Q1 2021 VSE Corp Earnings Call
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Greetings and welcome to the DST Corporation first quarter 2021 conference call. At this time all participants are in a listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone.
You bet.
The reminder, this conference is being recorded it is now my pleasure to introduce your host Noel Ryan Investor Relations. Thank you you know you may begin.
Thank you welcome to Vse Corporation's first quarter 2021 results conference call.
Leading the call today are president and CEO, John Cuomo, and Chief Financial Officer, Steve Griffin.
The presentation. We are 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 significantly from those projected on todays 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 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 know welcome everyone and thank you for taking the time to join our call today.
Let's begin on slide three of our conference call materials.
During the first quarter, we continued to successfully advance our business transformation.
Strong progress the organic market share gains, including new win in all three of our business segments.
Spanning our products and service offerings as well as inorganic growth from our Heiko Special services acquisition.
Okay.
Our change management and business transformation initiatives have begun to yield tangible results as evidenced by these new business wins expanded relationships with commercial and government customers and improve the organizational and operational efficiency.
We generated sequential revenue growth across all three business segments during the first quarter, while achieving another consecutive quarter of profitability.
Recovery in the aviation remains ongoing.
Aviation segment revenue grew 15% on a quarter over quarter basis outpacing the market recovery and represented our third consecutive quarter of growth in the segment.
Aviation distribution revenue returned to pre pandemic levels during the first quarter.
Turning now to slide four.
Earlier this month, our aviation segment announced the major engine accessories and distribution agreement building on our partnership with one of the leading global aircraft engine manufacturers, serving the business in general aviation market.
Under the terms of this $1 billion 15 year agreement the.
He will be the distributor for more than 6000 flight critical engine components.
We expect the service more than 5000 U S base of aircrafts with on demand flight critical components on the 20th four seven basis to support schedule of line maintenance and aircraft on ground of that.
This agreement is transformational for V S. The aviation for a number of reasons.
The first it affords us the opportunity the deal directly with the large base of business jet owners operators and maintenance providers.
Supplying critical engine components and on demand part and repair solutions.
Which further advances our business in general aviation market focus strategy.
This direct to consumer approach will position us to provide complementary product and circumcise offering that support long term market share gains within this attractive customer vertical.
Once this program is implemented there'll be new cross selling opportunities within the fragmented and underserved business jet market.
Second.
This agreement significantly expands our scope of services to include more than 100 business and general aviation and regional aviation engine platforms.
With this OEM partnership we intend to expand our existing business and generally the repair capabilities to service additional engine accessory exchange yet.
Finally, the agreement provides the long term contract revenue at attractive margins consistent with our strategic focus on building a pipeline of higher value flight critical business.
We currently expect program revenue from the agreement to be approximately $12 million in 2021 and $45 million in 2022.
Once fully implemented this program is anticipated to generate more than $60 million in annual revenue.
Implementation work is underway and initial deliveries under the program will begin in June of this year.
On the strategic level disagreement of similar to the acquisition of the new business, one that requires full integration into our existing operations.
However, unlike of new business acquisition or integration customer and supplier risk is always the factor disagree on that brings the stable long term relationship with the major engine OEM through 'twenty 36. Additionally.
Additionally, if the transaction with strong historical financials at the low risk profile.
The S. The aviation was selected for this agreement because of our unique business and general aviation market focus and value proposition that combines the proven distribution capabilities and experience managing complex global supply chain for highly technical products the.
Together with our extensive business and general aviation MRO capabilities.
I want to take a moment to recognize the aviation team for its many efforts in winning this contract and I look forward to building upon the current momentum evident in this business.
Turning to a review of our fleet segment.
Revenue increased approximately 3% in the first quarter driven by continued growth in commercial fleet demand and our e-commerce fulfillment business.
Total commercial revenue, which excludes the U S postal service and government related revenue increased 64% on a year over year basis on the first quarter of 2021.
Driven by increased sales in the e-commerce fulfillment and commercial fleet channel.
Commercial revenue represented 26 per cent of total fleet revenue.
First quarter of 2021 first of the 17% in the prior year period.
Testimony to our customer diversification strategy for the segment.
Our federal <unk> defense business had a solid quarter with revenue up about 1% versus the prior year as new wins served to offset previously announced contract exploration.
In April F D S announced $37 million and combined new contract awards with the U S Air Force and in Allied foreign military as the business continues to make steady progress on filling the pipeline with new multi year contracts.
The contract award reflect the continued execution of our federal and defense segments vehicle and aviation the MRO strategy introduced last year.
And then emphasizes multiyear growth and higher margin segment backlog.
We are pursuing additional niche MRO opportunities as we leverage our technical expertise and proven project management capabilities with new and existing customers.
As mentioned last quarter, we closed on the acquisition of Heiko Special services or Hff's on March 1st.
In the first 60 days since closing the transaction the integration of this business has moved forward quickly and seamlessly with the.
275, H F. S team members performing ahead of plan as part of the Vse family we.
Currently anticipate this business, which historically has achieved an operating margin profile above that of the federal and defense side and the the average will be of strong contributor to revenue and profit from the segment.
I will now turn it over to Steve Griffin per review of our financials.
Thanks, John well now turn to slide five of the conference call materials for a review of our first quarter results.
We reported $165 million on revenue for the first quarter down 7% from the prior year period. However, excluding the 'twenty 'twenty divestitures within our aviation segment revenue declined less than 3% on a year over year basis importantly.
Importantly, vse revenue grew 10% as compared to the fourth quarter 'twenty 'twenty as all three segments grew on a sequential quarter over quarter basis.
This growth was propelled by both continued market share gains with existing customers and new business wins, particularly as we expand both our distribution and MRO capabilities.
On slide six we detail the revenue on adjusted EBITDA walk sequentially from fourth quarter, 2020 and versus the prior year period.
Sequentially Aviation segment revenue and profit improved total company margins, while federal and defense segment margins drove a reduction in our adjusted EBITDA rate as expected driven by favorable contract Closeouts in the fourth quarter of 2020.
Versus the prior year period, our adjusted EBITDA margin rates declined primarily by COVID-19 impact on global revenue passenger miles.
We anticipate that the aviation segment will continue to improve its profitability throughout 2021.
Turning to slide seven.
Aviation segment revenue increased 15% on a sequential quarter over quarter basis, representing the third straight quarter of revenue growth.
Segment, adjusted EBITDA improved 61% sequentially.
<unk> Aviation segment revenue was approximately 12% below pre pandemic levels in the first quarter when excluding previously announced divestitures.
Aviation distribution revenue increased on both of the sequential and year over year basis, driven by improved business in general aviation and narrow body of demand, while our aviation repair business grew 18% versus fourth quarter 2020.
Turning to slide eight.
Fleet segment revenue increased 3% year over year, it was up 1% versus the fourth quarter 2020, as higher commercial revenue offset the decline in the department of defense and other government work commercial revenue increased 64% versus the first quarter 2020, driven by a 115 per cent increase and the ecommerce fulfillment revenue.
While our commercial revenues are on average slightly lower margin than the U S. P. S business, we remain focused on driving absolute growth in EBITDA dollars grew commercial markets given what we believe remains of significant growth opportunity for us.
Turning to slide nine.
On the defense segment revenue was flat year over year, but increased 15% for the fourth quarter 2020.
First quarter revenue benefited from a combination of U S Department of Justice task orders and the recently acquired Hff's business that we acquired on March one.
H S. S contributed approximately $3 million to the federal and defense business in the first quarter of 2021.
Consistent with the strategy outlined last year, we remain focused on growing both bookings and backlog within the segment, particularly within the higher margin value added offerings, such as those provided by H S S to military customers.
Turning to slide 10, given.
Given our recent new business wins, including the $1 billion engine accessories agreement John referenced the cash.
Current year will be a period of significant working capital investment as we purchase inventory to support new customer programs.
During the first quarter, we invested approximately $35 million of inventory to support new programs, including $20 million related to the engine accessories agreement and $15 million related to new distribution deals previously announced.
As we look to the remainder of 2021 we anticipate investing an additional $35 million to $40 million and new inventory to support the new engine accessories program as disclosed in our press release.
Given the extent of our planned investment in new programs, we expect to be free cash flow negative for the full year 2021. However.
However, as we look ahead to 2022, we anticipate cash conversion will accelerate meaningfully positioning us to reap the benefits of these initial investments.
At the end of the first quarter, we had $167 million in cash and unused commitments under our $350 million credit facility.
Net leverage ratio increased to $3 seven a strong first quarter aviation 2020, EBITDA was replaced with 2021 results.
This metric does not take into consideration the prior period EBITDA from our recently acquired H S. S business and as we continue to recover our aviation business. We expect net leverage to return towards 2020 levels by year end 2021.
With that I will turn the call back over to John.
Thanks, Steve in summary, our first quarter results were strong, particularly given lingering pandemic related headwinds.
We achieved sequential revenue growth across all business segments, while continuing to lay the groundwork required to capture additional share in higher value segments of the market.
Our leadership team has completed a successful immediately accretive bolt on acquisition, while winning several new contract awards, including a transformational business of General Aviation engine components agreement.
All of 2021 will be a period of working capital investment for our company.
We view these investments as foundational for what we expect will be significant high value growth within higher margin markets for vse in the years ahead.
I am proud of the exceptional efforts put forth by our team I look forward to announcing additional progress as we continue to build this leading aftermarket services business.
Operator, we are now ready for the question and answer portion of our call.
Thank you we will now be conducting a question and answer session. If you'd like to ask the question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is on the question Kipp you May press star two if he would like to remove your question from the queue.
The participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Thank you. Our first question comes from Ken Herbert with Canaccord. Please proceed with your question.
Yeah.
Yes, hi, good morning, John and Steve.
Good morning day.
Hey, Good morning, John My first one yeah I first wanted to ask about the.
On the distribution agreement you just signed on the the for the business jet engine accessories. Congratulations on that can you talk about the margin profile of that agreement I. Appreciate all the detail on the topline implications, but how do we think about the the dropdown of that agreement in sort of the back of the rest of this year and into 'twenty two.
Yeah, I mean for competitive reasons I don't want to you know publicly share of kind of what the margin profile of Steve How would you kind of guide of kind of a little bit on that how to look at it.
I would say, it's gonna be in line with how we've talked about that business you know in terms of its long term profile.
I think we've been pretty public about saying that where that business is out and getting back to pre COVID-19 levels. I think you should you know we've gone out and the explained a little bit more about first are the fiscal year 'twenty, one of being about $12 million on revenue.
There are some costs associated with getting the business up and running so it's you know just thinking about it's not kind of meaningful contribution in the year, but you know we're beginning to ramp the program headed into 2022 and beyond.
Yeah.
Okay. That's helpful and then second on that agreement.
Can you talk about the the pipeline of similar agreements I would imagine.
And as we've talked now's, the time to maybe take share as the Oems face.
It's a challenging marketplace, but.
You know without you know specifically predicting when we could hear about more of these but what are the conversations like with the Oems now across the across the business and how should we think about additional opportunities on the pipeline.
Yeah, I mean, we feel very good about the backlog pipeline and the Delta on pipeline in all three of our business segments right. Now you know it's been a tremendous focus of the buying for the last few years and starting to really see the pipeline of of activity really start to build I would say for aviation, yes, we're focused on building the pipeline, but we've been down.
I have a few really significant awards and it's you'll see a little bit more of a balance as we move forward. This year of New awards, along with the talking about executing on these awards I mean, I want to start to generate the revenue and earnings.
The debt the debt the debt from the piece of paper that we put out in our press release, so it'll be a balance of execution and new awards, but we do feel very good about the pipeline of vote of awards I would say that there are they're not as large as the one that we just announced that is the very rare size of the deal but there are many large awards out there with.
A variety of Oems.
Great. Thanks, and just finally, Steve is there anything we should keep in mind across the segments as we think about sequentially here from the first of the second quarter.
What kind of a we haven't given guidance, obviously, but the what we've gone back to at the start of the year I think we would hold true which is that we're expecting the aviation business to grow sequentially every quarter. So we demonstrated that here in the first quarter, we're expecting that to continue on and then we'd broadly just said that we expect the businesses all of all three of them to grow throughout.
And I think if you look at the first quarter results you know in terms of looking at the second half theater, all going to have to grow to get there, but we're still confident that as our overall qualitative guidance for the year.
Okay, perfect I'll pass it back there thank you nice quarter.
Thanks, Ken.
Thank you. Our next question comes from Michael Carmony with true. Please proceed with your question.
Hey, good morning, guys nice results of climax of taking my questions.
And just to stay on that last question, Ken was asking I think the average.
The guidance, but the qualitative from last quarter, you talked about that 40, 60, EBITDA split some new contract acceleration.
Obviously, the only item that seemingly change is just the free cash flow I'm, just getting the inventory investment, which is well explained but those general EBITDA split still still hold.
Yes, we're still holding to the guidance that we gave earlier I was sort of percent first half 60 per cent second half and then kind of given some updated information in regards to inventory most of most.
Predominantly driven by the OEM deal Yep perfect John Yeah, simple question, but I don't know.
How and why did you guys win this contract maybe can you point as to what the value proposition was you know what was there a lot of competition for this or you know what do you think you know enables the S E. The secured the steel.
Sure a couple of things you know first of what we will announce more details about the OEM and the like in the coming months, we really wanted to align that with the customer communication. This is our current deal that's managed in house by the OEM. They are managing the aftermarket support in house and this was a desire to outsource I think.
Again as I've spoken about in the past some of the opportunities that we found through COVID-19 was you know people have the time to focus on some of these strategic initiatives that they wanted to execute.
Well it was a competitive process, the where others involved I'd say for us the biggest differentiator that we offer is this predominantly business and general aviation work and we have a tremendous amount of history of success on their distribution business and managing complex the G&A programs, including engine type programs.
The end of life programs and the like as well as our our MRO shop in Kansas. That's a on the OEM focused engine accessory shop for business in general aviation that does exchanges and and MRO activity. So the combination of those two.
And you know the the long history that we've had with this OEM are really enabled us I think to differentiate ourselves from our peers out there and I'm really excited about the about the program the size of the program and what it will do for our business in General Aviation business meeting now will have access to the.
The entire customer base and the to me what I love about these deals very similar to the the landing gear of deal that we announced is not just what we we announced what the deal looks like itself, but it's much more about everything that we can attach to it once we get it implemented all of that those opportunities for bolt ons on add on product lines.
Got it and I want it that's a good segue I wanted to ask about those cross sell opportunities. So do you think there's any I'll call. It you know maybe on elephant type contract out there that you just secured or is this going to be more low hanging fruit with individual operators individual owners or how do you think these these kind of cross sell and up sell off.
<unk> play out.
Yeah, Matt I think that you know we've got a you'll hear more from us on the coming months about the strategy not just around this program, but around the business in general aviation customers of what we plan to do there.
And we definitely see an opportunity to cross sell on see an opportunity.
As Ken mentioned, we're aware of the pipeline of deals many of the pipeline of deals are coming when the Oems understand now exactly where we play and how they can fit into that strategy. So so some of it is even reactive where we're getting the calls now to say you know we think our product line will fit very nicely and what youre doing.
Got it got it last one from me and then I'll just get out of the way it sounds like the distribution side of the business, leading the recovery in the business General aviation.
What do you think what are you seeing what are you hearing is that a lot of restocking where were inventory levels low or was there a lot of deferred maintenance work what kind of color can you provide us with on the on that nice distribution growth that was certainly leading aviation or.
Yeah, I mean, two things number one is you know our business is predominantly a proprietary product.
More expensive products. So there is not necessarily the amount of product out there of customer locations, which is very different from what I've done in the past the it's nice to see all of it helps the the recovery of a little faster than the second is obviously, it's coupled with some of the new business wins on the execution on those wins and now we've kind of said that's the will have the normal market recovery and then our ability to outpace that with the new.
With some new wins and we are starting to see you know I've said that the MRO business was lagging a little bit and we are starting to see a lot more positive signs of that business as well.
Got it.
Perfect. Thanks, guys I'll jump back on the Q.
Thanks, Mike.
Okay.
Thank you. Our next question comes from Louis Dipalma with William Blair. Please proceed with your question.
Yeah.
John and Steve Good morning.
Good morning.
Good morning.
The the engine accessories deal seems transformational from an operational perspective.
In the estimated how revenue can scale or will scale up the $60 million per year.
Just to be clear does that run rate include the potential revenue synergies from cross selling and bolt on or is the cross selling additive to that $60 million of ourselves.
Cross selling is additive.
So the so that's the that you had.
This represents the clean deal.
Gotcha, and when when including the deal at the 60 million dollar run rate are you able to estimate what fraction now of your total aviation business.
Is like business debts, and general aviation versus no commercial and cargo on other segments.
Yeah, well, but we were not ready to share that information most likely as we talk about 2022, we'll probably share a little bit more color on what those markets look like as I, just said a little earlier, we'll continue to share more details on the business of general aviation strategy and as we get the towards the back end of the year, we'll share a little bit more color on you know we now.
All of them breakout the MRO and the distribution business in the filings that will start to share a little bit more color on what the markets look like as well, but we're not we're not prepared to do it at this point.
The sense that that makes sense and switching quickly to the federal and defense business are a 15% sequential step up in revenue it seems that business has stabilized.
After last year's churn is the run rate that you achieved for revenue in the first quarter should we expect that the sustainable for the rest of the year.
Yeah, Louie so we have gone out in the first quarter and we communicated that you should expect all three of our business segments to grow year over year.
So I think in order for us to do that this would have to be of sustainable rate. So we feel confident in saying that I will say, though that we've communicated it it is a little lumpy at the top line. We've communicated there are some larger contracts that sort of move in and out but I think we were expecting this business to start to recover of your nicely.
Great. Thanks, Steve Thanks, Tom.
Thanks Louise.
Okay.
Yeah.
Thank you there are no further questions at this time I would like to turn the floor back over to John Cuomo for closing comments.
Yeah.
Great. Thanks, everybody for joining our call today and appreciate the continued confidence in the business and we look forward to speaking with you in July after our second quarter of a great day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.