theres just been of recent announcement, we don't have the.
Complete details yet of.
You know delivery and if everything is going to be accepted in the contract and so on and so forth, but you know we've been supporting the postal service since the mid eighties, and we support you know everybody talks about the yellow the in that fleet, specifically and we've supported that fleet as well as the rest of the vehicles that are in the free.
Today, so when we look at this this is just the ordinary transition that we had anticipated and our plan is to support the app their.
Their aftermarket you know we are the largest supplier for the types of products in which we serve the postal service and you know of weeds, we see the same opportunity for us to continue to serve the aftermarket now with regards to scheduling Steve do you want to talk about kind of what's been public out there in terms of.
Know, what what we see right now as we try to model. This out there you know so the U S. P. S. As publicized that the L. O B's you know will be in their fleet for at least nine years of the new vehicles. The earliest from what we see right. Now is are expected to arrive like late 2023, and it will probably be a seven year phase. So I mean, Steve did I cover everything or anything else.
You wanted to add there from a data perspective.
No I think that covers the John so when we model out the burn down of that that program vehicle, but I do want to reemphasize. The point that you made that over our 10 year of working with them. We've helped them retire tens of thousands of vehicles.
And that's why we continue to take on new work new capabilities, and we believe that'll be a key element of our strategy as we start to partner in terms of changes in the future.
Got it that's helpful.
John just can per.
Any color on you know certainly you guys have had some really nice new contract wins on the aviation side, most notably with triumph.
Obviously margins in the business the strained now, but can you give us any color as to you know what the margin profile or how you're thinking of potential profitability on some of these new contracts just as you know I'm not going to ask for a specific margin guidance in the aviation, but just trying to get a sense of are you seeing.
Margins in line with historical norms on some of these distribution and accessory repair programs. You know its there is there some pricing power that you're having or is there some price degradation of any color you can give on that.
Sure I mean, so Steve I'll toss it over to you in the second so what we've consistently what I said prior to kind of Steve's arrival was when I scaled the business down I didnt scale of down to the to the traditional operating margin because we knew we had a strong pipeline and I wanted to make sure that we had the resources to to get the businesses and get these two.
Transition the programs transition as quickly as we could and to start to drive back to historic margins by the back half of the year, Steve do you want to address Mike's question, specifically about the program margins.
Yeah, I mean, we've kind of said that at this point that we're expecting around mid teens for this business in the long run and so I think that's where you should expect some of these distribution deals in terms of the future profitability no. One element that's important for us to discuss the the notion around working capital investments as we've mentioned on our call and just in general you know, we take a pretty aggressive approach on our team I should say.
<unk> of approach with our teams to make sure that we take into consideration, where we're making investments and so where you see larger inventory purchases, it's safe to assume we're going to sit in the higher margin rate in the future to make up of that cost of capital and so that's a pretty diligent process that we go through in terms of making the decision of where we want to be playing versus non and how it equates to the overall margin rates of the deal.
Got it and last one just to be clear it sounds like the more second half 'twenty, one weighted youll start to see some of the benefits of these deals flow through and that's kind of driving some of that EBITDA split.
Yeah that is exactly what you should expect that we mentioned earlier.
The focus we're starting to see some of the fruits of the new programs you know theyre not big dollars quite yet, but we are definitely seeing the traction of the market, but you should expect the larger dollars to start to accrete as the second half continues.
Got it perfect I'll jump back in the queue here guys.
Yep.
The last thing I'd want to add Mike is that we you know the the Apu deal with Pratt that we closed right at the end of the year, we're already seeing initial revenue from that deal in Q1.
Got it perfect alright, thanks, guys I'll jump back in the queue.
Okay.
Thank you. Our next question is coming from the line of Ken Herbert with Canaccord. Please proceed with your questions.
Yes, hi, good morning.
I just wanted to get just hey, John I wanted to follow up on those comments some of the aviation segment you saw sort of.
6% to 7% sequential growth in the segment from the third quarter on the top line.
Is that a trend that continues here into the into the first and second quarter or how should we think about sequential growth coming out of the fourth quarter in the aviation segment.
Sure.
Yeah, Steve you want to address that.
Sure thing thanks for joining Ken Thanks for the question.
Here's what I would say I think we're anticipating that the market is going to look mostly flat sequentially from <unk> and then we're looking at sort of modest increases from a market perspective from <unk> with the real recovery starting in the back half you know we've shared that our expectation is for the aviation business to be able to grow sequentially quarter over quarter.
That's primarily due to the new programs of the market share gains and then we think we've got an accelerated recovery as a result of the business in general aviation.
The segment, which we think we're well positioned in.
You know at the end of the day Youll be able to see some of the splits from what's been published the 10-K in terms of the splits between distribution and repair later, but it's safe to say that we expect to see the distribution base business pick up more quickly through the beginning of this year.
Okay, Great that's helpful and if I.
What are the ask on the the HFF acquisition you just completed.
Is that a company exclusively on the KC 10, and can you talk about maybe potential timing of you know with the new capabilities. Other you know as other contracts could potentially get layered into that and can you provide maybe just any any comp in the context around how we should think of that in terms of the growth.
Contribution to each of the segment of the company in 'twenty one.
Yeah, So I'll kick it off and then Steve I will turn it over to you to talk through a little bit more of the financials of.
So Ken from a strategic perspective with the deal does is it really.
Our Air Force programs today are really line maintenance in there on base. So this takes us to heavy maintenance and off base. So now we've got the the full scope of work, where we can now go a bit as the prime or of subcontractor on any other program. So we've got two hangers and the Greensboro is the area that where the performing this work we've got access to <unk>.
Their hangers that we can start now go go into bid pretty quickly. So you know the the first thing is get the business. You know, we're gonna do sort of slight integration of systems, and you know and get it integrated into our business. The second thing is where there's opportunities kind of cross segment, whether with our supply chain organization or some of our component of our repair businesses that can help.
Augment and add value to that business and then the third element is where we have the ability pretty quickly. We've got some near term opportunities that we want to start getting the.
The pipeline out there and get the business development team starting to bid using these new capabilities. So that's kind of what you know this fits really nicely into the strategy of moving a little further upstream from more of that base operation support kind of cost plus work that we were traditionally doing to more of the fixed price higher.
Higher margin technical work, Steve you want to talk about a little bit of how to catch it think about it from a.
Modeling perspective.
Yeah sure so from a business perspective, we view the current run rate of the business to be about $25 million of revenue per year, and then you know I think we shared it before earlier, but just in general I think we the business is EBITDA range is going to be accretive it's in excess of what we have within our fts business and so you can look that up I mean, it's in the filings today is as <unk>.
All of us in the presentation in terms of the trailing 12 months EBITDA rate, but it'll be in excess of that which is what we're excited about in terms of the transition in terms of our focus and priorities and capabilities.
Yeah.
That's great I really appreciate the color just finally, you've really called out some some really nice growth I know, it's obviously off of small base, but in the fleet business on the non U S. P. S business can you give any more details John on maybe some of the examples of customers maybe some of those types of contracts and if your visibility.
On that sort of the non U S. P. S growth of the opportunity there how that how that looks into 'twenty one of 22.
Sure you know I mean I'm.
Really really excited about the strategy for our for the our.
Of our Wheeler business day.
It's just tremendous distribution asset in the company and they've traditionally serviced the.
The service and government customers, so expanding that but it runs like a commercial business so expanding into the commercial market.
There's been a pretty easy transition. So we really have a few different kind of revenue streams. The first is through our own E Commerce site and just utilizing our distribution capabilities. The second is what we call E Commerce fulfillment and that's where we will connect our inventory through other e-commerce sites out there it could be general sites like in Amazon It could be more specific.
Vic automotive or heavy duty or other type of vehicle aftermarket sites as well.
And the third is you know the our program with the postal service as a full adjusted time program. So very similar to bypass the world. It reminds me of lot of that world, where really get embedded in the entrenched with the customer and you can see from the longevity of our postal service relationship and from the consistency of the market share that we've had that that embedded.
The relationship and the execution has been quite strong. So we've you know we've launched that program and now we've got some key platform customers. So think of people like utility vehicles think of your delivery vehicles. Your we've got of our bakery company kind of the food services industry those types of vehicle fleet owners, who have.
Have a multitude of fleet typically will go towards that just in time model those who are more on the transactional side are going more towards our ecommerce model. We're staying away from that had more heavy capex brick and mortar type focused world. So when you look at kind of how do you. How do you look at the forecast you know this is a very short.
The book to Bill kind of business, which I've lived my entire life and so it's for US it's about how do you take share.
And how do you have that consistency of growth out of month over month basis, and we feel really confident in our plans for 2021 of the team that we have the place to execute on that.
So I would say from a modeling yeah, I said I'd say just the last thing kind of on the modeling perspective, I'd say you know we've been growing at a double digit growth rate of today, you can expect that that side of the business you can expect that to continue in 2021.
Great. Thanks, John I'll pass it back there.
Thanks, Ken.
Thank you. Our next question is coming from the line of Josh Sullivan with the Benchmark Company. Please proceed with your questions.
Hey, Josh Hey, good morning, John well casino.
Yeah, just with regard to the comments on all of them being a little more acquisitive the theirs.
Been some headlines out here over the last day or so you know about another aerospace OEM looking to divest from some aerospace.
Service assets can you just talk about the balance between organically addressing some of these opportunities that are opening up versus inorganically.
Our OEM assets interesting to you at this point just some color on that would be great.
Yeah.
It's a good question and the kind of one we talk about a lot here. So what we've done in 2020 and the <unk>.
First 18 months of you being with the business is really really focused on being very clear on our strategy. So we know exactly where we want to play we know exactly what we wanted to do and we know the gaps of that strategy, whether their geography customers.
<unk> or service capabilities. So we have a very disciplined approach, we'll look at every transaction or divestiture asset thats out there and say does it meet this criteria then the Kenneth you know from a cultural and of business perspective can it be integrated into the business at the end of the financials work. So all of that has the kind of a check the box before we'll kind of move forward.
That you know where we see opportunities today, we mentioned, we're looking at businesses in all of our segments. We've kind of left out of our fleet segment and some of the the public kind of communication because theyre going to go through an ERP conversion of we've talked about you know the.
The ability to integrate and they were just not in the place to integrate a business in the first half of this year, but when you look at our other businesses, it's very much around the MRO capabilities or distribution type assets that that debt still these market niches. So we are we are looking but I'd say expect it to be very very disciplined.
Our approach this asset we're very excited about it filled the gap the H sss that fill the gap for us in our federal business brought some nice synergies between our our aviation business in the aviation segment in our federal segment income.
Can you to see assets like that as we move forward.
Got it and then maybe just one on it's just US I think I read you know they were averaging about 30 inductions of year.
Where could that go or of course inductions sort of the number of injections not the right way to look at the opportunity.
Yeah, I mean, I'd say that the this is the way we looked at the opportunity is it's it's Scott I love the end of life programs, because I think it's when the OEM.
It really is looking for a true partner and you can build strong strong relationships with that OEM that the debt.
Translate into future opportunities as well both on other under light programs or other places where they are struggling. The second thing is you just don't see as much aftermarket activity around that asset because everybody is focused on on the newer assets. So this fits into that model and it's something that we do in all of our other business segments as well. So there was a key component of that that was it.
To us we like that we've got very strong visibility into the backlog and therefore, the revenue and earnings and free cash flow generation through 2025, but it took the next step is really about how we take the capabilities and then focus on the new business development.
Got it got it.
And then just one last one on the aviation can you just talk a little bit about what youre seeing in aftermarket activity, maybe between business and general aviation versus commercial aerospace just as airlines gear up for of Covid recovery anything they're coming in faster than you expected or maybe even slower than expected at this point.
Yeah, I'd say that we're seeing of business in general aviation, if I break things out business and general aviation is leading the commercial.
The recovery from a commercial perspective, we're seeing you know more narrow body work. Then we are seeing wide body of work and then from distribution to repair.
<unk> businesses, we're seeing our distribution business.
No kind of start to recover faster than our MRO businesses. So I don't know if that's kind of qualitatively answers. The question, Steve do you of any more color on that.
Yeah, No I think you summarized the well it'd be the distribution is going to be the area. If we I mentioned this earlier when we're talking about Ken the distribution was the area that we expect to see the recovery faster.
And it's just driven by our business model, you know 90% of our products are proprietary.
So we do believe they're going to move in line with the recovery, which we're pleased about and then as John mentioned the VGA space, we are seeing that the pick up more quickly.
Got it.
At the time.
Thanks, John I appreciate it.
Thank you. Our next question is coming from the line of Louis Dipalma with William Blair. Please proceed with your questions.
John Stephen though of good morning.
Hey, Louie how are you good morning.
Not bad regarding the trio of exclusive distribution agreements with Honeywell of triumphing and Pratt. These three Oems have massive product portfolio and should investors view the enel.
The contracts over the past here as the stock.
<unk> point with the three large partners.
Absolutely you know I think there's a couple of things I you know I like to have a diversified business. So we look at business and general aviation from the aviation perspective, specifically, we look of business General aviation and commercial we want to have a strong diversification of mix between those two and then from a distribution perspective, we.
On the mix of the Oems that we represent as well as the aircraft that we're on so you'll see us.
There'll be opportunities with with those Oems, but also we want to make sure that we're continuing that diversification strategy, so where we build a very balanced portfolio from a distribution perspective, but we look at each of them not only as exclusive OEM deals, but what else. We can do with them. So I'll give you. An example, like the triad deal. So you look at that land.
The <unk> deal and you say, okay. So what else does that do for us so what else of those customers buying and whether that's consumable and expandable type product. That's non proprietary or are there other proprietary lines that we can look to bring in together. So that we can create a better offering to the market as well so that we look at it in both of those ways.
Great that's helpful and for the federal and Defense business EBITDA grew 37% in 2020, John and Steve you and Rob Moore appear to be executing well on the strategy to optimize profitability with the higher margin technical services.
And you also suggested the H S. S acquisition is positive for the margin.
That being said do you expect that segment to continue growing EBITDA in 2021.
Yeah. Thank you for the question. So at the end of the day, we benefited this year from a mixed shift of our fixed price versus cost plus contracts, which inevitably allowed us to take advantage of some incremental productivity and drive productivity on the contracts. That's what primarily drove some of the margin increases that we've walked through in terms of the financials earlier.
What I'd say is that you know that's sort of the short term thing. So we are seeing a little bit of a headwind as we faced in the 2021 associated with that shifting contracts. However, as youre seeing we are chasing after more of those technical services higher margin capability and we think the margin rates that we've demonstrated this year or sort of where we want to be as we move forward, hence why the HFF acquisition is of great.
Place for us to continue to grow.
Great and one final one on there's been a lot of M&A activity within defense Logistics services recently E com.
In Corp. The.
Great and then.
Have you witnessed any change in the the competitive environment as it relates to the elimination of some.
Key competitors and you know should that also be positive for the margin structure in this business.
Yeah, I mean, there are a couple of things. So first is what we've seen is you know the.
The traditional business the Bse really supported a lot of that base operation and that's why last year I said you might see the revenue a little lumpier in the federal business as we focus on shifting to that higher margin more technical services type work.
What we've seen in the larger kind of cost plus base operations work is actually a more competitive landscape and we have minimum margin thresholds.
We're focused on driving.
Margin growth much more than we are focused on driving revenue growth. So we I'd say that the in that area. We saw the competitive landscape really become even more compressed than more competitive now with that and with the acquisitions and also you know.
Watching some of the assets that have been brought on me the transportation assets in the last few years from all three you know Army Navy and Air Force, we are seeing some gaps in some of the technical and supply chain offerings that are out there for the in the.
The market, so meaning the customers want things that arent necessarily readily available in the market and that's where we see our opportunity for growth.
In some areas of a little bit more competitive and that's why we pivoted.
To fill the gaps that are debt, we see out there.
Great. So if the competitive environment I guess as it relates to.
The aviation.
<unk> services for defense customers like similar to what you acquired with H S debt is that like less competitive or more favorable than the the base operations work.
I would say, it's let me say it this way the base operations work doesn't require it's very commoditized. So it's the it's a cost plus contract.
Much more about labor than it is about technical services. So the reason the HFF acquisition was important to US is that there's a tremendous amount of technical capabilities that we acquired with that business and of that and the more technically capable of that you are the.
The more of that you can differentiate in the more of that you can pull away and separate yourself from a competitive perspective.
Perfect. Thanks.
Thank you there are no further questions at this time I would like to turn the call back over to John Cuomo for any closing comments.
Yeah.
Thanks, everybody for the time today, we really appreciate your continued interest in V. S E and we look forward to speaking with you later.
Later this year on our first quarter earnings call. Thanks, everybody and have a wonderful day.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.