Q4 2021 VSE Corp Earnings Call
[music].
Greetings and welcome to the V. S E Corporation fourth quarter and full year 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 will now turn the conference over to your host Noel Ryan you may begin.
Thank you welcome to Vse Corporation's fourth quarter and full year 2021 results conference call.
Leading the call today are our president and CEO , John Cuomo, and Chief Financial Officer, Steve Griffin.
The presentation, we're sharing today is in our website, we encourage you to follow along.
Today's discussion contains forward looking statements about future business and financial expectations actual results may differ significantly from those projected in these forward looking statements.
These risks and uncertainties, including the risks described.
<unk> reports filed with the SEC.
As required by law, we undertake no obligation to update our forward looking statements.
Youre 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'll open the line for questions and with that I'd like to turn the call over to John Cuomo for his prepared remarks.
Thank you know welcome everyone. Thank you for taking the time to join our call today.
During the fourth quarter and full year 2021, we continue to successfully execute on our multi year business transformation plan.
On engineered to develop a market, leading global aftermarket distribution repair and services company positioned for long term value creation.
Last year, we moved closer to the end user identifying new and varied ways to support complex customer requirements.
We also aligned ourselves with both new and existing global tier one OEM supplier partners, while expanding our diverse portfolio of products and capabilities.
During the fourth quarter our V. S. C Aviation segment continued building backlog with new business win.
Most notably we entered into an agreement with a major U S airline to become the exclusive end of life solutions provider for their 737 N G aircrafts and surplus material.
Under the terms of disagreement we will support this major domestic airline with the dismantling and disposition of retired aircraft there.
The program allows for the refurbishment of used parts for fleet support and the sale of used spares to airline OEM brokers and other third parties.
During the fourth quarter, we began making investments in the program management infrastructure to support the launch of disagreement.
This program requires limited capital commitment as V. S. He is not purchasing any aircraft.
Most importantly through this agreement Vse aviation will now become one of the largest global suppliers of refurbished 737 N G material.
In our aviation segment, we are building a business in general aviation platform that encompasses a full breadth of products and services.
Tip to tail approach to support the requirements of D. N G E customers a strategy that builds upon our established MRO capabilities and industry, leading parts distribution business.
Our 15 year $1 billion engine accessories agreement with Pratt <unk> Whitney Canada remains our most significant b N G a contract executed to date.
In 2022, we estimate approximately $45 million of revenue from this contract representing the first full year of revenue contribution.
Once this program is fully developed we anticipate contract revenue in excess of $60 million annually.
Our aviation markets continued to recover.
In 2022, we anticipate distribution all remained strong within business and general aviation and commercial market activity and recovery to continue to accelerate throughout the year.
Within MRO, we expect increased demand for spares and component repairs and all markets supported by market share gain.
Robust B N G E flight activity and increased commercial aviation flight hours.
Looking ahead, we see multiple avenues for profitable growth across each of our operating segments.
We have streamlined our value proposition, while placing more emphasis on niche market opportunities, we maintain our bidding discipline, even as we enter new markets.
Our fleet segment continues to successfully execute upon our commercial customer growth and diversification strategy, specifically with focus growth and success in ecommerce.
Our federal and Defense segment launched new divisions in 2021 to support MRO and distribution capabilities as it continued to focus on our long term pivot to more technical capabilities and higher margin niche markets.
Entering 2022 V. S. He is in a strong position to accelerate our strategies and drive profitable growth as we continued to build a leading global aftermarket distribution MRO and services brand.
Aviation finish 2021 as the largest segment for the first time in our history as.
As we continue to execute on our long term company's strategy prioritize the deployment of capital and other resources across the business aviation will increasingly become our growth engine.
We will continue to use a disciplined approach to M&A transactions as we did in 2021 with our acquisition of H S. S. In March and global parts. In July 2021 represented strong upgrade the system talent facilities processes and capabilities to drive the.
The ability to scale our businesses as we grow in 2022 and beyond.
We continue to focus on the V S. He culture and brand.
We are building a high performance customer focused culture that will allow us to develop a leading global aftermarket distribution repair exchange and solutions single go to market brand.
Additionally, Wheeler fleet solutions is continuing its path to become a market leading vehicle distribution and E Commerce brand.
We finished 2021 on a strong note as our fourth quarter revenue increased by 40% versus the prior year contributing to growth in both net income and adjusted EBITDA.
This was driven by a combination of new contract wins and strong performance from core program. The addition of new MRO capabilities and continued growth within our distribution and e-commerce platforms.
Within our aviation segment fourth quarter revenue increased 115% year over year to a record $82 8 million.
The sixth consecutive quarter of sequential revenue improvement driven.
Driven by both new program execution and contributions from the global parts acquisition.
More specifically aviation MRO revenue increased 27% versus the prior year period, while aviation distribution revenue increased 174% in the first fourth quarter driven by a combination of organic share gains within the B N G E market together with the acquisition related contribution.
Aviation distribution revenues remain above pre pandemic levels supported by organic contributions from new distribution awards.
Turning now to a review of our fleet and federal segment.
Fleet revenue increased 12% on a year over year basis in the fourth quarter driven by continued growth in our commercial e-commerce fulfillment business.
Commercial revenue increased by 61% on a year over year basis in Q4, 2021, representing 32% of total revenue in the period.
Our federal defense business had a solid quarter with revenue up 16% 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 1% year over year during the fourth quarter as supported by increased new business development activities.
In summary, the fourth quarter was a solid finish to a transformational year for BSC in 2021, we acquired two strong businesses to add products and service offerings.
Ed is MRO and other technical capabilities to our portfolio.
We expanded our e-commerce solutions.
Enhanced our distribution product offerings with market transforming agreement and product additions.
And improved internal processes systems centres of excellence and talent to support all of that is ahead for vse.
I'm incredibly proud of the team the culture, we are building and all that was accomplished in 2021.
This year, we will continue to execute on our winning strategy and playbook.
Within customer problems, winning new business, adding new service capabilities and expanding product offerings to our customers.
We are off to a strong start to 2022.
We remain in the early phase of an exciting multi year transformation.
During the third quarter of 2022, we intend to host our first ever Investor day.
During this event, we will outline our strategy and multi year roadmap for growth and greater detail stay.
Stay tuned for additional information on this event in the coming months.
With that I now turn the call over to Steve for a detailed review of our financial performance.
Thanks, John .
Now, let's turn to slides five and six of the conference call materials for an overview of our fourth quarter performance.
We reported $210 $2 million in revenue in the fourth quarter, an increase of 40% from the prior year period.
Within aviation year over year revenue growth was driven by a combination of new program wins share gains and contributions from our global parts.
Acquisition completed in July 2021.
Fleet segment growth was supported by commercial fleet and ecommerce fulfillment revenue, while the revenue from many United States Postal service was flat year over year.
Federal segment revenue growth was driven by inorganic contributions and new business awards, partially offset by the completion of certain D. O D contracts in 2020 one.
We generated adjusted EBITDA of $17 $8 million in the fourth quarter, an increase of 3% on a year over year basis.
Adjusted EBITDA margin rate declined 300 basis points year over year to eight 5% as.
As margin compression within federal into a lesser extent within fleet offset significant margin expansion within our aviation segment.
Turning to slide seven.
Aviation segment revenue increased 115% year over year in the fourth quarter.
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.
Distribution revenue, excluding the $18 $6 million of revenue contributions from our global parts acquisition is approximately 60% above pre pandemic levels.
We continue to see commercial repair recovery in line with the overall market.
We anticipate further repair revenue recovery throughout this year as we continued to invest in new capabilities and expand our integrated solutions across a growing base of business and general aviation customers and new commercial customers.
Aviation adjusted EBITDA increased by more than 400% year over year, while adjusted EBITDA margins increased 580 basis points year over year to nine 4%.
Delivering outsized revenue growth remains the top priority for this segment as we implement new programs when New awards and drive scale as commercial end markets recover to expand EBITDA margins.
For the total year Aviation segment revenue was up 50% versus prior year and adjusted EBITDA was up 66%.
Turning to slide eight.
Fleet segment revenue increased 12% versus the prior year period.
As higher commercial and ecommerce fulfillment offset a decline in D O D revenue.
USPS revenues were flat on a year over year basis.
Commercial revenues were $28 million in the fourth quarter.
An increase of more than 60% versus the prior year period.
Commercial revenues have grown to 32% of total segment revenue up 14 points on a year over year basis.
Segment, adjusted EBITDA of $7 $6 million was down 10% versus the prior year period.
While adjusted EBITDA margins declined 310 basis points year over year, given a higher mix of commercial revenue.
For the total year 2021.
Segment revenue was up 8%, excluding the effect of a onetime PPE order in 2020.
For the full year 2021, commercial revenues were up over 70%.
Which combined with the <unk>.
Over 90% growth in 2020 continues to highlight the strong end market demand and revenue diversification opportunities for this segment.
Turning to slide nine.
Federal and defense services segment revenue increased 16% 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 and the effects of the supply chain related disruptions to our U S Navy programs.
Federal adjusted EBITDA was $3 $6 million in the quarter, a decline of 58% year over year, while segment adjusted EBITDA margins declined nine four points year over year to five 3%.
Some previous fixed price awards have converted to cost plus and as the business works to mitigate some of the broader supply chain related disruptions.
For the full year 2021 Federal segment revenue was up 6% and backlog was up 1%.
Turning to slide 10.
At year end, we had $122 million in cash and unused commitment availability under our $350 million credit facility.
Our existing credit facility includes a $100 million accordion provision subject to customary lender commitment approvals.
In the fourth quarter, we generated $10 million of free cash flow.
Which with our third quarter results puts us at $31 million of free cash flow in the second half of 2021 .
As of year end, we have acquired the majority of the inventory for our newest aviation distribution programs.
We anticipate for the first quarter 2022, we will have completed all cash outflows for these programs and expect that full year 2022 free cash flow will be positive in line with our previous guidance.
As of December 31.
We had total net debt outstanding of $284 million.
Adjusted EBITDA for the trailing 12 month period was $73 6 million and excludes full year EBITDA contributions from the global parts and H S. S acquisitions.
At the conclusion of the fourth quarter net leverage was three nine times.
In 2022, we are positioned to be free cash flow positive as full year contributions from recently launched programs and completed acquisitions support incremental growth in EBITDA.
Operator, we're now ready for the question and answer portion of our call.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove 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.
Our first question is from Michael <unk> with Truest Securities. Please proceed with your question.
Hey, good morning, guys. Thanks, Good morning, guys, taking the questions and thanks for the detail maybe just housekeeping I don't know if I missed it did you guys give the organic growth rate in the quarter.
We didn't give the organic growth rate in the quarter, but we did give specifics associated with global parts acquisition.
And I think we gave the specifics in terms of the organic growth rate of the distribution business within the aviation portfolio, which was up 60% year over year organically.
Okay.
Got it okay.
And then just can maybe focus a bit on margins I know you you called out kind of the nice year over year gains, but it looked like sequentially. You know there was there was significant pressure across all segments. I know you talked a little bit about mix and supply chain, but you know what what specifically drove.
The sequential margin decline and how should we be thinking about you know a recovery here into.
The current quarter and maybe progression through the year.
Yeah.
Sure.
First one on a kind of summary.
Yeah, absolutely we highlighted a bit at the margin walk details on slide six of the materials and specifically what we saw on a year over year basis for the fourth quarter was pressure within the federal <unk> Defense segment.
Which was driven by a couple of different things first off.
A different mix in terms of our fixed price versus cost plus awards, we saw more of a shift towards cost plus within the quarter and then secondly, there were disruptions within the business in terms of supply chain delinquencies, which delayed our ability to get the materials to our customers and subsequently reported revenue.
So we're gonna be working through some of those supply chain related disruptions as we start to recover the business.
But what we've communicated in the past is that this business. You know you should expect it to be in the mid single digits overtime progressed into the higher single digit range and so we're continuing to see that business progress towards that long term and then we thought to a lesser extent as I mentioned within the fleet portfolio. There is a mix difference between the commercial work that we do versus the work that we perform for some of our.
Our government related customers and so that pressure is something that's continued as.
As we expected, but we're very pleased with the overall performance of the fleet business as revenue diversification is key to that portfolio and then lastly, and probably most importantly, you saw the margin expansion on a year over year basis, but then the aviation portfolio.
That helped to contribute actual overall expansion from a margin rate perspective at the total company level, but.
But if you look at it for the fourth quarter, specifically to help to drive over 500 basis points improvement within the segment as we continue to recover that businesses overall margin rate back towards mid teens margin rate over the long term.
And Brian I'll add to that.
There is if.
If you look at the at the MRO business, the commercial MRO business, which has a higher margin business and the portfolio of aviation the recovery as it is a little slower than anticipated. So so we do continue to expect that we have seen month over month quarter over quarter recovery just not at the level of robustness that we would anticipate.
And that we're seeing in the other parts of the aviation business. So that will scale back and that will drive incremental margin improvement. The other thing I wanted to add is you know you're hearing from other companies out there the amount of supply chain pressure on margin, we have that pressure on our federal defense business really because we're seeing push outs in terms of delivery.
And the distribution sales are at a higher margin than some of the services sales, which are more cost plus in nature, but on the aviation business. It's much more about the infrastructure that we put in and we're now being ready to scale. We've invested a tremendous amount in that business in 2021 to get that business to scale I mean, you see the year over.
For year growth rate of distribution, it and year on year growth rate in total organically in that business. There was a tremendous amount of expenses that we added and we do anticipate as we get to the back end of this year just as to start to see that business scale, where we're not adding operating expenses and you're starting to see any incremental revenue in the product margin or the service margin.
Just drop to the bottom line.
Got it I guess too, though I was looking more at three two to four Q.
The year over year, but you know you had nice sequential aviation growth of about 13%. The incrementals were weak in the EBITA margin declined from three <unk> to <unk> and you know you had the steep falloff in federal sequentially as well and it sounds like I guess, a lot of those contracts slip, but like what happened sequentially.
Italy from three two to four starting with aviation to pressure the margins.
Yes sure.
I'd say first and foremost as you can see that we've combined and now the global business Global parts business operates at a slightly lower margin rates. So we have our first full quarter what kind of.
Margin contribution and we've communicated that when we acquired the business and then as John mentioned, we continue to make investments as part of the growth. So I know you referenced it a.
A little bit earlier in the call, but generally speaking we continue to make investments to drive the scale as we continue to grow next year.
As John mentioned, we continue to see significant opportunity to drive scale on that investment.
Got it within the U.
Got it.
The mix shift in the contracts.
Got it Okay, and then I'll, let me ask one more and then I'll jump back in the queue, but.
John I guess, what are the thoughts on pricing and what do you think you can get out there I mean, we just saw this mornings inflation number you know pushing 8%.
Presumably you've got the ability to price in aviation.
Any thoughts there on just how you can kind of keep pace and what we.
We have a very.
We have a very small level of.
Of long term fixed price contracts within our business, but we are.
Predominantly an aftermarket business, that's highly transactional in nature, and we do have the ability to.
We do have pricing power in the market as we speak.
Pricing in place so we do not see that as a long term risk for our business because we do see the ability to push that pricing onto the year.
Okay, Okay, and federal and defense two do you think that that's a little bit more challenging I guess, it really depends on how quick the contract.
It's the same thing for that thanks, Bob.
That's just really a timing issue right now.
This is the one we're seeing just there was just a significant amount of push from Q4 to probably more like Q2, and some of our federal and defense distribution orders that.
We don't have the product and we're seeing continued delays to probably closer to that year.
Got it got it perfect. Thanks, guys I'll jump back in the queue.
Thanks, Mike.
Thank you. Our next question is from Ken Herbert with RBC Capital markets. Please proceed with your question.
Good morning.
Good morning. This is actually <unk> on for Ken Herbert Good morning, guys.
For the recent 737 N. G agreement can you provide more detail on how this program ramps and what could be the revenue contribution for this program in 2022 and then.
If you could kind of I know you detailed that the investment requirements, we're going to be small, but if you could detail those little further that'd be great.
Yeah, Let me start just at a high level and then Steve I will turn it over to you on the financials. So it was that we highlighted.
A highlight as kind of earlier in my script that you know.
This is not a traditional U S M deal, where we're buying aircraft that I want to be transparent on that it's a very asset light kind of partnership where we are helping to manage the total process of dismantling of the aircrafts and then selling of the.
The assets that are associated with the aircraft. So that's the kind of the first thing that I want to highlight so when we look at expenses that we added in the fourth quarter. It's really building. The team that is going to manage that program and then contracting with the outside labor that's going to be doing the teardowns.
As far as the financial forecast, there's not much in 2022 as we start to look at the ramp up really.
Going more to 2023, but Steve I don't know if you want to jump in there and give any more color.
Yeah, I would just say I don't I wouldn't expect too much of a material contribution from this program in 2022 as John mentioned, we're just getting the program launched right now so we will be able to provide more guidance for you in terms of what to expect from a revenue standpoint as well as investments.
As we head into probably the first quarter and actually get some of the experience underneath our belt, but generally speaking I think probably the most important dynamic associated with this deal is the opportunity for us to continue to embed ourselves with our deep commercial relationships and look for partnership opportunities as we continue to expire or expand our repair capabilities. So it's further establishing us within the networks within our customers.
To help provide services to them.
That's perfect. Thank you so much for the color and then just wouldn't pull up if I may.
How are the 2021 acquisitions with Google ports, and Heiko performing relative to your expectations.
They're performing at or above expectations. So really pleased to see we did a small equity raise last year put that capital to use with two deals that were very favorable multiples of the business.
You know are well underway in the integration of both of those businesses into their respective segments and the businesses are performing at or above forecast and integrations are honor accelerated.
From our timeline, so very very pleased with both acquisitions the capabilities that came on board as well as the team that we acquired with the businesses.
Perfect. Thank you so much I'll.
Correct.
Great.
Yeah.
Our next question is from Louie Dipalma with William Blair. Please proceed with your question.
Good morning, John even and now.
Good morning, good morning.
B.
Is the new Boeing 737, Mg program with an existing U S airline customer or are you able to disclose that or is it for like a new logo for ya.
It's an existing customer that we support in both our distribution and our MRO commercial MRO business I mean, we're supporting.
Virtually all airlines in those businesses today.
We are not in a position right now where we are.
Going to publicly announce the airline until he probably launched the program to the market. So we'll have a more.
More marketing type announcements probably in the coming months.
Great and for that program I think Steve you mentioned, how there won't be much of a revenue contribution in 2022, but will there be a negative.
Margin impact and you ramp up the program.
I mean, there are some slight impacts associated with investments in the program, but it's not I wouldn't call it overly material.
As John mentioned, we made some investments into the team the program management team and you know that will continue probably through the first or second quarter and then it will get to a point at which it pays for itself and then I think what we're excited about as it continues to open up that cross selling opportunity for us as we head into 'twenty ended the 2022 period into 2023.
Great and for the Pratt and Whitney.
Canada partnership I believe you announced that.
Last April and when you announced the deal you targeted distributing I think over 6000.
<unk> and accessories.
Are we there yet in terms of you fully scaling to all 6000, I know that you said that outflows associated with inventory.
Inventory for some of your large programs.
And towards the end of March so.
He asked in the next few weeks, we will be fully scaled for.
Program, and so that mean that like four.
And when you can't have a program that will be around.
Peak.
Profitability margin for the program.
I really want to think about it.
Yeah, I'm happy to take it so I think from a let's talk material first some of the material acquisition I'd say, yes, we're at full scale in terms of ramping on the program.
There's a couple of things, we're just working through towards year end and into the first quarter for the completion of all remaining piece parts, but generally speaking, yes, and then I would say in terms of as you look to this year, we've communicated guidance of $45 million. This year with expectations that the program can be larger than that if it continues on into the future, but as it relates to the margin rate the performance of the.
This yeah midway through this year, I think we'll optimize and really get to that full scale.
As we referenced last year. This is like a full business acquisition. If you really think about it. So we've set up new sales folks new customer service Representatives and we're looking to drive scale on that as we head into this year at which point, we'll be able to really optimize the partner both for customers and for us internally.
Great.
And you you recently announced.
And expansion for your NAV Sea contract do you have any visibility in terms of the timing of the long term.
The potential long term contract award.
Mike I'm going to give you a guess my guess would be.
End of Q3 would be kind of an announcement on the longer term contract.
To get the $100 million bridge contract in place.
But we do have.
Task orders and backlog on our legacy contract plus now another $100 million commitment through next year and then our anticipation is an award.
The end of Q3.
Okay, and I know you didn't provide.
Formal financial guidance, but are you able to provide any color on how we should think about in terms of margins trending across your aviation Lee and I will say I mean, I know you.
Well look about how like.
The hit like.
The peak margin for the Pratt <unk> Whitney, Canada program and in the summer and Theres been the supply chain impact on the federal side and there's the mix shift with.
With the fleet size, but is there like any high level.
Guidance that you can provide on like what.
We should be modeling that the margin trend for 2022.
Yes, sure how would you start with.
Yeah.
Little bit of background noise.
Let me start with the federal business, So I communicated a little bit ago that mid single digits is where this business is and.
And we've communicated in the past that's where the business is working to go from mid single digit to high single digits I would I would say mid single digits is the right place for it to be right now.
As we continue to drive scale and work through some of the supply chain related disruptions that we talked about I would say for the fleet segment you saw some margin compression last year as the business continues its mix shift there will be.
Some continuation of that but we are looking into the back half of this year to really drive scale within the business.
Yes, we mentioned last year, we made big investments into the commercial growth avenues, you spoke to the sales teams et cetera, and we're looking forward to that in the back half of this year and then I'd say from an aviation perspective, we just communicated that look we're going to expect continued improvement as we try and drive the business to scale I mentioned some of the dynamics associated with <unk> with the global parts business, but as we look.
Towards this year, we're going to continue that long term target.
Around mid teens margin rate and we will continue to get there, but it is going to be predicated upon the commercial repair business getting back to its pre COVID-19 levels and that is longer term. So I think everybody in the market has continued to see some slowness or some delays associated with that repair business getting back and.
And so we're going to continue to pace in line with the market. So I think you should just model out the expectation from an aviation perspective that it's going to take a while as it relates back to the market for the commercial MRO, but as we mentioned in the distribution side, we are back to pre pandemic levels.
Thanks for the color, even thanks, John and now.
Frankly, that's it for me.
Our next question is from Josh Sullivan with a bunch of our company. Please proceed with your question.
Hey, good morning.
Good morning, Josh.
Just to kind of follow up on that a little bit on the commercial narrow body activity and I know you said, it's obviously going to take a while to recover here, but you know in the spring of 'twenty. One there was a lot of optimism for summer travel by the Airlines curious if you could just compare how that 'twenty, one activity or behavior contrasts with what youre seeing here in 'twenty two heading in.
And to the summer.
You know my anticipation is we're going to continue to see month over month improvement.
And the commercial MRO business, and our parks trading business that connected to that business. So each month, we do see a level of increased activity level of increased backlog and a level of increased work in our MRO shops.
Is it as robust as any of US anticipated no I think when you look at the initial.
You know market studies that were done when COVID-19 hit talking about getting back to 2019 levels sometime.
Sometime in late 2023 to early 2024.
<unk> been clear it includes international travel I think that.
Statistics are probably going to come out to be quite accurate in yet.
So its the slowest part to recover but that said month over month, we are seeing continual improvement in that business and that will drive the margin improvement because again, we've got kind of a base of fixed cost that we can scale from as that recovers.
Got it and then just on the end of life service supplier agreement you've got here you know what are your thoughts on commercial airline fleet retirements going forward.
Has the recent spike in energy you know caused any change in thinking by your customers.
And then just curious what pricing looks like for U S M.
Yeah, we don't see any change in kind of I think we saw that that fleet shift during COVID-19 parking of 760 Sevens.
People, hoping they were going to be able to accelerate their 777 deliveries, which hasnt happened but.
We don't see a major shift in.
In our retirements or how our airline customers are using their their fleet I think with regard to pricing on U S and that's why we haven't given any clear guidance on the program. We're just doing the first kind of tear down as we speak getting our arms around the inventory and then we will do an analysis kind of on what we think.
Pricing will look like an AD model this business out a bit more and we'll share color on that is it kind of midway through the year.
And then just on that contract you mentioned, it's not a typical contract, but with an existing customer. So does that change your exposure to any particular service schedule, a b C or D.
Does it include the engine just curious on what types of new verticals that Mike Okay.
Great. It does not include the engine.
Steve I don't know you're far more technical but I am not sure. If you want to dive into kind of how we look at the products, but what I would say Josh is that from our perspective, we look at both the.
It will be one of the largest we can't say, we're the largest but we don't know all the details on the market, but we believe we could be the largest supplier of these energy products in the market. There is an overlap of a significant percentage of overlap on some of these parts on the <unk> to the Max So it gives us.
That ability as well these.
E N G aircrafts are going to continue to fly in other markets and it gives us the ability to to sell in those markets and with continued supply chain disruption, we see this as being even more lucrative probably than we thought when we when we had the initial dialogue Steve I don't want do you want to give any more color on the products.
Yeah, I would just say it includes a whole aircrafts excluding the engines, but does include the Cumulus C kit.
And so we'll be working with.
Our partners to make sure that we optimize all the opportunities to see where that inventory can go and find the best possible place for it with customers brokers and repair shops.
Got it thank you for the time.
Thanks, Josh Thank you.
Our next question is from Jeff Van <unk> with B Riley. Please proceed with your question.
Good morning, everyone just to clarify earlier comments.
Were you, saying that we should see second half year over year inflection in the <unk> segment and then also wasn't clear. If you were you were suggesting similar timing for year over year inflection on the fed and defense segment.
I think within the fleet segment, we continue to see the top line growth accelerate within the commercial side of the business offset by the USPS as we've mentioned, but as I was referring to the margin rate. My point was specifically that you know we've brought a point now where we've seen that mixed.
Shift take place, we're going to continue to see that mix shift take place, but as we drive scale towards the second half of the year, we do expect to be able to drive growth there within the federal and defense space, we haven't necessarily get given specific guidance associated with.
Where we expect to see the margin rates trends ratably throughout the year, what John mentioned, though is we do expect some of the supply chain related delinquencies that have affected both the first quarter and last quarter to essentially start to free up towards the back half of this year.
Okay, and then realize it's early on the new 737 contract, but any sense.
Our expectations are for margins around that particular contract I know, it's not going to be much this year, but.
The short answer is no I wouldn't say, it's going to be materially different from where we've given the guidance after the aviation business.
And as we get our arms wrapped around it will be able to share more details with you in terms of magnitude of impact, but right now I wouldn't expect it to be something substantially different than what we've communicated for the overall segment.
Okay, and then just kind of turning back to the general inflationary cost pressures out there. It seems like everybody is experiencing.
Any particular areas that you feel are more vulnerable than others for that do you just see that as something that's going to probably just impact everything and you'll pick up prices, where you need to or just I guess anything else to call out around that.
Yes, I mean, we're staying very close to labor.
Watching our labor markets and there they are very different geographically very different by kind of work.
Work type and we're staying close to that but we feel we've got our arms around it at a level of control and stability in our workforce and the other side of it is on on product cost and again, we do feel you may see a lag from when.
We get a price increase from vendors and we do have some backlog with customers, where we're locked in it.
For one quarter on a price and we have some inflationary pressure, but we do feel by the next quarter, what we're in a position where we can quickly adapt so we do not see long term. It back. So we see a short blip, maybe one quarter or another and a product based.
<unk> sure, but we don't see a significant long term impact.
Because of the pricing power that we have the lack of long term fixed price contracts with our customers, which is just the nature of that business.
Okay. Thanks for taking my questions and best of luck.
Thank you for his time.
Yeah.
Our next question is from Michael Chair Moly with true Securities. Please proceed with your question.
Hey, guys. Thanks for taking the follow up John just maybe can you comment on kind of what you're seeing real time from from some of your airline customers as they they kind of get ready here in prep for for summer Flying you know any any you know I guess maybe.
Order intake you know maybe bookings color and then any issues that you're seeing or you may run into with access to raw materials or turn times. Just you know kind of Dovetailing, what you, what you've talked about which kind of labor and just supply chain.
I'm sure Steve you want to kind of kick it off and then I'll give some color on it yet.
Yeah sure I mean.
I think from an overall market standpoint, we continue to see order intake being high but I think there is some uncertainty as we received customer orders for repairs and alike around need and readiness levels for the summer. So I think it's hard to predict at this point just given some of the overall market uncertainty.
As for access to raw materials, and the impact to our supply chain.
At this point with the stocking levels that we had from last year I think we're in a pretty healthy position from an inventory perspective.
When times are a little bit longer than probably what they've been historically, but I wouldnt necessarily it should be back to something for BSD tied to specific raw material.
It's probably just more tied to just general supply chain delays and then from a labor perspective, I think we're in a good spot from a labor perspective.
We've invested in the teams I think we've got a really good culture and brand teams are excited about when we feel like we're well positioned to capitalize as the market recovers.
Yeah, and if I break it down a little further in the revenue stream is if you look at the kind of pure distribution. We're seeing you know relatively consistent revenue nice month over month improvement in the commercial.
Backlog and customer activity, we are not seeing aggressive stocking from airlines. So we're not seeing them go make deep purchases, we're seeing kind of consistent order flow.
Remember our products are a little expensive. So we don't see them just not the kind of considerable expendable where their overstocking on the repair side again, we're seeing consistent.
Month over month improvement on input well. We are seeing is you know an airline will give us.
Our repair unit to quote and then they're saying, okay hold it rather than accelerate our repair and deliberate so we're seeing a little slow.
There is not a necessarily a as.
But speed as I would have anticipated and the desire to get their products back and then the third piece of the revenue stream, it's kind of a rotable pool that exists within our repair business as I said that one of the slowest to recover so we are.
But in my opinion that one is as the market starts to pick up youre going to see that recovery happen pretty quickly at the back end of the year.
Okay, and maybe this is too early and a bit real time, but are you seeing any behavioral changes yet as a result of rising oil prices and fuel costs. You kind of mentioned you know airlines give me units quote hold it rather than accelerated I mean is it is it too soon to see those behavioral changes or how.
Are you guys thinking about oil I mean remember all of them.
Yeah, we're very domestic focused we do have an international base, but the domestic U S Airlines are.
General aviation customers do represent a significant portion of our revenue we are not seeing any behavioral changes in that customer mix.
And internationally again, they've been quieter, but again no no material changes at this point.
Okay got it thanks, Chris.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Our next question is from Chris Mcginnis with Sidoti <unk> Company. Please proceed with your question.
Good morning, Thanks for taking my questions and I.
I was jumping in outsource this has already been asked I apologize.
Just on capital allocation, obviously, you raised the dividend recently just wanted to ask you about that is that more of a change in strategy or just confidence in the ability to execute and then maybe if you could just discuss the M&A landscape.
2022, and the opportunity there. Thank you.
Sure. Thanks, Chris.
The dividend the company has has historically paid a dividend and historically increased it I would not anticipate us.
A rapid path to increase the dividend at this point, we do want to put the capital to use and put it back into the business and invest in the business, but on the flip side we have.
Kind of loyal shareholders that that dividend has been important I want to show them the confidence that our free cash flow forecast for 2022.
Our M&A pipeline is filling up we've got <unk>.
Continuing to look at capability.
Expansion in our services business and potential distribution opportunities and our parts distribution business is predominantly in the aviation business and we do have a nice pipeline of deals we remain very very very disciplined in our approach so very.
Very much around it's got to meet the capability or the.
The product requirement, it's got to be a cultural and a business that can be fully integrated and one that will truly add value. So you know we've got a good pipeline and we'll continue to keep a disciplined approach to M&A.
Great I appreciate it thanks and good luck in Q1.
We have reached the end of the question and answer session and I will now turn the call over to John Cuomo, President and CEO for closing remarks.
Thanks for your time and interest today. We appreciate all the continued support of <unk>, we really have an exciting year ahead look forward to connecting with you all in late April to discuss our first quarter results.
Have a great rest of your Thursday.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
[music].