Q2 2021 VSE Corp Earnings Call
[music].
Greetings and welcome to the C Corp.
Corporation second quarter 2021 earnings conference call at this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
My pleasure to introduce Noel Ryan Investor Relations. Thank you you may begin.
Welcome to Vse Corporation's second quarter 2021 results conference call, leading the call today are our president and CEO, John Cuomo, and Chief Financial Officer, Steve Griffin.
Presentation, we are sharing today is on our website and we encourage you to follow.
All along accordingly.
Today's discussion contains forward looking statements about future business and financial expectations actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the 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 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.
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.
Let's begin on slide 3 of our conference call materials, we continued to advance our business transformation and revenue growth and diversification strategies during the.
And with that well.
We continue to take share in focused high margin verticals, while capitalizing on gas, but then underserved fragmented markets, where our differentiated technical expertise and integrated suite of products and services remain key competitive advantages excluding nonrecurring items total.
Quarter revenue increased by 18% year over year, adjusted EBITDA increased by 10% year over year and adjusted net income increased by 16% versus the prior year period.
Further all business segment had sequential quarter over quarter revenue growth.
Within our aviation segment.
A combination of new contract wins and share gains within the business and general aviation market.
Distribution product expansions and new program launches.
MRO service capability expansion.
And a gradual ongoing recovery in air travel.
Supported strong organic growth throughout.
Total debt.
Aviation segment revenue, excluding the <unk> divestiture increased by 52% on a year over year basis, representing the fourth consecutive quarter of sequential revenue improvement.
Adjusted distribution revenue increased by more than 90% on a year over year basis.
While repair improved 16% when compared to the prior year period.
On balance aviation generated adjusted EBITDA of $4 million versus $1.2 million in the prior year period.
As we've indicated on prior calls.
Is this a general aviation market remains a.
Key growth opportunity and focus area for vse.
The market is fragmented creating complexity for the large number of owner operators, who want an integrated solution provider capable of supplying a comprehensive array of aftermarket parts and MRO services.
During.
And the last year, our team focused on creating a business in general aviation platform that encompasses the full breadth of nose to tail products and services required by business jet customers.
1 that builds upon our well established MRO capabilities and parts distribution business.
Last quarter.
<unk>, we announced a major engine accessories and distribution agreement in this market a brief update.
We are progressing quickly with program implementation and began successfully supporting customers out of a disagreement from our Kansas in Miami centers of excellence in the month of June.
Earlier this week, we announced the acquisition.
A Kansas based global parts group.
Fully integrated aftermarket distribution and MRO service provider supporting this market.
Stocking more than 95000 part numbers global parts distribution focus is on supporting airframe components, while its repair capabilities extend to hydraulics and pneumatics.
From a strategic perspective this acquisition achieved several important objectives.
First it significantly expand product distribution offering and repair capabilities across a diverse base of global business and general aviation customers, including airframe serving to round out.
Our B N G E solutions portfolio.
Global parts currently serves more than 3000, small and medium sized business share customers across more than 100 platforms is very few of whom are currently vse customers.
Second this acquisition is expected to generate significant.
<unk> revenue synergies as both new and existing business jet customers leverage the full breadth of our combined repair and distribution capabilities.
Finally, this transaction further positions vse as a consolidator of high quality complementary business and general aviation assets.
Given the fragmented nature of the B N G E services industry, we see opportunity to continue to add higher quality complementary assets to our portfolio as we build a best in class solution for business jet customers.
In 2020 global parts generated approximately $65 million in revenue.
While the EBITDA margin profile of this business is below our long term aviation segment average, we see opportunities to bring the margin profile in line with the segment average as the business is integrated.
Turning to a review of our fleet segment.
Excluding a nonrecurring pandemic related P. P P order in the prior.
Year period fleet revenue increased 12% on a year over year basis in the second quarter driven by continued growth in our e-commerce fulfillment business.
Commercial revenue increased by more than 100 per cent on a year over year basis in the second quarter, representing 30% of total segment revenue in the period.
Period, given the considerable growth evidenced in the commercial fleet business, we have and will continue to invest in expanded distribution capabilities to support further scale.
Given supply chain related challenges caused by the pandemic. Many fleet customers have turned to our Wheeler fleet solution.
<unk> solution.
Given our large on hand inventory selection and industry leading service.
And our federal business revenue increased 7% on a year over year basis in the second quarter, driven by a combination of organic growth and contributions from the recent Heiko special services or.
Or H S S acquisition.
Both bookings and funded backlog improved materially versus the prior year period, driven by maritime services and the contributions from HFF.
The HSN integration has been seamless with the business performing on plan during the first several months post acquisition.
As within federal and defense, our strategic focus remains on developing higher value services and capabilities and support a bolt on and off base maintenance.
To that end, we recently leveraged the capabilities and expertise gained through the HSA acquisition to develop what we now refer to.
Aircraft maintenance and modernization division within our federal segment.
This division is currently supporting government customers with maintenance and modification services, including scheduled and unscheduled maintenance checks avionic and structural modification and upgrades and conversions for government and military aircraft.
Similar to our approach within the aviation segment, we are developing bundled niche market solutions that support margins above historical average, while positioning vse higher on the value chain.
Over the last 60 days, we added 2 new contract deal team programs to this division supporting the.
Again E D aircraft and the Navy's MH 60 helicopter maintenance both in southern Virginia.
In summary, our second quarter results reflect continued progress on our business transformation strategy.
We delivered another consecutive quarter of profitable growth.
Completed our second acquisition in the last.
<unk>.
And continued to add strong experienced industry talent to our team with plans to announce our chief legal officer appointment shortly.
We have made significant strides in recent quarters successfully navigating through a global pandemic growing our product distribution and services capabilities.
Well Bill.
<unk>, our presence within growing higher margin adjacent markets.
As we look to the second half of the year, we intend to build on this momentum with a strong focus on program execution and new business integration and realizing the results of both.
With that I'll hand, it over to Steve for a review.
<unk> 6 financials.
Thanks, John turning to slides 5 and 6 of the conference call materials for an overview of our second quarter performance.
We reported $175 million in revenue in the second quarter, an increase of 4% from prior year period, excluding the divestiture of <unk> aerospace and a nonrecurring.
In order for PPE in the second quarter of 2020 total revenue increased 18% on a year over year basis in the second quarter on an adjusted basis revenue increased across all 3 reporting segments on both the sequential and year over year basis in the second quarter.
The year over year improvement was driven by both new program.
<unk> of our profit and share gains within the aviation segment organic and inorganic growth within our federal segment and continued commercial and ecommerce fulfillment growth within our fleet segment.
Turning to slide 7.
Aviation segment revenue, excluding the 2020 and divestiture of Cte aerospace increased by more than 50%.
When year over year in the second quarter.
Both our repair and distribution businesses grew on a year over year basis with distribution revenue up more than 90% on a year over year basis, excluding the divestitures in the prior year period, given improved end market demand and new contract wins.
During the second quarter our aviation.
<unk> segment recognized an increase to its inventory valuation reserve, resulting in a non cash $23.7 million pretax loss related primarily to aviation segment inventories purchased before 2019 the.
The reserve is primarily driven by the significant decline in global air travel related to the COVID-19.
Percentage that resulted in lower demand for certain aviation products and international regions, primarily in the Asia Pacific region, We do not anticipate this lower international demand to materially impact the recovery of our aviation segment. At this time, we do not anticipate any further material inventory reserve adjustments.
Turning to slide 8 within our fleet segment revenue, excluding a nonrecurring order for PPE during the second quarter of 2020 increased 12% versus the prior year period as higher commercial revenue more than offset a decline in the department of Justice and U S. Postal service work.
Commercial revenue increased.
<unk>, 7% versus the second quarter of 2020, driven by a 161% increase in e-commerce fulfillment revenues.
While our commercial revenues are on average slightly lower margin than the U S. Postal service revenues, we remain focused on driving absolute growth in EBITDA dollars within commercial.
100, and what we believe remains a significant growth opportunity for us.
Turning to slide 9 within our federal and defense segment revenue increased 7% year over year and 6% on a sequential basis, driven mainly by contributions from Heiko special services and strong revenue performance on.
Give me program.
Federal and defense segment bookings increased 138% year over year due to maritime services and Heiko Special services contributions, while funded backlog increased 31% versus the prior year period due to maritime services contributions.
Turning to slide 10.
In July we amended and extended our existing loan agreement with our commercial banking syndicate.
This amendment extends the maturity of our existing arrangement from early 2023 until 2024.
This agreement provides us flexibility to further our business transformation.
<unk>.
Profitable revenue growth from our most recent aviation distribution awards.
And pursue immediately accretive strategic acquisitions.
At second quarter end, we had $140 million in cash and unused commitment availability under our $350 million credit facility. The company's existing credit facility includes 1.
Billion dollars, an accordion provision subject to a customary lender commitment approvals.
As of June 30th Vse had total net debt outstanding of $275 million and approximately $70 million of trailing 12 months adjusted EBITDA, resulting in net leverage of 3.9 times.
Over the near to medium.
<unk> term, we expect working capital investments and new program inventory will convert into incremental revenue and EBITDA, resulting in a decline in net leverage at or below 2.5 times by year end 2022.
I've now been with Vse for 9 months and I'm motivated by the progress that our teams have made on our organic.
100, and inorganic strategy, while also improving internal processes. Our teams have worked hard over the last 2 years to position vse to respond with agility and speed to customers and market opportunities I'm excited by this momentum and the depth of talent vse.
With that I'll hand, it back over to John.
Thanks, Steve in summary, our second quarter results were strong 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 second successful bolt on acquisition.
Several new contract awards growing backlog and continuing to execute on the contract wins over the last year.
I'm proud of the progress and the outstanding Vse team 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.
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Uhm.
Our first questions come from the line of Michael <unk> with <unk>. Please proceed with your questions.
Hey, good morning, guys. Thanks for attending on the cash.
Questions nice quarter nice results.
<unk>.
Hey, John just you know.
Aviation, obviously, we're seeing this domestic recovery I think you guys put up a positive adjusted operating margin I think it was the first time in 5 quarters.
How should we think about.
The aviation margin.
You're quite projector I mean, even if you want to talk to the EBITDA margin, but as we continue to recover here it sounds like it sounds like it should build from these levels. It sounds like global parts you might have some work to do there to lift the margin, but anything you can you can help us with on that go forward margin profile in aviation.
Sure.
Sure Steve you want to address the rest of it Mike Yeah, I think Mike Youre seeing us start to gain some scale as the revenue comes back and that's improving the overall margin rates is where as you know we kept some of the investment in the business. So that we could scale as the market recovers. So you should expect that our margin rates to continue to recover in.
In line with how the market recovers.
As you mentioned global parts does have a slightly lower margin rate than our overall historic average and where we've given targets to in terms of the aviation portfolio, but we do expect opportunities to improve that margin rate, but you know towards the second half, we'll obviously absorb that and continue to grow from there.
Okay, well on global parts, what's the path for margin expansion.
You know, what what levers where they were they not pricing accordingly is there some pruning of the product portfolio, what specific or is it more bundled solution. What what are the levers you can pull there to drive the margins within our global Park.
So all day about so it's not this is not a deal where there is cost take out.
Synergy perspective, we see this as we're keeping the facility will expand the facility as a business and general Aviation Centre of excellence.
See a tremendous amount of revenue synergies in.
The lack of overlap of be G&A customers, so the ability to take our existing products selling through their channels and vice versa.
No.
Come from my background, a very strong.
Strong school of product margin focus and deploying that.
Some of those best practices with the team here bolt on.
Product and cost and price margin.
We feel very comfortable that we'll get that.
That business to a different margin profile as we enter 2022.
Okay. Okay.
And then just on the you took the inventory reserve can you just.
Roborate a little bit more I think you said it was tied more to Asia.
Asia Pacific region were there specific platforms that were required.
I'm just surprised I guess I mean, it seems like traffic picking up there you don't have the international or the big heavy wide body exposure.
Also can you tell us about the inventory there.
Yeah.
In the second quarter, we evaluated our excess and obsolescence policy, obviously driven by COVID-19.
And in light of that we're also looking specifically at certain regions Asia Pacific being 1 of them and there were a couple of distribution deals entered into prior to 2019, where the the revenue expectations were at levels higher than what our anticipated forecasts are now for those product lines and.
And that's just lowered our overall demand forecast for those product lines.
You know I wouldn't necessarily call it out to any 1 specific program or platform. So much of it is just tied to the overall market and the expectations of recovery in those.
Certain regions a couple of notes that I would say first off is we don't anticipate any incremental or any additional reserves at this time.
I'd also say that.
We don't anticipate these reserves to affect our go forward strategy or execution in our aviation business is theyre not material in terms of the overall revenue contribution to the business historically.
And then just lastly, you know ive worked in very capital intensive businesses with a net.
Aerospace inventory model before and I. Just think this is the right approach for us from a policy.
<unk> and revenue perspective, as we move forward and continue to grow that side of our business.
Got it last 1 from me and I'll jump off here, but if I, if I strip out the inventory reserve and I think you guys talked about it, especially with the engine deal.
First thing in new inventory it looks like that core inventory was up 6.6% to 7% just how to think about.
Future working capital and maybe second half free cash flow. If you can give any color there.
Yeah. So you've noticed obviously, we've made investments as we've previously described that we would in the first half of this year to continue to execute on the programs that we've been awarded.
Just to recall those the Pratt and Whitney Apu deal.
Which was announced last year and then also the larger deal which is the Pratt <unk> Whitney Canada engine accessory deal that we announced this year, which is going to be a usage of $56 million I'd say, we're on the way in terms of building up the necessary inventory levels to support those programs.
We have already communicated that will be free cash flow negative for the year.
In the second half, we expect to see some of the contributions of those programs take effect, but at this time, we don't share any further guidance on that.
That's kind of what I would what.
But I think yes, I think it's helpful to share kind of as you look at 2022, Yeah. I mean in terms of I mean look these investments are obviously going to bear fruit as we start to execute on the programs heading out into 2.
'twenty, 2 which is a significant opportunity for us in many ways. They are almost like an acquisition in terms of the amount of inventory brought on and we see great traction in the marketplace. I think Mike. We may have cut you off I think you were about to ask maybe about how far away into the Pratt Whitney deal.
The inventory investment.
Yes, yes.
More than 50% into that.
I stood up the locations on the East Coast. We've also stood up the locations in the Central region and then in the second half of the year, we'll be standing up our location in going live on the West coast.
Got it got it perfect. Thanks, guys I'll jump back in the queue.
Thanks, Mike.
Thank you. Our next question is come from the line of Louis Dipalma with.
Blair. Please proceed with your question.
Good morning, John even though.
Good morning.
With the the global parts acquisition.
Uh huh.
The business Aviation and general aviation market is very.
<unk> attractive because of its fragmentation over the long term what do you envision in terms.
Of your revenue composition between business aviation commercial and defense in terms of parts distribution and repair.
I'd say, we're not ready to answer that question.
William yet, but I would say it for the long term expect to see a level of balance.
Between both the distribution of products within those market segments as well as the MRO capabilities that we have within those market segments right now as we see the market both recovering faster than business in general aviation and were seeing opt.
<unk> is both organically and inorganically to support those gaps.
We're going to see that debt.
Debt percentage from a market perspective skew much more to be G&A in the near term, but expect it to be more balanced in the long term.
Gotcha and then.
Our previous.
<unk> answered you discussed.
Aviation.
Margin is there a general timeline in terms of when you would anticipate the aviation margin to return back to close to the levels of 2019.
Previous should it be around when.
The Pratt and Whitney.
The deal matures.
Is there any other color you can provide in terms of just the overall trajectory of the aviation margin.
Yes.
We've communicated in the past and it's still true today as we will see those aviation.
And rates recover to their pre COVID-19 levels, when both the repair and the distribution businesses recover to their pre COVID-19 levels. So obviously, you've seen that the distribution business has recovered since COVID-19, mostly driven by market share gains and the new programs that we've been awarded the repair business is not quite there yet and so what I would communicate as as the repair business starts to scale.
Rail we start to see the revenue increase and obviously cover some of the fixed costs in that business. That's when you should see the margin rates get back to their pre COVID-19 levels, we haven't necessarily articulated when we expect the repair business to get back to its pre COVID-19 levels, but I'd say, we're on track with our internal forecast as to what we'd expect to see in terms of our recovery profile ahead of the market.
Margin, if that makes sense and.
On that topic for the repair.
Division pro forma for the divestiture of the engine turbine business, how much is the repair division or how much was it down in the second.
Quarter versus the comparable 2019 quarter.
So repair on an adjusted basis, excluding the CPE business is actually on a year over year basis, it's up 16% versus the second quarter of 2020 up 4% versus the first quarter of 2021 still download versus the.
The pre COVID-19 level.
Yeah do you have a percentage of how much it's down versus the 2019 pre COVID-19 level on an adjusted basis.
No I can get that for you though.
Thanks.
That's it from me thanks.
Thank you our next questions come from the line of Jeff Fan syndrome with B Riley. Please proceed with your questions.
Hi, good morning, everyone.
Morning shift gears for a second.
Can you speak more about the growth in the commercial fleet business. The E comm fulfillment and then any thoughts on the outlook for that segment.
Including contribution margin outlook.
Sure from a strategic perspective really pleased with the results when I came onboard here 2 years ago. The first priority for that business. It's such an outstanding distribution platform was to focus on customer diversification when it's such a high concentration with 2 customers.
So really pleased to see the continued progress and how.
Positively the market is responding to our product and service offerings in that business. So.
We speak about acquisitions for that business, we decided rather than acquiring a business to build internal capabilities and build the team.
Italy to manage that and it's been quite successful now it's about scaling that business for the operating costs that we put in so Steve do you want to kind of give a little bit more clearer guidance or clarity on kind of how we should look at it from a margin perspective, yes, certainly from a margin perspective.
As we grow the commercial side of our business. It is an overall lower margin.
And then our U S postal service business. So we have seen some margin decline as a result of that as we grow that business, but there are also significant investments, we're making to grow that commercial business, which we believe will be able to scale on and as we grow the revenue will be able to get to a more normalized level in terms of the margin rate, we haven't given long term guidance other than to say somewhere in the.
Teens is where we've been we've been on the high teens range, but as we mix shift towards a more balanced profile of revenue, we'll see that come down.
And we're confident in our ability to drive that scale in terms of the investments we've made in the business.
Okay great.
And then I think you mentioned bookings and backlog increasing debt.
<unk> business.
Any more color you can give us on developments around new contracts and renewals there.
Yes, I mean from a from a market perspective, I'd say there is still.
It's slow in terms of awards. So so the backlog is building the pipeline of new business opportunities is building, but both are our renewals.
Extended and new programs.
<unk> keeps getting pushed out so there is a little bit of a lag in actually seeing the realization of both awards and renewals on the Recompete, but very pleased that first to report.
Growth in backlog at the quarter specifically.
Keeping it around our our maritime business.
And through some of our existing contract vehicles and.
Really that from a strategic perspective, taking our Heiko special services acquisition and building a internal.
Division that is sold.
<unk> on that aircraft maintenance and modernization and with our contract field team program being able to have 2 awards that were won in the late first and early second quarter and being able to execute on both of those in June and July of this year to support that New division.
Okay. Good to hear and then just 1 last final 1 if I could.
<unk> thoughts on how the jet fuel supply issues can impact your business if at all.
John is looking at me.
When we look at risk factors I would say, we don't look at that as a primary risk factor at this point in time, what we're seeing in our business and general aviation.
<unk> customers is.
Those aircraft are flying.
And we're not seeing any impact there whatsoever and in fact, a few down days could help us in terms of getting some of the maintenance activity moving and we continue to see.
Even with the Delta variant, we've continued to see domestic travel quite strong international travel and.
Our international work continues to be lagging very much in comparison to both domestic commercial and business in general aviation and we Havent really seen those trends stray very much in the last few months.
Okay. Thanks for taking my questions and best of luck. Thank.
Thank you.
Thank you. Our next question is coming from the line of Austin Moeller with Canaccord Genuity. Please proceed with your question.
Good morning, everyone. My first question is for Steve.
I know where the weather.
The revolver capacity stood as of June 30th, but can you indicate to what degree.
They've had to draw from our revolver for the global parts acquisition.
Yes, I mean, I believe we've announced that the global parts acquisition was $38 million total purchase price for cash so thats, the drawdown associated with that which youll see take effect in the third quarter here. You'll also note that we extended and amended our debt agreement with our term loan day.
You made it.
As part of that agreement, which is a subsequent event.
Just to give you a little bit of color and context around it as.
As we looked at our overall capital structure were certainly considering everything is part of our transformation, but 1 of the things that we would love to be able to do is make sure that we've got the time in this space to continue to work on our transformation and make the investments in our.
Our business and realize some of the revenue and profitability growth drivers based on the investments. We've made in our historic agreement would have been become current in the first quarter of 2021, and so by extending the agreement by 18 months. It really does give us the time that we need you noticed in terms of the overall unused commitments of $140 million, we feel that that's appropriate.
Preet for us as we continue to execute now on the programs that we've won in the global parts acquisition. So through the second half of this year really gives us the time to work with those businesses realize the revenue opportunities and drive the profitable growth and really give us. Another 12 to 18 months before we make any further decisions around how we capitalize the business.
Okay.
Great.
On the on the aviation business I know you didn't call out any specific aircraft platforms.
<unk>.
Specifically relevant to the inventory reserve, but can you maybe indicate what the aim.
Each of the aircraft involved or what.
You know considerably older aircrafts.
I mean, I'd say, they're mid to old I wouldn't necessarily highlighted them at what I would focus on is the region is primarily affected by Asia, which in and other shelf Gen tends to be more wide body focused international travel driven.
I would say.
Okay.
And I know you guys are anticipating any any more changes to the inventory reserve at this time, but do you have any concerns about the adult ovarian potentially flow.
Other impacting Asia Pacific travel or protracted out over an extended.
Periods of time.
We don't see any impact to the reserve based on the recent varian.
Okay.
And then.
How would you expect.
An increase from the defense budget, you know the Senate Armed Services Committee proposed a $25 billion increase.
Above the button administration request, how do you think that might impact demand in the in the federal defense business for you.
I think from a positive perspective.
The thing that we love the best as we keep hold things moving and you'll see less retirements at the spend is in the services.
Areas that.
Did that we support so I would say a big portion of our revenue.
Is treaty based and not budget based so we we are a little bit less subject to some of the.
The budgetary constraints that some of our competitors.
It might be but that said, it's always an opportunity for us when budgets increase.
Okay.
Okay, great. Thank you guys.
Thanks Awesome.
Thank you. Our next question is coming from the line of Michael <unk> with tourists. Please proceed with your questions.
Okay.
And maintenance thanks for taking the follow up here just on global Parks I think you mentioned.
Can you call out there $65 million right.
Revenue.
Run rate in 2020, what was the pre Covid what was the 2019 run rates can you give us color on on what first half year has been running at.
Just for modeling purposes, as we think about layering that in.
Yeah, we haven't necessarily I don't know that we're necessarily ready to share. The early part of this year's numbers, but we share the $65 million I'd say they were down in the mid single digit range, a little bit versus the 2019 levels.
They had a pretty strong business.
And general aviation business, which helped buoy them throughout the Covid period.
But as Steve I would say, it's not a hockey stick of a 2021 plan agreed Mike as you're looking at it it's relatively consistent 2021 plan because of the platform that they're on the 2021 revenue has been relatively consistent.
20.
Consistent Okay got it thanks guys.
Thank you there are no further questions at this time I would like to hand, the call back over to John Cuomo for any closing comments.
Oh, Thanks for the time today I appreciate your continued interest and support in a V O E.
Have a great rest of your day everybody.
1.
Thank you so much that does conclude today's conference. Thank you for your participation you may disconnect your lines at this time.