Q2 2022 VSE Corp Earnings Call
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Greetings and welcome to BSE Corporation's second quarter of 3222 earnings conference call.
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The question and answer session will follow the formal presentation.
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I'd like to hand over to your host, the Senior Health No Ryan of Investor Relations. I'm going to hand over to you. Thank you. Thank you.
Please go ahead. Thank you. Welcome to VSE Corporation's second quarter 2022 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 four looking statements about future business and financial expectations.
Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except is required by law, we undertake no obligation to update our forward-looking statements. Actual results may differ significantly from those projected in today's
We are using non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our presentation where available which is posted on our website.
All percentages in today's discussion refer to year-over-year progress except we're noted.
At the conclusion of our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to John Cuomo for his prepared remarks. John ?
Thank you, Noel, and welcome to everyone joining us on the call today. Let's begin on slide three of our conference call materials.
BSE finished the first half of 2022 with two of the strongest revenue quarters in more than a decade, led by broad-based year-over-year growth in all segments.
including aviation which reported record, and the second quarter.
While the macro environment remains challenging.
Giving continued supply chain disruption, cost inflation, and labor constraints.
We continue to make steady progress on our customer-centric value proposition.
highlighting the strength and resiliency of the VSE team and the demand for our products and services in the market.
Our strong second quarter performance, further highlights our successful implementation recently awarded distribution and MRO programs.
together with our effective integration of recently acquired businesses.
We executed on plan in the second quarter, delivering strong year-over-year growth in revenue and profitability.
Total revenue increased by 38% year-over-year, adjusted evata increased by 21% year-over-year, and adjusted net income increased by 25% versus the prior year.
We continue to advance our ongoing business transformation, guided by three strategic initiatives that position us to drive long-term value creation for our shareholders.
First, we are building sustainable revenue channels through new program execution, market share gain, and product and capability expansion. And products and capability expansion. And products and capability expansion.
Second, we remain focused on margin expansion and profitable growth as we drive scale with our recent and ongoing investments.
and improve our supply chain and operations through continuous improvement.
And third, we are building on our strong legacy programs and our long-term customer relationship to optimize our core revenue channels without standing customer service and depth and breadth of product and service offerings. And depth and breadth of product and service offerings.
The company's second quarter results demonstrate substantial progress across these strategic initiatives
As we continue to execute the next phase of our business transformation roadmap, developing a market leading after market parts, distribution and MRO services platform to support higher growth transportation and markets.
I'll start by highlighting the progress in our aviation segment.
Our aviation segment reported record results in the second quarter with $105 million of revenue.
highlighted by organic revenue growth across both our distribution and MRO businesses and contributions from our Global Parts Acquisition.
Distribution revenue increased 177% year over year, representing the eighth consecutive quarter of sequential revenue growth. Renewable MRO revenue increased 37% year over year.
supported by ongoing commercial market recovery and continued growth within the business and general aviation market. Welcomeg Avanba ??? you
Aviation segment adjusted EBITDA increased by over 293 basis points year over year to 11.4 percent.
driven by new program implementation and an increased mix of higher margin repair activity. and an increased mix of higher margin repair activity.
Over the last few years, the Aviation Team successfully launched a new business and journal aviation market focus program.
These programs expanded our business and general aviation customer base from 100 customers in 2020 to more than 3,000 unique customers today.
Also, we are on track with our Global Parks Acquisition Integration activities and our new programs are performing ahead of initial expectations.
Commercial air travel levels continue to recover, and we experience incremental growth in commercial distribution and MRO activity in the quarter, which will contribute to further revenue growth in 2023 and beyond as commercial air travel recovers to pre-COVID levels.
Turning to our fleet segment.
Fleet revenue increased 12% year-over-year in the second quarter, driven by strong growth with commercial fleet customers and e-commerce fulfillment sales, together with steady contributions from the U.S. Postal Service.
We continue to experience strong demand for aftermarket parts, servicing medium and heavy duty police across our commercial distribution and any commercial fulfillment channels.
Commercial revenue increased by more than 48% on a year-to-year basis in the second quarter, representing 40% of total segment revenue in the period, up from 10% at the end of 2019. The The
Looking ahead, we anticipate further growth within commercial channels as we continue to expand operational and supply chain capabilities to be this growing debate.
Also, our USPS revenue increased on both the sequential and year-over-year basis in the second quarter, given consistent customer spending, including increased spending on commercial off-the-shelf fleet vehicle.? vehicle.
Turning to our federal defense statement.
Federal defense revenue increased 3% on a year-of-year basis, supported by growth in the Farm Military Sales Program with the U.S. Navy as we focus on optimizing legacy programs. The Federal defense revenue increased 3% on a year-of-year basis, supported by growth in the Farm Military Sales Program with the U.S. Navy as we focus on the Farm Military Sales Program. The Federal defense revenue increased 3% on a year-of-year basis, supported by growth in the Farm Military Sales Program.
In the second quarter of 2022, Federal and Defense segment margins declined versus prior year levels, driven by an increased shift in our contract mix from fixed price to cost plus.
POS Plus now comprises 48% of total federal revenue versus 31% in the second quarter of 2021. The
Before Steve shares our financial performance for the quarter in more detail, I'd like to take a moment to announce two recent additions to the VSE Board of Directors as part of our long-term succession plan.
We are excited to welcome Anita Britt and Lloyd Johnson to the VSE Board during this next chapter of growth and transformation.
Both incoming directors are accomplished executive with decades of commercial experience at respected world-class public companies committed to delivering long-term value for shareholders. Long-term value for shareholders.
We are confident they will provide diverse and valuable perspectives to our continued business transformation.
Our results for the first half of 2022 demonstrate the strength and resiliency of the VSE team and the demand for our products and services and strong execution on our multi-year business transformation strategies. I am proud of our team, how they support our customers and OEM partners, and for delivering strong and record-setting first half results.
As we look to the second half of the year, we intend to build upon this momentum with a strong focus on program execution. With a strong focus on program execution. With a strong focus on program execution.
market share gains, and new business integration in continued support of the growing fragmented markets we serve.
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 second quarter performance.
VSE reported $241.7 million in revenue in the second quarter, an increase of 38% versus the prior year period.
Second quarter revenue grew year over year in all three of our operating segments.
Aviation generated $105 million of revenue. It's highest quarter ever driven by a combination of strong new program execution.
shared gains within the business and general aviation market, and continued commercial and market recovery.
Fleet Segment Growth was supported by commercial fleet and e-commerce fulfillment revenue.
Federal and defense growth was driven by growth in our U.S. Navy programs, partially offset by a U.S. Army contract completion.
During the second quarter of 2022, we generated adjusted EBITDA of $22.9 million.
An increase of 21% on a year-over-year basis.
Adjust the debita margin rate, decrease to 9.5% in the second quarter, as margin expansion across the aviation segment offset margin compression within the federal and defense segment. Offset margin compression within the federal and defense segment.
Turning to slide six.
Aviation segment revenue of $105 million increased 121 percent year-over-year in the second quarter.
Both our distribution and repair businesses grew on a year-over-year basis of 177% and 37% respectively.
Distribution revenue, excluding $23.7 million of revenue contribution from our global parts acquisition, is approximately 150% above pre-pandemic levels, as a result of recent new awards and strong program execution. As a result of recent new awards and strong program execution.
Total MRO revenues are approximately 6% below pre-pandemic levels and are led by business and general aviation repair, which is above pre-COVID levels, while commercial repair is approximately 25% below pre-COVID levels.
Consistent with recent market trends and our first quarter expectations, we anticipate moderate commercial MRO recovery in the second half of 2022 and continue to expect commercial MRO to recover to pre-pandemic levels by 2024.
Looking ahead, we will continue to invest in new capabilities and to expand our integrated solutions across a growing base of new business and general aviation and commercial customers.
This is including MRO capabilities and support of our recently announced Honeywell Aerospace Agreement for AVEONIX product repair. The
and our 737 end-of-life aircraft solutions business supporting a major US airline.
Aviation of just the EBITDA increased by more than 198% year-over-year, while adjusted EBITDA margins increased by 293 basis points year-over-year to 11.4%.
Within the aviation segment, we continue to anticipate year over year growth in quarterly revenue during the 2nd, half of 2022.
Together with an adjusted EBITDA rate of approximately 10 to 11 percent, driven by the mix of emerald recovery.
We maintain our longer term mid-teen and adjust the EBIT-DOM margin target. We maintain our longer term mid-teen mid-teen
Turning to slide 7.
Fleet segment revenue increased 12% versus the prior year period, driven by higher commercial and e-commerce fulfillment revenue.
Commercial revenues were $26 million in the second quarter, an increase of 48% versus the prior year period, and now represents 40% of total segment revenue. And now represents 40% of total segment revenue.
USPS revenues were up 4% on a year-over-year basis.
Segment adjusted EBITDA of $7.7 million increased 10% versus the prior year period, while adjusted EBITDA margins remained relatively flat given a higher mix of commercial revenue.
For the remainder of the year, we continue to anticipate flat to modestly higher quarterly revenue year over year as commercial growth is offset with flat to modestly lower USPS and Department of Defense revenue.
We expect sleep adjusted EBITDAW rate to be approximately 12 to 13%.
We remain focused on driving higher EBITDA dollar contribution year over year, as this segment drives revenue diversification as a key strategic initiative.
Turning to slide 8.
Federal and defense segment revenue increased 3% on a year-over-year basis, driven by U.S. Navy growth, partially offset by the expiration of a contract with the U.S. Army.
Federal and Defense adjusted EBITDA with $3.4 million in the second quarter, a decline of 58% year over year.
Adjust the EBITDA margins to client 690 basis points on a year-to-year basis to 4.8%, given a higher mix of cost-plus contracts and in line with prior communications. Narration
For the remainder of the year, we continue to anticipate relatively flat quarterly revenue year over year as new awards under our NAVSEA program offset the expiration of a contract with the U.S. Army.
We expect federal and defenses adjust the EBITDA rate to be approximately 4% to 5%. Different by the contract, next of cost plus versus fixed price awards. The EBITDA rate is approximately 4% to 5%. The EBITDA rate is approximately 4% to 5%. The EBITDA rate is approximately 4% to 5%.
Turning to slide nine.
At the end of the second quarter, we had $91 million in cash and unused commitment availability under our $350 million credit facility.
Our existing credit facility includes a $100 million for our Cording Provision. Our Cording Provision.
Subject to customary lender commitment of rubles.
As expected, we used $3.4 million of cash in the quarter, up from $19 million in the first quarter, primarily driven by the completion of new aviation distribution awards and timing of inventory 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 second quarter, we had total net debt outstanding of $308 million.
Adjusted EBITDA for the trailing 12 months was $84.3 million and excludes full-year EBITDA from the Global Parts Acquisition.
At the conclusion of the second quarter, net leverage was 3.7 times.
consequence of the completion of the second quarter and following the expiration of previous interest rates waps in the first quarter of 2022 We executed 150 million dollars before starting interest rates waps in July 2022 Equivalent to approximately 50% of our outstanding debt which will serve to mitigate interest rate exposure over the coming years
We continuously evaluate our existing capital structure and look forward to sharing more on our upcoming investor day in the fourth quarter of this year.
Operator, we are now ready for the question and answer portion of our call.
Thank you very much, sir. Ladies and gentlemen, I think John will become a
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The first question comes from Ken Herbert of RBC Capital Markets.
Hey, good morning, John and Steve. Nice quarter. Thanks, Ken. Good morning. Good morning.
Hey John , on the aviation business, it looks like you saw a bit of an inflection in the repair business in the quarter. Sounds like from the commentary that wasn't as much on the commercial side as it was on the business jet side. I know this tends to be the higher margin business, but can you just dig a little bit deeper into what you saw on the quarter on the repair side? And if you're starting to, comments sounded still a little cautious on the pace of the commercial repair recovery, but what are you seeing in that market and a little bit more on how the second half could look there?
of us and the issues around labor. We've definitely been a little more cautious and hiring and making sure that we're fully staffed to support the growth, growing a business and more than doubling the size of a business in a year, it requires a lot of operational excellence as well. So we have definitely been a little bit more cautious on the SG&A side as well as the commercial MRO businesses. It's been slightly slower to recover, which is why we're more cautious on margin. Steve, do you want to show any more color on it?
Kind of the breakout of commercial versus BGA. I know we don't go too much detail, but yeah, we don't provide the split necessarily. But you are right based on the commentary can we did see significant strength and BGA. And I think generally speaking, we could see some of that pent up demand coming through at the end of the 1st quarter that helped to translate. And the strong revenue generation for business and general aviation repair. I think we continue to see that commercial coverage, John pointed out, but as, you know, there's just some uncertainty generally in that market space, but we're pleased with the execution in the quarter.
You know, it looks great. Is there anything that's giving you pause within the BGA segment or you seeing anything from your customers that may imply that the growth we've seen in that market could start to moderate? The market could start to moderate. The market could start to moderate.
No, I mean, you and I had a few conversations. I tend to be a little more cautious than what you read in the market. That said, when we see the backlog and we see the customer activity, we continue to see pretty robust trends in that market. We continue to see pretty robust trends in that market.
Okay, great. And just one final question with global parts and then of course with the distribution agreements you put in place. Now that your few quarters or a year or so into some of these distribution agreements.
Any surprises on these, anything around with material you've acquired that's either positive or negative or how are those performing relative to plan?
Yeah, I appreciate the question. When we know where exactly actually Monday was a year anniversary of the Global Parks acquisition, that was a self-sourced deal at a low multiple. And when we look at the multiple in terms of how it performed compared to plan, it's tremendously exceeded our expectations. We're on track for a Q4 system integration and full integration of the business into our full distribution business, but it's performed above plan a year to date.
When we look at our Pratt and Whitney Canada agreement as well as a few of our other larger distribution agreements that we launched last year, I can't stress enough how proud I am of the team to be able to build out you know platform that essentially double the size of our distribution business while having you know market leading distribution results and just amazing customer feedback in terms of you know how much we've improved both you know operational performance as well as inventory availability
So, so far, you know, everything is really performing above plan. And, you know, we came in with the thesis of where we, there were some gaps in the market, and the market's really responding well to it.
That's great. Alright, well thank you very much.
Yeah.
Next question comes to Michael Jamoli of the test.
Hey, good morning guys. Thanks for taking the questions, nice results as well. John , maybe just to kind of go back to 10's first question on aviation, I think you kind of hinted at the margin dynamic talking about this, GNA, but obviously the second half up implies a step down and you are getting that pick up in the MRO which is higher margin.
Is there anything else kind of any other moving pieces in the second half, are you looking at just higher labor, any longer term times, anything that might also be impacting the margin in second half? I'm assuming the MRO revenues don't take a step back here in 3Q and 4Q from where they were. Maybe you could just comment on the margin dynamic. Or at the end of the day, make mixes with them and drive them.
business for growth. I think you can see with the second quarter results in terms of strong execution on the top line we continue to see opportunities to grow organically. We'll make some investments to help generate that growth as we launch some of our new programs which we previously announced in the first quarter but besides the dynamics that John referred to I don't think there's anything else necessarily to call out.
Okay, and on those investments, can we just think that you guys may be carrying extra costs while some of these organic investments get ramped up? Is that the right way to think about where to have the margin might be impacted?
Absolutely. So you look at, you know, giving it a real, a real, so you look at a, you know, what we signed our first OEM authorized MRO capability to do avionics work, a 10 year agreement, you know, out of our facility in South Florida, which traditionally was an independent facility to get that, you know, business up and running. We've got it, you know, got the testing equipment. We've got in, you know, William Victoria is not in the, yes, gee, but we've got testing equipment. We've got labor. So when we look at the growth and the opportunities ahead.
Just one other one as well. Just on, you mentioned the BGA, the backlog, the activity. I guess we're now in a technical recession here and there's always been pretty tight correlation to corporate profits with BizJet activity. I mean, how are you looking at the trends longer term? I mean, do you have that much backlog and visibility in that specific segment?
No, I mean, it's an aftermarket business, so your correct is not a tremendous backlog of disability. We look at the trends. The trends are continuing to perform, you know, the way that the the year has started to perform. When we look at 2023, you know, we look at the back end of 2022, you know, I'm a little bit more cautious than the, you know, then the, then the, you know, double digit growth rates that you see out in the market.
I do not think that we will see the, like let's say the 2008 business in general aviation kind of boom and bust market. That said, I do think there'll be a level of caution in the forecast as we look at 2020 plus. Steve, anything else there? Got it.
see the like let's say the 2008 business and general aviation kind of boom and bust market that said I do think they'll be at a level of caution in the forecast as we look at 20 plus if anything else there got it
Got it. Thanks guys. I'll jump back in the queue.
Thanks.
Thank you. The next question comes from Louis Detaulner of William Blair.
John and Steve, good morning.
Hello, here are you. Hello, here are you.
Your aviation revenue growth, John the Steve continues to be robust, was your new Honeywell avionics contract that you announced in April , was that the key driver for revenue growth and aviation this quarter?
Louis, actually that program that we announced in the first quarter really won't start to generate revenue until maybe late this year, but probably more early next year. So it doesn't necessarily contribute to the strong result this quarter. I think what we would attribute the strong result this quarter to is really excellent implementation of the new programs, as well as success within the global parts business. We continue to see that the themes are operating at a very high level of efficiency in terms of managing our product as well as at the same time.
Finding new solutions for customers. So we're very pleased with the implementation of those programs as well as optimizing the legacy programs that existed within VSC Aviation beforehand.
Great, Steven. What were some of those new programs that were the key revenue drivers?
And what were some of those, I guess, new programs that were the key revenue drivers in aviation?
You know, I would point back to the three large programs that we announced last year, one being the Pratt-Wendy Canada Engine Accessory deal, the second one being the Pratt-Wendy Canada auxiliary power unit deal, and then the last being the Tri-Infectuation Program. All of those programs now are full implementation, and then that combined with the global parts integration and helping to drive some commercial synergies in terms of sales opportunities and sales leads. I think that helped to contribute to the strength on the top line.
Great, and when those programs are at flu, I mean, full implementation, does that mean that growth is somewhat capped for those programs, or should there be continued growth in future quarters and years from... Does future teams work in future quarter and years from...
Pratt & Whitney Canada engine
accessory parts and the other programs that you mentioned.
Yeah, I mean, once they're fully ramped, you're not gonna see the growth rates that you're seeing today. You'll see a growth with a market, you'll see, you know, us have the ability to grow both in terms of price and volume. And then there's additions and some add-ons as we kind of gain share while it kind of intend gentle sales around those core programs. So there is a growth strategy beyond the full implementation. It just won't be at the same pace that you see the implementation growth rate.
Thanks, John .
John , I think you referenced how the pipeline is very large. And Steve talked about how there's some caution related to staffing. Right now, are you turning down? Right now, are you turning down?
certain deals or even deferring certain partnerships until the staffing environment improves.
No, I wouldn't say I wouldn't say staffing is holding us back again. We've been a little bit more aggressive both in our fleet business and in our aviation business to support the growth that we have in front of us and the growth that we see even further ahead. We are looking at capacity during cobit. We created centers of excellence that will help us drive scale and all of our businesses. I wouldn't we've got a few that we're still working on getting that scale ready to handle the future. But.
I wouldn't say we're turning down business, but I'd say that we are watching capacity to make sure that we can handle the growth, not just today, but in 2023 and beyond.
That makes sense. And um...
One final one. How is the Southwest program progressing? I'm Southwest this morning announced that it expects. From the Southwest this morning announced that it expects.
um reduce deliveries for its Boeing 737 max For this year would that have any? impact on how your program with Southwest ramp
It does. We purposely did not put a large forecast and did not put a big forecast out in the market on that program for the near term. Although we anticipate about 250 or so aircraft that will retire during the life of that program, we do not believe that this is going to be the robust year. You need new aircraft deliveries to support aircraft retirement and there is just a level of uncertainty out there in terms of delivery. Our forecast is extremely conservative.
austina of caccord.
Morning, John Steve Nice Quarter.
nice quarter. Thank you, good morning.
So my first question here, just in the fleet business, the performance on the USPS contract was relatively strong. Do you now expect that USPS may perform better than anticipated going forward, just given the diverse vehicle fleet and potential extension of use on the Northrop LLBs, if we see the OSTOS vehicles get pushed to the right? The OSTOS vehicles get pushed to the right.
Yeah, I think that we are anticipating the LLVs to be more of a longer-term play for the Postal Service based on the communication that you see within the public domain as well as the same that we do. But based on both delivery of new vehicles and being a longer delivery cycle, the mix of fleet that the USPS will have when they're complete with their fleet transition in probably 8 to 10 years from now, which will include some commercial off-the-shelf vehicles.
as well as the inability for them to get vehicles today. We do anticipate the LLV being extended. And that's obviously, mostly we have very strong market share on that vehicle. We also were seeing market share gains on other vehicle types within the USPS fleet for two reasons. Number one, they're starting to age out. And as they start to age out, we're seeing revenue buy vehicle types start to grow. Number two, they're starting to age out.
as well as as we start to understand how the customer uses the vehicles, we're starting to be able to penetrate with additional products as well. So yes, it was a very strong quarter for the USPS.
Thank you. Good excretion comes from the Jets Fund Syndrome of the Raleigh.
Good morning everyone, let me add my congratulations as well.
Good morning.
Just a follow up on the BNGA MRO segment. Looks like a building pretty good, but that's in there. Taking market share. What's your latest thinking of what ining were in relevant to taking more market share there? That's like that. That's like that.
In the business, the general ladies, so let me just talk at a high level about MRO, a share gain. So MRO share gain is from when we kind of launch a capability or win a new program until you see revenue execution is about 12 months. It could even be as high as 18 months before you see these programs ramp. It's a little different than a distribution program where we have to get the capability and the testing and the like up and running. We still see a long runway ahead.
for both distribution share gains as well as MRO share gains in both commercial and in business and general aviation. Just wanna share the difference though when we announce kind of a win in the MRO space in terms of revenue realization versus a win in the distribution space as a quicker terms of revenue realization. But we still see a tremendous upside in both BGNA and commercial MRO capability expansions.
Okay, great. And I know you touched on being more aggressive on labor. Just wanted to circle back to that. Are there any changes for better or worse?
and kind of the latest that you're seeing in terms of labor availability, labor rates.
Any change there?
I would say there's no material change or difference from kind of what we've seen in the prior quarters. Part of what we're building is building a culture, and it may sound a little corny, but building a culture of a winning team where people want to be on the team. I believe that if you look at some of our growth segments like our aviation, our fleet segment, we actually have lower turnover than most of the market has experienced in the recent times.
Okay, good. And then any update on supply chain, how you're seeing availability evolve, and then maybe just update on how you're handling price and creases in the near term.
Yeah, I'll talk about pricing first, then we'll talk about supply chain. I mean, from a pricing perspective, we're an aftermarket business. We do not have a lot of long-term fixed price contracts, and that does give us the ability to amend price and change and adjust price pretty quickly to end user customers.
As we look at supply chain, we look at supply chain in two, it's kind of like a seesaw. You look at the risks and then you look at the opportunities that can come out of those risks. So when you look at our working capital usage, we are really making sure we've got sufficient inventories on the shelf to support both the current demand as well as the future demand that we anticipate. Somebody earlier mentioned kind of, are we in a recession or not based on the metrics?
We look at our business as one that has opportunity set during recessions as people try to extend the life of assets, specifically transportation assets. The repair spend typically goes up and you see maintenance, repair and overhaul and distribution businesses perform quite well. So we are positioning ourselves pretty strong in terms of our inventory position to support both 23, the back end of 23 as well as back into 22 as well as 23.
Okay, great. Thanks for taking my questions and best of luck. Thank you for your time.
Thanks for taking my questions and best of luck. Of course. Thank you. Thank you.
Next we have a follow up from Kinervid of RBC Capital Lockers.
Hey, John or Steve, thanks for taking the follow-up. Just quickly, the Positive Free Cash Flow Guide for the year implies a pretty nice recovery in the back half. You've had a nice improvement sequentially in cash from the first to the second quarter. How should we think about the cadence there? Are you cash flow positive in the third quarter and how much of it is dependent upon the fourth quarter?
It's a good question. What we've iterated here is that you should expect sequential free cash flow improvement from here. So, I think that would intuitively apply some level of positive free cash flow for the third quarter. But we reiterate our guidance that barring any major organic investments that might be strategic, we expect free cash flow to be positive for the year. And it's, candidly, kind of similar to what you saw last year. And we do see this kind of being somewhat of a dynamic as we move forward where stocking of inventory towards the year end that then could lead to payables that head out in the first quarter.
potential risk there in terms of rates.
Yeah, so first, you know, we did hedge about half the debt. I do think that we'll be able to provide further updates for you in the second half of this year because we'll be getting together in the fourth quarter for our analyst day. I might be able to provide a bit more guidance when we get to that discussion. Right now we feel very comfortable, obviously, with that 50 percent hedge, especially as we generate stronger free cash flow in the second half of the year. As it relates to interest rate risk, I mean, I think you should expect interest rate in terms of how it affects our P&L to be.
You know, pretty close to where we're at in the 3rd quarter. We do anticipate obviously higher interest rate on the remainder portion of the debt. That's not hedge. But we do also expect that positive free cash flow to reduce our debt balance and therefore improve our interest expense. But net net, I think you can expect 3rd and 4th quarter to be in line with what we saw thereabouts in the 2nd quarter.
Excellent, perfect, thank you. Thank you. Thank you.
Next we have a toilet from Michael Chamboly, called Trest.
Hey, thanks guys. Steve, just housekeeping. I'm in, missed it. The 2.3 million or so charge for Russia Ukraine. What specifically was the right down there related to? What specifically was the right down there related to?
Yeah, we had a bit of outstanding ease receivables and as well we had some inventory that we had purchased that is specific for that. There is a small slice of the business and general aviation market that is tied to Russia and given some of the recent news as well as obviously some of the sanctions, we felt it was most appropriate to take a reserve on those two items. I would say with both items there is no further risk on either one of them. Okay, got it. And then just looking at that second half.
of the business. I would say there's, you know, from a collectability standpoint nothing to be concerned about. So I think as you look to the second half of the year you'll see a bit more of the EBITDA contribution of the business fall down as well as a little bit of a work capital benefit.
Got it. Perfect. Thanks, guys.
That was right. Next we have a follow up from Austin, where I've kind of called an engineer here. Thank you.
Thanks for changing the question, don't just connect it. You sort of touched on this in a prior question, but if we do see a slow down in business jet activity in the next year, do you think that that might be offset by that greater pen-up demand that hasn't been realized yet from commercial aircraft, Emerald?
Yeah, I think, you know, we continue to look at diversity of the businesses within the businesses, so to speak. So when we look inside of, that's that has been a lot of sense. See, when we look inside of business and general aviation, you know, I think that we are touching all different types of aircraft, all different types of users, all different types of parts of the airplane on a tip-to-tale approach. And that we continue to see opportunities to kind of grow share a wallet. So,
If we see kind of a slower growth rate next year, first, there'll be opportunities for share wallet game within our existing customers to kind of combat that. Second, absolutely, we expect a commercial business and both the share gain and the other opportunity sets in front of us to help counterbalance any kind of concerns we have in business and general aviation. Thank you.
Okay, great. Thanks for the detailed job.
Okay, great. Thanks for the detail, John .
Ladies and gentlemen, we have reached the end of the Christian middle-arm session. I would now turn the call over to Mr. John Pimmer, President and CEO , for closing remarks.
Thanks everybody for joining our call today. We look forward to seeing many of you at our investor day that will allow shortly that'll be in the late third quarter or early fourth quarter. And if not on our third quarter earnings call. Thanks again for the support. Have a great day.
Thank you. Let's conclude today's conference. Thank you for your participation. Anyone else who's connected? No. No. No. No.
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