Q3 2021 VSE Corp Earnings Call
Greetings and welcome to the G. S E Corporation third 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.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host Noel Ryan you may begin.
Thank you operator, welcome to Vse Corporation's third quarter 2021 results conference call.
Leading the call today are our 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.
<unk> 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 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.
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 material.
These he had a strong third quarter, representing the highest quarterly revenue run rate since the fourth quarter of 2016.
Excluding nonrecurring items total revenue for the quarter increased by 27% year over year supported by total year over year growth across all three reporting segments.
Adjusted EBITDA for the quarter increased by 19% year over year, while adjusted net income increased by 42% versus the prior year period.
We continued to execute on our aftermarket distribution in MRO strategy during the third quarter.
While positioning the business to generate above market revenue growth in higher margin verticals that leverage our unique value proposition.
Through new contract wins.
Long term program extension.
New program execution. The addition of new MRO capabilities.
Growth in our e-commerce platforms and contribution from recently completed acquisition.
V. S. He has created a strong recurring base of business.
Which will drive continued growth and margin expansion opportunities for our business into the future.
Specifically within our aviation segment revenue increased more than 100% year over year to a record $73 $1 million driven by new program execution and contributions from the global parts acquisition.
Aviation is now posted five consecutive quarters of sequential revenue improvement driven by both organic and inorganic growth while both aviation adjusted EBITDA.
And adjusted EBITDA margin.
Have trended materially higher versus prior quarter and prior year levels.
Insistent with our focus on higher value margin enhancing opportunities.
Third quarter aviation distribution revenue with nearly 190% above the prior year and more than 90% above the second quarter 2021.
Due mainly to organic share gains within the business and general aviation market an area of significant long term opportunity for the company.
And the positive impacts of our global parts acquisition.
Well airline MRO revenue improved 8% versus the prior year period.
Zero activity remains below pre pandemic level.
As this market continues to recover we expect to see further improvement in aviation margin as MRO revenues become a larger portion of the overall aviation revenue mix.
As discussed on recent calls the as he continues to build a business in general aviation platform that encompasses a full breadth of products and services.
A tip to tail approach to support the requirements of our B N G E customers.
One that builds upon our established MRO capabilities and parts distribution business.
In June Vse Aviation commenced service under a 15 year $1 billion and you're in accessories distribution agreement.
This agreement represents <unk> largest business and general aviation focused contract to date.
The combination of both strong customer demand for the products and services we support.
And execution and implementation by the BSA team.
The result in contract revenue of $12 million in 2021 and $45 million in 2022.
Earlier this month, we announced that Vse aviation had entered into a five year extension with a global aircraft engine manufacturer valued at approximately $125 million.
Under the terms of the extension of this agreement we will remain the worldwide distributor of new fuel control system and associated spare parts to the business in general aviation and rotorcraft market to support this leading global OEM.
Similar to our engine accessories distribution program. This provides a multiyear pipeline of higher value contractual revenue and further positions us to become the leading integrated supplier of flight critical systems and MRO services to the <unk> market.
<unk> builds upon our long term relationship with another major OEM.
In summary, our aviation segment continues to execute on plan, while continuing to build a leading global distribution and MRO services brand.
Aviation is now our largest segment by revenue we still have work ahead of us, particularly as we continue to execute on the new program wins and focused actions to drive EBITDA margin expansion.
I'm incredibly proud of what this team has accomplished their relentless focus on the customer and I and I see ample runway for the above market growth in the years ahead.
Turning now to a review of our fleet segment, excluding a nonrecurring COVID-19 related personal protective equipment order in the prior year period.
Fleet revenue increased 6% on a year over year basis in the third quarter driven by continued growth in our commercial e-commerce fulfillment business.
Commercial revenue increased by 66% on a year over year basis in Q3, representing 34% of total revenue in the period.
Fleet adjusted EBITDA margin improved 70 basis points sequentially in the third quarter.
Our federal <unk> defense business had a solid quarter with revenue up 2% on a year over year basis.
Driven by a combination of organic growth contribution and the recently completed Heiko Special services acquisition.
Federal segment backlog increased 23% year over year during the third quarter.
It is supported by new business development activities.
Before I turn the call over to Steve allow me to share some thoughts on the macro environment.
Continued supply chain disruption and cost inflation, our business risk we are actively mitigating.
At this time, we are not reducing any internal revenue our margin forecast and our current outlook for the remainder of the year.
In closing each of our businesses executed at or above plan during the third quarter, while continuing to prioritize customer program execution, and new business development within underserved higher margin distribution and MRO market.
We have a strong pipeline of new business development activity and announced new contract wins and program extension.
That we expect will provide long term recurring revenue streams at attractive margins.
While 2021 was a year of significant upfront working capital investment and new program inventory.
We expect to realize the benefits of these investments as we look ahead to 2022, resulting in improvement in free cash flow versus current year levels.
We continue to evaluate a number of smaller complementary acquisition.
While remaining mindful of net leverage, which we expect will move towards two five times by year end 2022, given a combination of improved EBITDA generation and debt reduction.
With that I'll now turn the call over to Steve for a review of our financials.
Thanks, John.
I will now turn to slides four and five of the conference call materials for an overview of our third quarter performance.
We reported $206 million in revenue in the third quarter, an increase of 27% from the prior year period, excluding the impact of a nonrecurring pandemic related PPE order in our fleet segment in the third quarter of 2020.
On an adjusted basis revenue increased across all three reporting segments on a year over year basis in the third quarter.
Our aviation segment grew for the fifth straight quarter.
102% year over year growth was driven by a combination of new program wins share gains and contributions from our global parts acquisition completed in July 2021.
Federal segment growth was driven by a combination of organic and inorganic wins in the fleet segment growth was spurred by commercial fleet and ecommerce fulfillment revenue as well as slightly higher USPS revenue.
We generated adjusted EBITDA of $24 million in the third quarter, an increase of 19% on a year over year basis.
Our adjusted EBITDA margin rate was just under 11% as we saw the aviation segment continue to improve profitability, both on a year over year basis and sequentially.
Operating cash flow less total capital expenditures was $21 million in the third quarter.
Turning to slide six.
Aviation segment revenue increased more than 100% year over year in the third quarter and was up 54% versus the second quarter of 2021.
Both our distribution and repair businesses grew on a year over year basis with distribution outperforming repair.
Primarily driven by improved end market demand and new contract wins disc.
Distribution revenue, excluding the global parts acquisition is back above pre pandemic levels, while our repair business has been slower to recover.
We anticipate a further repair recovery.
Throughout next year, particularly as we expand our integrated solutions across a growing base of business and general aviation customers.
Aviation adjusted EBITDA increased over 200% year over year and more than 80% sequentially, while adjusted EBITDA margins increased 340 basis points year over year to 10%.
EBITDA margin growth continues to be a top priority for this segment as we implement new programs and drive scale.
Turning to slide seven.
Fleet segment revenue increased 6% versus the prior year period, excluding the impact of a nonrecurring PPE order in the third quarter of 2020.
This growth was driven by a combination of higher commercial revenue and USPS work offset by declines in Dod revenue.
Commercial revenues were $27 million in the quarter increased 66% versus the third quarter of 2020.
And accounted for 34% segment revenue in line with our continued revenue diversification efforts.
Segment, adjusted EBITDA of $7 7 million was down 14% versus the prior year period, but improved 10% versus the second quarter of 2021.
Adjusted EBITDA margins declined 120 basis points year over year, However, expanded 70 basis points sequentially to 12, 8% as the segment Diversifies its sales mix and positions itself to gain scale on the recent organic investments and commercial markets.
Turning to slide eight.
Federal and defense services segment revenue increased 2% on a year over year basis, driven by contributions from the Heiko Special services acquisition and new program wins.
Offset by the expiration of a contract with the U S Army in 2020.
Federal adjusted EBITDA was $6 $5 million in the quarter and adjusted EBITDA margin rates were nine 7%.
Federal segment funded backlog increased 23% versus the third quarter of 2020 due to increased bidding and business development wins.
Turning to slide nine.
At third quarter end, we had $117 million in cash and unused commitment availability under our $350 million credit facility.
The company's existing credit facility includes a $100 million accordion provision subject to customary lender commitment approvals.
As of September 30th BSC had total net debt outstanding of $294 million.
Adjusted EBITDA for the trailing 12 month period was $73 1 million and excludes the EBITDA contribution from our two recent acquisitions prior to the date of acquisition.
Reported net leverage was four times and as John mentioned earlier, we expect to deliver incremental revenue and EBITDA from recent working capital investments in New program inventory, which will result in net leverage at or below two five times by year end of 2022 with that operator, we are now ready for the question and answer portion of.
For our call.
Thank you and at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the question queue. You May press star two if he would like to be.
Move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And our first question is from Ken Herbert with RBC capital markets. Please proceed with your question.
Hi, Good morning, John and Steve and Noel.
Nice quarter.
Thanks, Ken good morning.
Hey, John I first just wanted to ask on the aviation segment on the top line can you provide any more color on.
Maybe some of the mix of business jet versus I know you've talked a lot about the growth in the distribution versus MRO, but within the distribution side in particular.
As we think about the business jet side relative to commercial transport or geographically any more any more ways to parse out that that's very strong growth within the aviation segment would be helpful.
Yes sure.
We don't break out the revenue by market channel, but.
When I first came onboard two years ago I kind of shared that the business was about 50% business General aviation, 50% commercial the business has definitely skewed more business in general aviation specifically on the distribution side over the last 12 months. So the global parts acquisition and the contributions from that business are all business and general aviation.
They do not support commercial customers and then our engine accessories program and our revenue and earnings supported from the ramp up of that program or contributions from the ramp up that program are all business and general aviation associated as well so as we get to the back end of 2021 were seeing the distribution business SKU.
Heavily towards it be G&A versus commercial.
The on the repair side, it's still.
A similar mix that we've consistently had in the past.
Okay. That's helpful and it looks like incremental adjusted EBITDA margins were sort of low to mid teens in the quarter. How do we think about the opportunity as some of the new contract wins ramp and what should the progression of the EBITDA margins within the aviation segment look like through the rest of this year.
And perhaps into 2022.
Yeah sure Ken So the adjusted EBITDA margin for the quarter and the business was 10% up three over three points versus the prior year and up a point and a half versus the prior quarter. So what we've communicated as you should expect sequential growth from the business as we continue to experience a recovery in the new program introductions. We've historically communicated that we expect to be mid teens, which is where.
This business had been historically and that all the new program wins would fit in with that so in line with sort of historic communications.
Excuse me around the EBITDA margin rate.
So I think what you should expect as we transition to 'twenty two.
Is continued improvement in the EBITDA margin rate of the aviation segment as the business recovers all at the end of the day subject to.
The recovery in the repair business, which we've talked about as being an incredibly important indicator as to how we'll get back to that mid teens rate.
Okay. That's helpful and just one final question I know you made the comment John that you Werent seeing any real significant disruptions yet from from supply chain or a cost.
<unk>, but I'm curious are you are there any areas of concern with your OEM partners. When you think about the distribution business and are you seeing any potential impact on their supply chains and are there any steps you're having to take to maybe mitigate risk down the road from your on the distribution side, yes.
Yeah, No. It's a great question and just to just to kind of clarify my comments, we are seeing both inflation and.
And labor as well as in some areas of our cost in some areas of our business. We have actions in place that we've been taking over the last 12 months to mitigate.
Is the risk that we see and how it could it negatively impact the business and what we've done specifically as you've seen us put a lot of working capital to use in terms of inventory and making sure that my.
Assumption, having been in distribution for the last 20 plus years is that we're going to see lead times continue to push out specifically as we see recovery in the markets like commercial aerospace and Youre going to see more compression there. So we've been.
A little bit more aggressive on inventory purchases to be well prepared to manage that and actually hopefully a little bit opportunistic as well.
The other thing I'd say is we have a very in our aviation business. We have a very proprietary park heavy content with without a lot of long term fixed price contracts is a little bit more transactional in nature. So it does allow us to push that cost directly to the customer similar to our fleet business. So the fleet businesses were.
We've seen probably the most inflationary.
And supply chain pressure on product, but we've been able to really manage that with pushing that cost both logistics and price down to the customer.
Its unique times right now and we're looking at it both in terms of how do we mitigate risk as well as how do we create opportunities for the business with the inventory that we have to capitalize on both new customer relationships, because we're solving problems and to expand margins, where we can.
Great well, thank you very much I'll pass it back there.
Thanks, Ken.
And our next question is from Michael.
Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question and nice results.
Steve maybe just clarity.
Can you give the organic.
Growth rate in aviation I mean, you had I guess global parks two months should we assume maybe $8 million to $10 million of revenue contribution from those guys.
Yeah.
It's the global parts business contributed $13 million worth of revenue in the quarter I was just a little over two months in terms of total contribution the organic growth rates. So if you were to compare sort of sequential growth <unk> aviation, excluding the global business.
Was up about 26% from a revenue standpoint.
Growth, excluding global and obviously good results from our global team as well.
And it was all of that the parks, obviously all distribution.
Did some of that is some of that flow into repair.
The majority owner of <unk>.
Repair is immaterial within that number of $30 million.
Got it. So so was there anything different I mean, if I look I think you called out on the slides.
Distribution up 187% year over year.
It looks like if you had a $13 million in contribution I mean, that's a pretty big step down from from <unk> June I think you did 28 five in distribution was there anything.
In the core business, I mean X X global parts. It would seem like that distribution revenue is down significantly.
Oh no no I don't think that I would say that distribution was $54 million in the quarter.
So $13 million contribution from <unk>.
Okay got it got it.
$54 million in the quarter Okay.
Got it yes, so distribution revenue up 187%, Okay. Yeah got it got it no that makes sense.
Okay, and then just on the.
Maybe back to Ken's question on supply chain and raw materials looking at the inventory pretty significant build.
This quarter, an investment in inventory how much how much was for.
Some of the new contracts ramping up these new programs and I think John you just said youre starting to look at extending lead times, so presumably youre building. Some buffer there I mean, how do we think about the inventory levels going forward.
Yes, I mean, I'll give you sort of financial answers as it relates to cash flow. So we feel good about the inventory position that we're in today as you know we are continuing to stock for inventory associated with the new Pratt <unk> Whitney Canada deal, which we announced previously would be $56 million of inventory purchases. So we're restocking as part of the build out of that program.
In the quarter, we generated $21 million worth of free cash flow, obviously, we used quite a bit to start the year. So we feel good I think in terms of the investment level in the business and by the end of the year, we've communicated will be free cash flow negative, but sort of on a trajectory to have a year over year improvement obviously.
As it relates to the inventory levels John in terms of stocking at lead times, maybe I'll, let you handle that.
Yes, I'd say Mike.
Nothing that we're going to do will take us off of our plan to be free cash flow positive next year.
No.
Without knowing if some.
Great New opportunity comes out in the market that may <unk>.
Inventory in the marketplace do I think there's probably there'll be pricing power and shipped and prices sometime in 2022, absolutely, but I would say on the commercial side, we're not seeing that yet and on the business in general aviation side, we're really not seeing as many supply chain issues out there I think and that's why you know I was pretty <unk>.
Parent in the earlier statements about no impact to our to.
Our business for the remainder of the year I'd say, maybe where there's some opportunity would be in the fleet business.
To where we can potentially.
Expand our margins there.
And we've been talking about I think supply chain relative to aviation you just brought up fleet thinking about you know kinda white trucks in the market you serve there and everything we're hearing you know on broader auto.
Supply chain inventories lead times any anything jumping out you know on that side of the business.
Yeah. So remember our commercial business in that market was very small and you can see our commercial growth <unk>. The whole 21, and 22 is all about that customer diversification strategy for that business.
And really building a business that less reliant on one single customer and I'm very proud and pleased that how the team is performing in that diversification strategy. So so it's not like we have a ton of long term contracts on the commercial space, where we're short inventory so.
I'd say, we're been very opportunistic with our our relationships to overstock and products and actually build new customer relationships, because we're solving some problems, but you are absolutely correct that we are seeing more supply chain issues and cost inflation logistics issues on that segment and the other two.
Got it got it perfect. Thanks, guys I'll jump back in the queue here.
Thanks Bye.
And our next question is from Lewis Department with William There. Please we'll see what your question.
Good morning, John Stephen though.
Good morning, good morning.
John is the main reason that the repair business has been slower to recover then your distribution business because the mix of repairs more skewed towards commercial whereas distribution, it's more skewed towards business aviation in business aviation.
Just recovered much faster is that the simple reason or is there something up.
We do have repair capabilities in our business in general Aviation segment, and they are recovering quite well and they're very close to if not above prepandemic levels.
Commercial MRO business is still below prepandemic levels, and the recovery is slow and steady but it's.
Slow and steady.
Great and as it relates to your fleet business.
<unk> discussed a sequential EBIT margin improvement are we add up quaint and which.
Fleet EBITA stabilizes as your commercial subsegment experiences rapid growth and your USPS business.
You choose.
Some slight stabilization or maybe a modest decline how we reached the point of overall EBITDA stabilization for for fleet.
I'd say, we're closed, but but I don't want to say that we're exactly there yet or you can say this is the bottom and now you can expect steady improvements we are committed and we feel very confident that we can get the business to return to mid teens operating margins, we are continuing to invest to support our commercial fleet business and.
In the back half of 2021, we stood up a center of excellence to support our ecommerce initiatives around that business.
We continue to invest to make sure that we are building centres of excellence, we haven't ERP system conversion that will go in early 2022, So I would say that.
The reason.
Summarize it in one customer which is the USPS.
Our goal is to keep the USPS is flat to slightly down as possible contribution margin from that customer is strong and if.
That number is slightly off you may see a slight bounce and the operating income until we get to levels that are stabilized over the next 12 months. So I'd say, we're close but not exactly there yet Steve any color you want to add I think that adequately covers it.
Great and one final on Monday I'm, one of your larger competitors omentum announced that it is acquiring.
And would you would you view.
E as one of your closest comps for your Federal Division.
I mean, there's definitely a comp and definitely a competitor they play a little bit more on the technical side than we do we've got a balance of of.
Rowe services work as well as technical and consulting work in our federal independence portfolio. So they skew more on the right side than the left side, but they are absolutely.
We look at them as a as a comp and a competitor.
Great sounds good thanks, everyone.
Thank you.
And our next question is from Austin.
And of course. Please proceed with your question.
Good morning, John My My first question here is just on the federal in Defense segment you know.
The 23% increase in funding backlog, there's there's clearly been a strategy here to sort of move from the.
Some cost plus a firm fixed price contracts have you indicated what the margin differential is on that or at least ballpark to between.
The two types of contracts as you change the mix more from one to the other.
We haven't but what I will say, what we have shared as the business has historically performed in the low single digit margin rate as a total segment and we've shared of the business will perform at high single digits, hopefully pushing to a double digit margin right. So with that I think you can kind of finished the math.
Kind of the mix. So it is we are definitely moving into higher margin verticals Bolton are consulting and services business as well as more technical MRO and distribution Mark.
Yeah, and just for you to know Austin, so like going back to 2018 2019, the level of fixed price work done in the business was low 20% of total of the overall federal in defense segment last year was 54%. This year, we're somewhere in the midst of like high thirties. This quarter was around 38% and last quarter was 47.
So the shift towards the fixed price contract has been a significant driver of the overall margin improvement that you've seen in that segment over the last 24 months.
Okay. Good yeah, that's very helpful.
Now just on the the aviation segment, you've obviously seen the recent news that the U S has reopened international travel to Europe how.
Have you already started seeing an uptick in demand for MRO work on on widebody aircraft or other commercial aircraft because of that or do you anticipate that soon.
We have not so we have not seen.
Just over in Europe. This last week at the MRO Europe show, there is definitely a different level of enthusiasm about that market, but.
That through the Azzam right now is is an energy and not unnecessarily backlog. So we've seen realm.
Relatively consistent month over month improvements in input in.
In our commercial MRO space, but we haven't seen.
Kind of bump on the heavy on the component of repair side with regard to wide body based on the recent announcements we do expect it will.
Again materially impact positively 2022, but haven't seen it yet.
Okay great.
And on the aviation segment on the on the business jet side.
There's been a lot of news about business jet oleum build rates being material higher and demand rising and so you know if you look at business jet travel rates in in terms of traffic, it's it's 15% to 20% higher than either 2020 levels or 20.
19 level. So obviously you guys are very bullish on the on the business in general Aviation market. So do you think this is sort of a a temporary trend or do you think there's been a long term structural changes in the market.
I think it's been a long term structural change I think it's a great question because obviously been in this market for about 25 years and there was a little bit of.
You saw like a pop in the market and then it would kind of settled down and it was never a real market. We're seeing this as a you've got new players in the market like wheels up you've got used aircraft.
Parked aircraft at the lowest levels historically, you've got people like Netjets and the like that are pretty much at capacity in terms of.
Access to aircraft. So we expect it to be a continued trend and we see our tip to tail approach in terms of both MRO capabilities and distribution products to be something that is a long term sustaining revenue and margin opportunity for the business.
Awesome, well that definitely sounds very exciting so I'll I'll pass it back in and Congratulant quarter guys.
Thanks Us I appreciate it thanks.
And our next question is from Jeff Van syndrome.
Riley. Please proceed with your question.
Hi, everyone.
Let me add my congratulations.
A bunch of my granular questions were answered so we'll take a crack at a multipart broader one and maybe you can apply some thoughts.
Believe previously the expectation was for 40% of EBITDA the fall in first half and 60% in second half wondering if that's changed in itself kind of what waiting you're contemplating now and then also would you anticipate that revenues will grow sequentially. Overall from Q3 D. Q4. This year and then any thought or a color on.
EBITDA margins that might be feasible for Q4.
Sure suggested to go to hear from you we are not going to give guidance on the fourth quarter. So I can't answer the I know originally at the start of the year back in I think it was February or January communicated it can expectation around a 40 60 split I can't necessarily give you that answer without just giving you the fourth quarter I think but what I would say is we're really pleased by their performers.
Within the aviation segments, so you've seen the strong revenue and EBITDA recovery, we've internally model than expectation Roma business sequentially recovering so I'd say, it's in line with our expectations.
And we're pleased with that trend and that was going to be the biggest driver of what we expect it to be a stronger back half of the year.
So we've seen strong results from our Ftf's business back at the beginning of the year, we communicated that on a year over year basis 2020 versus 2021, the EBITDA margin rate would be a bit of a headwind.
Last year, we were north of 11% EBITDA margin rate I think on a year to date basis for just about 10%. So we've seen some contracts moved from fixed price to cost plus within that portfolio.
And so as a result, we're kind of sticking to our guidance around year over year a bit of pressure, but overall, we are pleased with the businesses performance as it relates to sort of planning for the fourth quarter, we haven't given specific guidance, but other than to say, we still I think John answered. The fleet question already I think the fts businesses continuing to go task order by task order.
Identify where those opportunities are to take on some of that risk for the fixed price work. So I would say you should you model at the full year and compared to last year and you can get a sense for where we're at now and what you think the fourth quarter might be aviation as I mentioned, you should expect us to continue to drive from a recovery standpoint, all predicated upon some level of recovery within the repair business.
Okay, and then as a follow up to that and I know understand it's early.
But kind of looking forward in 2022, so there's only a couple of months out any thoughts on.
Sort of organically being able to grow EBITDA faster than sales.
Any thoughts around that.
Yeah, I mean, I think the places where you're going to see the most leverage opportunity as a place like aviation, where we've made significant investments into the business and we've talked about this versus our competitors, we didn't necessarily take out as much cost as we wanted to be able to grow as the overall market recovered. So you should expect us to be able to drive a leverage and hence therefore drive over.
We're all EBITDA margin improvement as we head into next year within the federal in Defense segment in the fleet segment, we haven't necessarily given guidance, but as John mentioned within fleet. We've got sort of two dynamics. One is the mix shift towards commercial which we've communicated his lower margin, but also there's an opportunity there from a scaling perspective as well as we've made investments both and salesforce as well as new.
<unk> to support that growth. So there's that mid two two different dynamics, one hurting one helping as we continue to look into that next year.
Okay. Thanks for taking my questions and best of luck.
Absolutely. Thank you.
And our next question is from Chris Mcinnes Sidoti and company. Please proceed with your question.
Good morning next quarter and thanks for taking my question.
Question around the new five year contract.
Recently announced can you just talk about the difference.
I guess from the prior contract what you added to it.
And then maybe how much of a.
Maybe a margin profile difference there might be associated with that thanks.
Yeah.
Chris So I. Thank you hope you guys have seen the level of transparency since I've been on board and Steve has been on board that we tried to have both on our disclosures as well as on these calls obviously with the exception of areas that we think will competitive.
Harm us.
We did with that contracts specifically is this is a legacy vse contract.
Been here earlier than myself or head of aviation and Steve and we saw a tremendous opportunity to.
Not only drive the longterm revenue in margin from that program, but also there's a little opportunity to take advantage of the situation in the market, where we can get more favorable terms. So what I would say is is that it.
It's as good or better than it was before and.
Each contract on the legacy side of the business.
Is getting close to exploration, we have a really sophisticated and strong team in place that's able to drive higher value out of those programs than we had in the past so I'd like to kind of keep it more qualitative and quantitative right now on that program.
Sure No I understand thanks for taking my question and good luck in queue for.
Thank you thanks, Chris.
And just as a quick reminder, if anyone has any questions you May press star one on your telephone keypad.
Our next question is from Michael ceremony with Truest. Please proceed with your questions.
Hey, guys. Thanks for taking a follow up John just on the topic of labor.
I know you're not going to kind of get the color you are going to give but as we look at this federal contractor vaccination deadline of December 8th I mean, how do you. How do you think about your employee base. There I don't know if you can share anything in terms of which employers are vaccinated in terms of percentage and then any any specific.
Labour tightness, you're seeing on.
Within the aviation side of your business that we should be aware of.
Sure we are not immune from the macroeconomic conditions were not immune from impact that faith.
Face all businesses are we do operate in three very distinct segments from an operating perspective. So the mandate impacts are better on defense team only and we're working through that now so we're not in a position where we're able to share the data or.
Or what the outcome will be until probably.
Q for we are working to mitigate it what I would say is more than anything we're trying to really get our this is we're trying to get all of you engaged on not just the the quantitative measures and the proof points and the improvements we've made in the business, but the culture and the business that was driving into the value that we're adding to the marketplace that people want to work.
Here. So yes, we are seeing some attrition and yes, it's an area of stress, but on the flip side, we're taking advantage of the attrition from other businesses and we were able to really attract top talent that are excited to be part of a nimble agile entrepreneurial business kind of scale and build something pretty powerful in the market for customers. So.
It's a balance of one day pulling your hair out in the next day feeling pretty enthusiastic about what we're building, but it's definitely interesting times on the labor front something that's definitely we talk about supply chain that had been through multiple cycles. This is this is this is definitely unique.
Right now we've got it under control for the Federal Defense team and we will continue to keep you guys updated if anything changes.
Got it perfect. Thanks, a lot.
[noise] and we have reached the end of the question and answer session I'll now turn the call over to CEO Jonquil Mafia closing remarks.
Great. Thanks, everybody for the time today I. Appreciate your continued interest in Vse and look forward to speaking with you. When we report our fourth quarter earnings have a great day.
And this concludes news conference and you may disconnect. Your lines at this time. Thank you for your participation.
Thank you.
[music].