Q1 2022 VSE Corp Earnings Call
[music].
Greetings and welcome to the Vse Corporation first quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now.
Now I'd like to turn the call over to Noel Ryan of Investor Relations. Thank you you may begin.
Thank you operator, welcome to Vse Corporation's first quarter 2022 results conference call, leading the call today are president and CEO , John Cuomo, and Chief Financial Officer, Steve Griffin.
The presentation. We are sharing today is on our website and we encourage you to follow along accordingly.
Today's discussion contains forward looking statements about future business and financial expectations.
Actual results may differ materially from the 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.
Right.
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 presentations 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 with that I'd like to turn the call over to John Cuomo for his prepared remarks.
Thank you know and welcome to everyone joining us on the call today.
We are off to a solid start to 2022 with the strongest revenue quarter for vse and over 10 years, including revenue growth in all segments and the highest revenue on record for our aviation segment.
Not only was the first quarter, a strong revenue quarter for the business.
But one where we delivered growth in adjusted EBITDA and profitability as well.
We started the year strong with a combination of new contract wins and execution excellence on existing legacy program.
Our business transformation continues as we make progress that our team systems and processes.
On track with our integration activity for both legacy businesses and recent acquisition, which will support our mission of creating scalable business is able to capture more of their growing end market.
Three key strategic focus areas will enable us to deliver value for shareholders.
First we are building a long term higher margin sustainable revenue channel that capitalize on the strength of the bse assets and enable us to support our customers and growing end markets.
Second we remain focused on growing profit as we drive scale with our recent and ongoing investment and improve our operation through continuous improvement.
Third we are building on our strong legacy customer relationships the strength in core revenue channel.
With our industry, leading customer service and breadth of product and service offerings.
The company's first quarter results demonstrate substantial progress across these strategic initiatives I'll start by highlighting some of the progress in our aviation segment.
Our aviation segment reported record first quarter results highlighted by strong organic revenue growth across both our distribution and repair businesses.
Distribution revenue has now exceeded pre pandemic levels for the sixth consecutive quarter, while repair revenue continues to accelerate supported by ongoing commercial market recovery and share gains within the business and general aviation market.
Aviation segment, adjusted EBITDA increased by over 600 basis points on a year over year basis to 11, 6% driven by an increased mix of higher margin repair activity.
While commercial air travel levels continued to recover we expect 2022 commercial MRO market recovery to be slower than initially anticipated.
As we look towards 2023, we see incremental growth in commercial MRO activity, which we contribute to further margin expansion in 2023 and beyond.
Within aviation, we continue to build our business in general aviation platform that encompasses the full breadth of products and services.
Tip to tail approach that builds upon our established MRO capabilities and industry, leading parts distribution business.
In March Vse aviation throughout global parts Group acquisition was awarded an early renewal of a three year distribution agreement with a global OEM valued at approximately $180 million.
Under the terms of this agreement will remain the global distributor for approximately 30000 airframe part serving approximately 1000 business and general aviation aircraft.
The renewal provides for increased multiyear revenue confidence through 2025.
We believe our customer focus performance based culture.
Experience managing complex supply chain.
<unk> proven technical expertise.
The OEM to support an early renewal of this important agreement.
Also during the first quarter, our aviation segment reached an agreement with Honeywell to provide new commercial OEM authorized repair capabilities, which will expand service offerings and support both legacy and next generation avionics and commercial market.
As a further example, DSD aviation distribution was recently awarded the 2021 regional channel partner of the year for the Europe , Middle East Africa, and India market by Honeywell and recognition of our high performance and service levels, particularly with respect to the Honeywell fuel control product line.
We are honored by this recognition and remain committed to building. Upon this long standing relationship with Honeywell and other global OEM partners as we grow our scale and expertise across our core commercial and be NGA market.
Turning to our fleet segment.
Please segment revenue increased 22% on a year over year basis in the first quarter driven by strong growth with commercial fleet customers and ecommerce fulfillment sales.
Together with stable contribution from the U S Postal service.
We continue to experience strong demand for aftermarket parts servicing class four through eight vehicles and heavy duty trucks across both our commercial fleet and ecommerce fulfillment channels.
Lee commercial revenue increased to 42% of segment revenue at the end of the first quarter up from 10% at the end of 2019.
<unk> with our multiyear revenue diversification strategy.
Our legacy USPS business was flat on both a sequential and year over year basis in the first quarter, given consistent customer spending on the <unk> and more importantly, other commercial off the shelf fleet vehicles used by the USPS.
The U S. P. S. This transition from the <unk> to its planned next generation vehicle remains a multi year process one that our fleet segment is well positioned to support.
Importantly in addition to the healthy we continue to support and further develop comprehensive part solution for non L. L. E vehicles in the U S. P. S fleet, which remains a significant long term opportunity for us.
Looking ahead, we anticipate further growth within commercial channel.
While product cost inflation and higher freight costs remain headwinds within this segment, we continue to invest in labor and facilities to fully capitalize on further anticipated commercial demand growth, while optimizing growth and EBITDA dollars.
Turning to our federal <unk> Defense segment.
Revenue increased 8% on a year over year basis supported by contributions from the Heiko Special services acquisition completed in the first quarter of 2021.
In both the fourth quarter of 2021, and the first quarter of 2022 Federal and defense segment margins declined versus prior year levels, driven by an increased shift and our contract mix from fixed price to cost plus contracts.
The federal and defense segment continued to build a robust multiyear backlog of new opportunities during the first quarter.
Total funded backlog increased by 5% on a year over year basis in the first quarter, while bookings increased by 46% in the period given increased customer demand stemming from aircraft maintenance and modernization activities and awards for logistics and distribution services.
In March we were awarded a $100 million 12 month contract by Naval Sea systems command or Nazi.
He is the current contractor providing foreign military sales follow on technical support to Nazi.
Under the terms of this contract award and in conjunction with not the International Fleet support program Office DSD will continue to support eligible foreign Navy with a broad range of aftermarket services.
Our first quarter results demonstrate the great progress our teams are making I'm proud of the work the team how we supported our customers and partners and the strong results we produced in the quarter.
I will now turn the call over to Steve for a detailed review of our financial performance.
Thanks, John .
Now, let's turn to slides four and five of the conference call materials for an overview of our first quarter performance.
We reported $231 $2 million in revenue in the first quarter, an increase of 40% versus the prior year period, our strongest revenue quarter in 10 years and revenue growth in all three of our operating segments.
Aviation recorded its highest revenue quarter ever driven by a combination of strong new program execution share gains within the business and general aviation market.
And continued commercial end market recovery.
Fleet segment growth was supported by commercial fleet and ecommerce fulfillment revenue.
Federal and defense segment growth was driven by inorganic contributions and new business awards, partially offset by the completion of a certain Dod contract in 2021.
During the first quarter of 2022, we generated adjusted EBITDA of $22 $2 million, an increase of 43% on a year over year basis.
Adjusted EBITDA margin rate increased to nine 6% in the first quarter.
As margin expansion across both the aviation and fleet segments offset margin compression within the federal and defense segments.
Turning to slide six.
Aviation segment revenue increased 110% year over year in the first quarter.
Both our distribution and repair businesses grew on a year over year basis up 172% and 22% respectively.
Distribution revenue, excluding $22 $5 million of revenue contribution from our global Parks acquisition is approximately 118% above pre pandemic levels. As a result of recent new awards and strong program execution.
Repair revenues remain approximately 20% below pre pandemic levels in line with the overall market.
Consistent with recent market trends, we see a more moderate commercial MRO recovery in the second half of 2022 than originally anticipated, but continue to expect commercial MRO to recover to pre pandemic levels by 2024.
Throughout this year, we will continue to invest in new capabilities and expand our integrated solutions across a growing base of new business and general aviation customers and commercial customers, including MRO capabilities in support of the recently announced Honeywell Aerospace agreement for avionics product repair.
Aviation adjusted EBITDA increased by more than 389% year over year, while adjusted EBITDA margins increased by 664 basis points year over year to 11, 6%.
For the remainder of the year, we are anticipating growth in quarterly revenue year over year, and an adjusted EBITDA rate of approximately 10% to 11% driven by more moderated repair recovery and organic investments that support continued growth in 2023 and beyond.
We maintain our longer term mid teen adjusted EBITDA margin rate targets in line with pre pandemic levels.
Turning to slide seven please.
Sweet segment revenue increased 22% versus the prior year period, driven by higher commercial and ecommerce fulfillment revenue.
USPS revenues were flat on both a sequential and year over year basis.
Commercial revenues were $27 $9 million in the first quarter, an increase of 93% versus the prior year period, and now represent 42% of total segment revenues a new record.
Segment, adjusted EBITDA of $8 $8 million increased 9% versus the prior year period.
While adjusted EBITDA margins declined as anticipated 160 basis points year over year, given a higher mix of commercial revenue.
For the remainder of the year, we are anticipating flat to modestly higher quarterly revenue year over year as commercial revenues offset flat to modestly lower USPS revenue.
We expect fleets adjusted EBITDA rate to be approximately 12% to 13%.
We remain focused on driving higher EBITDA dollar contribution year over year. As this segment continues to drive revenue diversification is a key strategic initiatives.
Turning to slide eight.
Federal <unk> defense segment revenue increased 8% 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.
Federal and defense adjusted EBITDA was $3 $8 million in the first quarter, a decline of 35% year over year.
Adjusted EBITDA margins declined 350 basis points on a year over year basis to five 3% given a higher mix of cost plus contracts.
The federal and Defense segment reported an operating loss of $700000 in the first quarter of 2022 due to a $3 $5 million provision for a loss contract recognized in the quarter.
The charge represents the expected loss, driven primarily by higher material and labor supply chain costs related to a specific fixed price non Dod contract with a foreign customer that is not considered indicative of ongoing business operations and strategy.
For the remainder of the year, we are anticipating flat quarterly revenue year over year as New awards under our announced C program offset the expiration of a contract with the U S Army.
We expect federal and defenses adjusted EBITDA rate to be approximately 4% to 5% driven by the contract mix of cost plus versus fixed price awards.
Turning to slide nine at the end of the first quarter, we had $100 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.
As expected, we used $19 million of cash in the quarter, primarily driven by the completion of new aviation distribution awards and timing of purchases to support 2022 sales.
Looking to the remainder of 2022, we expect sequential improvements in free cash flow and maintain our outlook for positive free cash flow for the year.
At the end of the first quarter, we had total net debt outstanding of $303 million.
Adjusted EBITDA for the trailing 12 month period ended March 31.
Was $83 million and excludes full year EBITDA contributions from our global parts acquisition.
At the conclusion of the first quarter net leverage was three eight times.
With that operator, we're 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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Our first questions come from the line of Ken Herbert with RBC. Please proceed with your questions.
Okay.
Are you able to check with you. Please.
Ken are you there.
Yes.
Our next question is coming from the line of Austin Muller with Canaccord. Please proceed with your questions.
Good morning, John and Steve Awesome quarter.
Thanks, Austin how are you.
So good.
So my first question here I understand the commercial fleet sales are lower margin, but just the exceptional demand for commercial trucking right now just with all the China Lockdowns and port delays mean that the average margin on these products might start to go up soon.
Yeah.
Overtime as we start to scale the business. We are so in that business. We haven't made any inorganic investments, we're making organic investments we have built a an infrastructure both people systems processes and facilities to support launching that commercial.
Revenue channel.
Through the end of this year, we still have investments to make as we start to get into 2023 and beyond youll see us be able to scale that business to a different level and youll see.
A little bit of margin improvement there in that sector, but I wouldn't expect anything in the near term.
Okay. That's helpful and then for <unk>.
For the federal and defense business bookings and backlog can you discuss what countries or geographic regions for the allies, where the largest portion of the bookings for the quarter.
Yes, I mean, the largest portion is.
It's probably Egypt.
Through our Navy program.
That's probably the largest.
Country.
Steve any other color you think you're going to get there.
Yes, I would just say the primary driver of the bookings increase is driven by the Nazi program, which supports many different countries as John mentioned, Egypt is a big one Bahrain Iraq.
Pretty we're seeing increased pickup in terms of award activity on that program, which we're pleased about no new countries that we haven't previously announced though.
Okay. That's helpful. And then just one last question. So I understand the company's goal to achieve positive free cash flow. This year do you think that inflection point happens next quarter or sort of in the second half of the year.
Sure.
Sure.
We haven't necessarily given guidance. All we mentioned is that we expect sequential improvement from here on out I think what you see is that we made some investments early in the start of this year as it relates to preparing for 2022 sales also related to some of the distribution deals that we had previously announced.
So I think we've gone with sequential guidance at this point and we look forward to being able to share more so the quarter comes out.
Okay. Thanks for the color.
Thank you. Our next question is coming from the line of Ken Herbert with RBC. Please proceed with your questions.
Yes.
Yes, hi, good morning, John and Steve sorry, about the technical difficulties a few minutes ago.
Eight point.
Hey, good morning, nice quarter, just wanted to start off on aviation.
As you look at the as you look at the market and then we think about this business sequentially from the from the first of the second quarter.
And sort of the $10 million I'm, sorry from the fourth quarter to first quarter of a $10 million increase can you break that down in terms of what youre seeing from distribution I know, we will get that and obviously with the filings, but not so much the growth, but in terms of the activity levels and the margin contribution because I know you've talked about MRO in the past is sort of key for continued margin expansion.
And in this segment what were the trends you saw from the fourth to the first quarter and are you seeing that continue here into the second quarter.
Okay.
Yes.
Okay. Thanks for the thanks for the question I think we've seen improvement from the fourth quarter to the first quarter, both in distribution and been repair.
You'll see when you kind of see the complete filings, but youll see there is sequential growth in both sides of the business.
And at the end of the day as we mentioned one of the key drivers from a margin rate improvement standpoint is the repair recovery from a revenue standpoint, because it does drive higher incremental margins just given the nature of the cost structure of the business.
I think from a market trend standpoint, we will still continue to see positive improvements, but what we have communicated is that I think there is a slightly more moderate recovery it within the repair space than what we had initially anticipated which as you know when somebody is driving some of our assumptions as we look to the back half of this year in terms of what we think repair or recover and likely out in the 'twenty three 'twenty four.
Okay, that's helpful and with the recent distribution and other agreements you put in place how much would you say of your business within aviation is sort of under long term or recurring contracts versus.
Were sort of spot market or what I would call sort of point of sale or book and ship type businesses.
So our distribution business I'd say at this point, we're probably close to 90%.
Of the revenue is probably locked in under a long term supply agreement, obviously as did demand and the backlog is more of a transactional nature. So we have a lot of exclusive arrangements with suppliers, but then obviously that doesn't necessarily mean you have firm backlog the backlog obviously it depends on the demand of the end user cut.
But as far as.
Consistency of revenue as we kind of break out our strategy as we look at this first phase of business transformation that a big part of that was to lock in our core.
Programs and make sure that we've got a lot of longevity up kind of consistency in those revenue channels. So it is a big part of what we did to end the year and to start this year.
So when distribution, but really have one program, we're trying to get.
The finalized on a renewal and that puts all of the legacy programs in locked in for a really long term consistent revenue going forward.
Okay very helpful. And then just finally as you think about sort of the capital structure and we think about.
Capital allocation.
Two questions here first is there any sort of near term risk around.
Floating or fixed rate on the debt and is that anything that.
You might be able to address this year and then second as we just look at leveraging the aggregate how do we think about that moving through the year is ideally free cash flow profile starts to improve.
Yeah. Good questions. So I think there obviously is risk because we arent up excuse.
Excuse me have floating rate structure from that standpoint, So I think what we have internally assumed is that we would expect the back half of this year to continue to be at levels from an interest rate expense similar to where we're at right now even though we expect the free cash flow to drive down the balances we do anticipate rates to continue to rise which will drive.
Set to that reduction.
And then in terms of the capital structure long term, we continue to evaluate options. I think you know last year, we did amend and extend for 18 months of our existing facility released so that we could support the recovery within our businesses and get to a stabilized level of new performance, because we're such a different business than where we were about three years ago. When we really wanted it sounds putting when.
We have conversations about what we want our capital structure to look like long term. So I would say it remains something that we'll look at it over the course of this year and evaluate whether or not there is something to move differently.
In terms of the capital structure, whether it be this year early next year.
Okay perfect. Thanks, Steve.
For the color.
Okay. Thank you.
Thank you. Thank you. Our next question is coming from the line of Michael <unk> with <unk>. Please proceed with your questions.
Hey, good morning, guys nice results.
Good morning, just before I wanted to get into aviation just on the on the federal and defense you took the charge.
This quarter, calling out.
I guess the nature of that fixed price contract, but I guess as you look about our.
The current mix of contracts.
And dealing with the inflation environment do you expect more pressure on some of your existing fixed price contracts do you have to wait for those to renew to kind of deal with the current whether it's labor raw materials I guess I'm just trying to figure out how much risk is in that federal segment from a contracting.
Standpoint.
It's a good question I'd say, there's very very little risk at the end of the day, we've been talking about the business for about three years now and first phase of it was the kind of clean up the legacy assets and get our value proposition in each of the three business segments aligned and start pushing this business forward in the federal business has been.
Its the slowest business, just because of the market to get it back on track so.
So we made the decision this quarter when we look at kind of exiting legacy contracts that were non core at this.
This is pretty much the end of it and I think the business now from here as you could expect this kind of a floor and now it's.
Looking at the assets inside the portfolio to see what's core and non core as we move forward, but I wouldn't expect anything else.
Any risk on fixed price contracts going forward.
Okay, how does that.
Let's say you signed a fixed price contract six months ago, where the inflationary environment, which dramatically different I mean is that how are you protected on a contract like that six months ago. I mean is that just you have more open negotiations with the customers or I'm just trying to understand.
So if you look at our when you look at the three business segments are our aviation business in our fleet business. Our highly transactional. So we have a lot of strong ability to very quickly change priced to very few contracts. We have in those two segments that are long term there are pricing escalation.
Abilities within the contracts to raise prices when when we need to raise prices within the federal business the way that the contracts work most right now our contract mix.
Unfortunately, you see it in the margins is a little bit more.
Cost plus or cost Reimbursable heavy right now the fixed price work that we do have though.
As more task order base. So it's more of a short term booking and we have a lot of.
Confidence in how we're booking now so we don't really have any long term kind of fixed price contracts right now where theres any open risk as we move forward.
Got it perfect.
And then just switching to aviation.
Could you call out what specifically changed with the repair business you said, it's tracking a little bit.
Below your expectations versus what you called out last quarter, what are you seeing in the marketplace.
Yes, I mean, we anticipated.
The commercial MRO side of the business to be very close to.
Pre pandemic recovery by the end of the year.
It's like a slower slope up every every month.
Obviously track our inputs on a daily basis, but when we look at the trend on a monthly basis, we are continuing to see.
Input improvement in the MRO shops month over month as we move forward. It's just not at the level of robust activity from the airlines that we had anticipated. So we look at kind of that pre pandemic recovery in that segment really being pushed out to 2023 and not happening in the back end of 2022, we would anticipate.
Is it just more of a market recovery, but we feel.
The business is performing well you can see this margin improvement as we have discussed as the business starts to scale, it's just a slightly slower recovery in the market.
We initially had anticipated.
Got it got it and then last one for me and I'll jump back in the queue on those margins. It sounds like from your kind of directional guidance, we're going to get sequentially.
Down margins from here is that is that a function I mean, I know you called out the organic investments and obviously the the slower ramp in repair but.
I mean, it still seems like youre going to start to get some some leverage on some of these new contracts.
More volume.
Is there I guess I'm just trying to figure out from this 11, 6% level talking 10% to 11% the remainder of the year it seems like it could be.
A bigger step down I mean, I know youre going to get the year over year expansion versus versus obviously, what you did in 'twenty one but.
Anything else color you could provide on some of that margin pressure.
Yes, Steve do you want to go.
Yes, I was just going to engine so as it relates to some of the newer programs that we mentioned we continue to make these organic investments as you referenced I do want to make sure that it's clear those those won't necessarily turn into revenue. This year right. So these were new repair activities that we're investing in that business. They don't necessarily turn into revenue within a month.
Like a distribution deal you can turn around quite quickly. These are businesses that we're going to have to make investments in it in terms of technical talent to make sure that we're prepared and we really anticipate revenue to begin in 2023, hence why it was we talked about the margin rate of the business. We want to make these investments because we know what drives long term growth of the business, but it wont drive short term improvement in margins in that sense some of the.
Assumptions, we've given around that margin.
10% to 11% for the year.
Yes got it.
Yes go ahead.
I wanted to ask a colleague.
But you first.
Yes.
I was going to ask so, it's primarily staffing and adding exactly the technical labor Okay exactly.
So when you look at it so we feel when we look at our our product margins in our service margins. Those are performing very much in line with our plans and we're really pleased to see where those margin net margin performances. When we look at our SG&A as a percentage of sales is higher than that maybe I think maybe.
You had maybe had modeled and let me explain why we really want to be well positioned as you could see the growth on a year over year basis, we need to be able to manage that growth a huge part of our value proposition in the market is how we perform from a customer.
Excellent perspective, and a big part of that is making sure that we're staffed appropriately.
You were at that conference for Aviation This week and you hear a lot of pressure on labor. We are really we believe better position than most of the market from a labor perspective, and we just want to make sure that we're not being too thin on the labor side as the recovery starts to happen and people are going to struggle with technical talent, we want to make sure that were really fully staff.
And so the SG&A right now is a little heavier relative to sales and then just over time it'll scale naturally and we feel very confident in our mid and longer term margin.
Expansion plan, we just again want to be a little cautious in the near term based on the pressures that you see in the market.
Got it makes sense, thanks, guys I'll jump back in the queue.
Yeah.
Thank you. Our next question is coming from the line of Louis Dipalma with William Blair. Please proceed with your questions.
John Stephen and no. Good afternoon, good morning actually good morning, good morning.
What drove the sharp increase in revenue from your fleet E Commerce fulfillment channel.
A sequential basis and are we still in the early innings of growth. There every part of like a multiyear growth cycle or should that.
Exceedingly high revenue growth taper off significantly over the next several quarters.
No. It's a great question, it's two years ago or so we launched this commercial revenue channel and we kind of go to market as a true kind of classic commercial distributor.
Have our own E Commerce platform, we have what we call e-commerce fulfillment, where we're supporting products through other platforms as well and then we have our adjusted time program and the market is really responding well to our offerings. So we do believe we're only in the early innings of growth here.
You'll continue to expect growth at some point in the back end of this year, we will we're going to move that business onto a new ERP platform that will kind of communicate ahead of time, you might see just a one month kind of level off a little bit as we kind of go through that transition and that will get us ready for 2023, but we believe we're in the early innings of really building something special and <unk>.
And able to continue to diversify that customer base.
Within the fleet business, so really proud of what the team has done what they've been able to deliver.
Thanks, John and Stephen you provided guidance for the fleet EBITA margin and you mentioned further investment to support the rapid growth I believe.
For this year and next year.
You then expect I think you said, 12% to 13% margin should that be the.
The long term trough for the margin or should make future investment.
<unk> down further.
We haven't necessarily given long term guidance for the business, yet I think towards the back half of this year, we'll be able to provide more color for you as you look to the long term multiyear transformation, but.
But I'd say in and around this range is probably the right place to be.
And the reason why I say that is this year as John mentioned, we're going to continue to make investments and those are going to help us deliver the next round of scale because the business as you can see us continuing to rapidly grow which in some level, we're going to have to make investments in terms of our infrastructure to make sure that we're able to support that growth.
What you Havent necessarily completed all that modeling to be able to share with you sort of what the long term guidance looks like in terms of that business is margin rate, but it's in and around this space and I'll go back to sort of the commentary that John you said at the very beginning were looking at growing adjusted EBITDA of this business. The margin rate itself is obviously very important to us, but we're also trying to think about building a long term business it's very.
Sustainable while we go through this mix shift with the other USPS customer with them within the segment and so our focus right now remains on growing EBITDA dollars and that's what we're going to continue to drive as we go through this transformation.
Okay. So should the EBITDA dollar should that continue to grow from here.
That's when it comes to long term guidance as to how to think about the businesses performance that's exactly what we're driving for.
Sounds good.
Final one back to John can you talk about your ability to gain market share in the aviation.
Repair business, you recently announced the Honeywell repair partnership in last quarter. The Boeing 737 partnership if you execute.
On those contracts those showcase vse aviation like repair abilities and should that lead.
The other partnerships on the repair side.
Absolutely I think that so we're trying again to build out when you look at the aviation business it'll be the long term kind of strategic vision as it is.
As for the business being very balanced between commercial and business in general aviation and MRO work and pure distribution work and what Youre seeing from the business in the first year and a half two years and I think that the business. We had a tremendous growth in the distribution business and brought on a lot of great new programs, what youre seeing this.
Year is start to scale the.
The MRO business. So we're bringing on board. This program that we announced this week with Honeywell is supporting legacy as well as next generation aircraft.
Mostly avionic work and that will take us probably through the end of this year to get that that new test cell in that authorized repair center up and running but then we have a lot of very long term consistent revenue stream what that will do is not only bring new customers to us and those customer approvals will then give us opportunities to use our other repair.
<unk> to sell to those customers, but also highlight our ability to be a very OEM centric business and that we will do.
Show this week or are you starting to have dialogue with other Oems to say this is how we really can represent you well in the market specifically during these times are really tough labor.
When we have the ability to move a little quicker than they can for that to.
Build that those MRO capabilities to support these Oems so very excited about the future potential for that MLR business as well as distribution business.
Yes.
That's helpful and where is that Honeywell repair center are going to be located.
It will be in our south, Florida and our.
Miami Miramar.
Aviation headquarters, so thats, where our most of our commercial hydraulic pneumatic avionic repair is Kansas is where we do more of our business in general aviation work and in Cincinnati, It's more kind of low tech.
Like interiors.
Things like that.
And is the Boeing 737.
Teardown work is that also going to be done in Florida.
Or is that.
Texas somewhere else.
Does that work is it's a partnership with the airline and we have a third party.
That will do actually have a physical tear down we're not actually tearing down the aircraft and then what we're doing once the aircraft is just kind of torn apart then we're moving that material to our facilities either in Miami or in Phoenix, and our distribution facilities to help distribute that product and theres repair needs then that product will come into our shopper into another.
Shop to get repaired before it gets sold out to the market.
That makes sense. Thanks, Dan Thanks, everyone.
Thanks.
Thank you. Our next question is coming from the line of Jeff Van <unk> with B Riley. Please proceed with your questions.
Hi, Good morning, everyone. So wanted to circle back for a second if we could do the commercial MRO market just a point of clarification there.
I know you mentioned that you see the recovery running slightly slower than anticipated and just wondering what do you attribute that slower rate of recovery to versus prior expectations.
Okay.
Steve you want a job.
At a high level I mean at the end of the day. The market is just just recovering a little slower and softer than anticipated. My personal perspective is I think you've got a lot of labor and fuel pressure at the airlines and any maintenance that can be deferred they're taking advantage of those opportunities and deferred maintenance. So again, we're continuing to see consistent improvement and inputs.
Over a month and our commercial MRO shop, but it is slightly less robust than we had initially anticipated.
But youll continue to see based on that.
I want to close the gap on that 2019.
No.
No.
Kind of data point.
Mhm and so let's just say they are deferring some maintenance I mean would you anticipate sort of a catch up period at some point in the future where all of a sudden theres a lot of deferred maintenance that that starts to hit and the benefits your business.
Yeah.
It's a good question at this point I wouldn't say that I think you're just going to see a nice gradual increase.
We may see.
The market heat up and kind of.
That trajectory kind of go more directly up rather than all of that.
A nice incremental month over month improvement, but at this point, we're not forecasting it that way.
Okay Fair enough and then on Honeywell the contribution from not just wondering when.
That's likely to be running at peak levels, and then I guess as you think about.
Other potential wins, there how much more capacity do you have to take on more work of that nature.
Yes. So a good question so on the Honeywell side when you look at a new MRO capability I'd say really eight to 10 months before because we build out the capability, we get new test cells and we obviously do some pilot programs to make sure things are working before we really start going to market. So you won't really see the real contribution until 2023 on that program.
From a capacity perspective, we have a tremendous amount of capacity for growth. So during COVID-19 .
Our site consolidation adult centers of excellence, So our MRO center of excellence in South, Florida has the ability to at least double the size of the business within the existing footprint. So we are very well positioned as we win new awards to quickly bring them onboard and to scale to scale. This business.
Okay, Great and then one final one if I could squeeze it in just wondering around all of the activity with the war on Ukraine.
Are you seeing an increase in request for bid on.
And your federal and defense segment.
Any changes there that youre noticing that might result in an incremental contract wins.
There is a lot of initial discussions specifically kind of NATO country, we havent.
Our team over in Europe , right now, having some discussions with some customers.
Say that Theres initial discussions at this point, we don't have any firm orders supporting any of that work yet we will report if and when any of that materialize into actual order.
Oh, yes.
My question just to cover sorry go ahead, Jeff I was just going to say just to cover sort of the impact across the other two segments. Because I think it is relevant obviously no real impact on the fleet segment, because theres quite domestic I'd say, our aviation business. The real upside is if we look at what the potential is there's maybe $2 million of sales in that region last year.
Just to give you referenced in terms of the type of an impact that might have on our business. This year.
Okay.
Thanks, a lot.
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Hey, Thanks for taking the follow up guys just on I appreciate the.
The directional guidance here for the remainder of the year, but Steve.
Global parts I think you said it was $22 5 million contribution this quarter.
I think I had it at a similar run rate in the fourth quarter of.
Last year is that is that correct and that kind of 'twenty, one 'twenty $2 million range.
Yeah.
Let me actually get it for you we disclosed it last quarter. So last quarter was about just under 19 and this quarter you can see it's just over 22.
Okay and then.
Good.
Got it.
Yes, no I guess I was getting at if we think about the remainder of the year that was.
Good.
Sequential aviation growth and I think we're looking at a lot of good.
Industry and the company is on a sequential basis are those kind of the that's the right trajectory to kind of think about aviation on a on a go forward basis I mean, there's obviously a lot of moving parts with material flavor price.
But if we continue to see traffic grow.
The market remained healthy.
Something in that mid to high single digit organic sequential kind of the way to think about aviation.
Hi.
I would think about the business maybe twofold, because remember we've got the commercial side of our business and the business in general aviation side of our business I would say the sequential improvements we expect to continue for the commercial side of the business I think at some point youre going to start to see the business in general aviation side start to slow somewhat just given the market is.
Quite strong and quite robust right now and I think at some point you'd have to expect that its going to level off at some point.
So total business will we haven't necessarily given sequential guidance that we've given the assumptions on year over year and I think you can kind of get a good understanding of what we're thinking about for the year.
Yes, there is a difference between commercial and business in general aviation.
Okay got it helpful. Thanks, guys.
Yes.
Thanks, Mike. Thank you there are no further questions at this time I would now like to turn the call back over to John Cuomo for any closing comments.
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