Q3 2022 VSE Corp Earnings Call
[music].
Greetings and welcome to the U S E Corporation third quarter 2022 earnings call.
At this time, all participants are in listen only mode.
Brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Noel Ryan. Thank you Sir you may begin.
Thank you welcome to Vse Corporation's third quarter 2022 results conference call, leading the call today are president and CEO , John Cuomo, and Chief Financial Officer, Steve Griffin.
Presentation, we are sharing today is on our website and we encourage you to follow along accordingly.
This discussion contains forward looking statements about future business and financial expectations.
Actual results may differ significantly from those projected in today's forward looking statements.
Due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC.
Except as required by law, we undertake no obligation to update our forward looking statements.
We are using non-GAAP financial measures in our presentation the appropriate GAAP financial reconciliations are incorporated into our presentation, where available which is posted on our website.
All percentages in today's discussion refer to year over year progress, except where noted.
At the conclusion of our prepared remarks, we will open the line for questions and with that I would like to turn the call over to John Cuomo for his prepared remarks.
Thank you and welcome to everyone joining us on the call today as detailed in our third quarter earnings release, our business transformation continues to gain momentum.
Recent new business wins and strategic progress across each of our business segments.
Contributed to continued profitable growth during a period of broader market volatility.
Let's now turn to slide three of our conference call materials.
During the third quarter revenue net income adjusted EBITDA and free cash flow each increased materially on a year over year basis, driven by a combination of new business wins program execution and improved demand across our key commercial end market.
Total revenues of $242 $5 million increased 21% year over year, driven by growth across all three segments.
In the third quarter, both the aviation and fleet statements recorded their highest year to date revenue in company history.
Third quarter, adjusted EBITDA of $24 million was.
It was up 12% versus the prior year.
Driven by contributions from both our aviation and fleet segments.
Our aviation segment had another outstanding quarter with revenue of $102 million up 40% and adjusted EBITDA up 86% in the third quarter.
This segment's strong performance was supported by balanced growth across both commercial and business in general aviation customers and both our distribution and MRO revenue channels.
Revenue in our fleet segment increased 7% in the third quarter, driven by growth with commercial and ecommerce fulfillment customers.
Commercial fleet revenue increased 23% on a year over year basis, and now represents 39% of total fleet segment revenue.
<unk> segment, adjusted EBITDA increased 13% on a year on year basis in the third quarter.
The EBITA improvement benefited from commercial fleet growth along with steady contributions from the U S Postal service.
During the quarter Federal <unk> Defense segment revenue increased 12% year over year driven by growth within the foreign military sales program with the U S Navy.
Finally, we generated positive free cash flow for the quarter of $11 3 million.
In summary, our third quarter results highlight the many successes generated by solving complex problems for customers during a challenging supply chain environment.
Turning now to slide four and an update on our key strategic priorities.
Number one building a growing base of recurring revenue number two generating adjusted EBITDA growth and number three optimizing legacy programs.
We made steady progress in the quarter on new business growth and building sustainable revenue.
Last week, our aviation segment announced multiple new distribution agreements with global Oems.
<unk> products in the business and general aviation market.
These agreements represent a combined value of approximately $350 million and are anticipated to commence in early 2023 with contract terms ranging between two and 15 years in duration.
These new business wins support our goal of building a pipeline of consistent and recurring multiyear revenue.
And they include the following.
A new 15 year distribution agreement with Pratt <unk> Whitney, Canada, supporting New engine line maintenance spare parts and engine accessory exchange to support customers in the Asia Pacific region.
Our new five year exclusive distribution agreement with a global Oems supporting their fuselage mounted antenna systems for their European Middle East Africa, and India customers.
The expansion of an agreement with a global OEM.
He asked as the exclusive distributor of their inertial reference system and navigation device supporting a wide range of aircraft platforms from Bombardier Textron, DSO and Gulfstream and a new two year agreement as a sales channel partner to distribute more than 200000 to spare parts.
Supporting Embry our business jet.
In the third quarter, we also announced an important investments to ensure continued commercial and e-commerce growth within our fleet segment.
To support our successful revenue diversification strategy and developed scale to the next phase of sales growth in 2023 and beyond we are launching an ecommerce fulfillment center in Memphis, Tennessee area. This new state of the Art 425000 square foot facility will have on hand inventory of more than.
175000 fleet skews once fully operational.
This low Capex high return organic growth investments is scheduled to begin servicing customers in the first quarter of 2023.
Our next strategic priority is growing adjusted EBITDA.
During the third quarter.
The Asian segment achieved record adjusted EBITDA through successful implementation and execution of recently awarded distribution program, along with growth and scale within our MRO businesses.
Segment margin increased 326 basis points on a year over year basis to 13, 2% the highest level achieved since the first quarter of 2020.
The food segment also grew adjusted EBITDA in the quarter.
This 13% increase was driven by a combination of commercial sales growth and stable contributions from the U S Postal service.
Our final strategic priority is optimizing legacy program.
All three segments demonstrated progress in the quarter.
Aviation segment was awarded two multiyear contract renewals during the quarter, providing both sustained revenue and increased cross selling opportunities.
In addition, vse aviation announced a five year agreement.
The technique for 737 next generation parts, along with MRO service support.
<unk> from our 787 used serviceable material agreement with southwest Airlines.
The fleet segment also experienced solid legacy program performance with a stable quarter from our USPS customer, including the continued expansion of product offerings for all USPS vehicle types.
Finally, our federal and defense segments NAV C program.
Drove revenue opportunities in the quarter.
During the quarter, our existing British contracts supporting foreign military sales for the U S Navy with increased by $86 million to $185 million.
This addition is expected to generate incremental bookings and backlog during the next 12 months with anticipated revenue benefit in 2023 and 2024.
In summary, our third quarter results reflect strong financial performance.
<unk>, new business wins and continued execution on our multiyear business transformation strategy.
Before I turn the call over to Steve I have a few closing comments.
In 2023, Vse intends to host an investor day to share more details about our business strategy platform capabilities customer and supplier program details and long term financial outlook we.
We will confirm a date and share more details for the 2023 Investor day too.
Finally, I want to honor our recent milestone earlier this month PSC celebrated our 40th year on the NASDAQ exchange as we enter our fifth decade as a publicly traded company. We do so with incredible momentum we are well positioned for the future with our customer focused value proposition, our market, leading product and service.
Offerings, and an increasingly robust pipeline of new business opportunities.
But truly the thing that makes us different and that sets us apart from our competition.
Every market is the strength of our team our people culture and their dedication to customer excellence is a meaningful differentiator and our greatest asset and the strong performance. This year and this quarter is indicative of that difference I will now turn the call over to Steve for a detailed review of our financial performance.
Thanks, John .
Now turn to slides five and six of the conference call materials for an overview of our third quarter performance.
We reported third quarter revenue of $242 5 million.
Increase of 21% versus the prior year period driven.
Driven by growth in all three of our operating segments.
Aviation recorded another strong quarter with over $100 million in revenue driven by the successful implementation of new programs.
Share of wallet expansion and.
And continued end market recovery in both business and general aviation and commercial end market.
Fleet segment growth was supported by commercial fleet and ecommerce fulfillment revenue.
Together with modestly higher contributions from the U S Postal service.
Federal <unk> defense segment growth was driven by the U S. Navy programs, specifically for military sales and supportive ongoing aftermarket services.
During the third quarter, we generated adjusted EBITDA of $24 million, an increase of 12% on a year over year basis.
Consolidated adjusted EBITDA margin rate decreased 80 basis points to nine 9% as margin expansion across the both the aviation and fleet segments was offset by margin compression within the federal and defense segments.
Turning to slide seven.
Aviation segment revenue of $102 $6 million increased 40% year over year in the third quarter.
Both our distribution and MRO businesses grew on a year over year basis up.
Up 35% and 55% respectively.
Distribution continues to operate above pre pandemic levels, while commercial MRO remains 10% below pre pandemic levels.
Aviation adjusted EBITDA increased by more than 86% year over year, while adjusted EBITDA margin increased by 326 basis points year over year to 13, 2%.
Margin expansion was driven by achieving scale on new programs.
Improved MRO results.
And disciplined price and cost management across our mix of offerings.
Within the aviation segment, we maintain our assumption of year over year revenue growth as we look to the fourth quarter.
The newly announced distribution deals highlighted earlier will contribute to revenue beginning in early 2023, as we ramp the programs through the first half of the year.
We have updated our assumptions for aviation adjusted EBITDA margins from approximately 10% to 11% through.
<unk> grew 11% to 13% for the full year 2022.
This improvement is driven by both stronger business in general aviation market dynamics.
And a broader MRO recovery.
Partially offset by approximately 25 to 50 basis points of dilution associated with our prior year acquisition.
We maintain our longer term mid teen adjusted EBITDA margin expectations for the segment.
Turning to slide eight.
<unk> segment revenue increased 7% versus the prior year period.
Driven by higher commercial sales and e-commerce fulfillment support.
Total commercial revenues were $25 $4 million in the third quarter.
An increase of 23% versus the prior year period.
And represent 39% of total segment revenue.
U S. Postal service revenues were up 7% on a year over year basis, which is included within our other government revenue.
Segment, adjusted EBITDA of $8 $7 million increased 13% versus the third quarter of 2021.
As fleet continues to scale offerings and solutions for commercial customers.
Adjusted EBITDA margin grew modestly in the quarter as the business drove scale, while shifting towards lower margin commercial revenue.
Looking to the fourth quarter, we continued to anticipate flat to modestly higher quarterly revenue year over year.
As growth in commercial revenues offset flat to modestly lower seasonal USPS revenue.
We maintain our assumption of an adjusted EBITDA rate between 12% to 13% for the full year 2022.
We continue to remain focused on delivering higher EBITDA dollar contribution year over year. As this segment continues to drive revenue diversification as a key strategic initiative.
Looking towards 2023.
We expect the new fleet commercial center of excellence to contribute to revenue in the first quarter and ramp progressively throughout the year as we fully operationalize the facility and expand inventories.
We expect lower fleet segment adjusted EBITDA margins in the first quarter of 2023, driven by this new facility launch with progressive improvements from there on out.
Turning to slide nine.
Federal <unk> defense segment revenue increased 12% on a year over year basis, driven by growth in U S Navy aftermarket services.
This quarter the Fts segment saw meaningful revenue contributions associated with the transfer of enable forgets to Bahrain as part of our foreign military sales program.
Federal and defense adjusted EBITDA was $2 8 million in the third quarter, a decline of 57% year over year.
Adjusted EBITDA margins declined 600 basis points on a year over year basis to three 7%.
While we continue to right size this business and develop a solid pipeline of potential opportunities with our government customers.
The continued shift from fixed price to cost plus contracts negatively impacted the segment adjusted EBITDA margin in the third quarter.
Cost plus contracts now represent 53% of federal <unk> defense segment revenue versus 40% in the same period last year.
For the remainder of the year, we continue to anticipate relatively flat quarterly revenue year over year.
New awards under our <unk> program offset the expiration of a contract with the U S Army.
We continue to expect federal <unk> defense segment, adjusted EBITDA rate to be approximately 4% to 5% for the full year 2022, driven by the contract mix of cost plus versus fixed price awards.
Turning to slide 10.
At the end of the third quarter, we had $99 million in cash and unused commitment availability under our $350 million credit facility.
After the completion of the third quarter, we successfully amended and extended our existing loan agreement.
This amendment benefits vse in multiple ways.
First it extends the maturity of our existing arrangement from 2024 until 2025.
Second it reduces anticipated borrowing costs.
And lastly, it increases the availability under our credit facility.
This amendment provides flexibility to further our business transformation organically invest in new business opportunities and remain opportunistic for strategic M&A.
As expected, we generated $11 $3 million of free cash flow in the quarter.
Primarily driven by revenue growth and the successful execution of recent aviation distribution awards.
At the end of the third quarter, we had total net debt outstanding of $298 million.
Adjusted EBITDA for the trailing 12 month period, ending September 32022 was $86 9 million.
In line with the prior communications net leverage was down from three seven times in the second quarter to three four times in the third quarter.
We maintain our outlook for positive free cash flow for the full year 2022. However, we may choose to strategically invest in working capital to support newly announced distribution deals and our new Memphis Center of excellence before year end, if it can positively impact revenue and margins in 2023.
These strategic investments could affect full year free cash flow and we expect to share the details of such during our fourth quarter call.
We're proud of the strong third quarter performance and look forward to sharing our full year results in March.
With that operator, we're now ready for the question and answer portion of our call.
Thank you.
We'll now be conducting a question and answer session.
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The first question, we have is from Ken <unk> from RBC capital markets.
Hey, good morning, John how are you good morning, Ken.
Yes.
Good move obviously in the aviation segment My first question.
<unk> not just up the guidance there for the full year EBITDA I was just wondering if you can provide a little bit more detail on where youre seeing the incremental upside and then specifically how are you handling inflation. When you think about increased increased costs from your suppliers on the distribution side or increased cost on the MRO side.
Are you able to pass most of that through it sounds like it but just help us better understand the moving yes, sure moving pieces within inflation, yes, I'll start with the inflation piece and I'll, let Steve talk about the EBITDA guidance the with.
With regard to inflation, yes, we are.
Predominantly transactional business being 100% aftermarket focus so we do have the ability.
For the most part to push price down to the end user customer as we see price increases. So we are not seeing the inflationary pressure on material costs impact our margins, obviously labor has a slight play there, but we're not seeing the material costs on have that negative impact as CEO when I address the margin improvement.
Yes, I think the.
Second half of this year in terms of improvements versus what we initially anticipated I think the business and general aviation businesses remain quite robust and.
And that has helped improve our expectations for the business. The second half of it is an improved MRO recovery and Thats both on the business in general aviation side and on the commercial side. So we've talked a lot about sort of expecting what we expect throughout the year for commercial recovery were now at about 10% below pre COVID-19 levels, and our commercial repair business, which has improved versus the <unk>.
Second quarter and continues to pace in line with the overall market recovery.
And then our business in general Aviation repair business has continued to accelerate in terms of investments we've placed into those businesses and all of that I think has contributed to the expectations changed.
That's great. Thank you and if I could in the fleet business with.
The opening of the center of excellence.
In Tennessee and Memphis.
How can that contribute or whats the potential opportunity for revenue increase from that or should we think about that more as you come out of the investments is more accretive to margins.
Both but a little bit it would be.
Revenue versus Steve you want to give a little color, yes, sure. So Ken if you look at the run rate for our commercial business within fleet right now I'd say, it's let's call it roughly $100 million commercial business at this point, we think that as we look towards next year. This can contribute up to potentially $50 million of incremental revenue.
As an important step for us as we think about building our business and obviously, it's going to take us some time to ramp the facility ramp our capabilities and we expect that this will be an important pivot point as we think about the overall diversification of our revenue from the United States Postal service and commercial.
As it relates to the margins we've made reference to this earlier, but we will see some margin dilutive effects driven by the investments, we're making to build the facility and ramp it up as well as the fact that the commercial revenues do come with a lower margin rate. However, we are very very bullish on this opportunity for the diversification effect it has as well as our opportunity to grow long.
Term EBITDA dollars.
That's great and can you quantify or at least help us bracket the potential margin impact or sequentially. How we think about the first quarter of 'twenty three relative to how you should come out of this year in the fleet segment.
I don't think were ready yet to give the specific guidance I think it's going to take us some time to really get our arms around the ramp in the production in terms of hiring of new individuals' and exactly how it's going to translate into revenue. We've tried to give our best estimate at this point, which is to say that we expect it to be dilutive in the first quarter.
And at this point I don't think were ready to provide any specific range.
Perfect Alright, Hey, nice quarter. Thank you very much thanks, John appreciate it.
The next question, we have is from Michael <unk> from <unk> Securities.
Hey, Good morning, guys, John Steve Thanks for taking the question here and nice results.
John could you just give us a little bit of color on aviation I mean, it sounds like.
Trends are pretty favorable but revenues down a bit sequentially did anything any noticeable changes in demand anything different from our customers just from <unk> to <unk> or.
Any color you could provide on the sequential downtick in revenues.
No just a little bit of seasonality.
We're going through an integration with our global parts business, So a little little slow slightly.
Lower sales there, but nothing.
I wouldn't say anything material on the commercial.
Side of the business, we are seeing very consistent month over month, just a nice gradual improvements and inputs in our MRO business and bookings on our distribution business business in general aviation tends to be a little bit more.
Driven by activity is very engine focused so a little bit more cyclical in nature there but.
Nothing.
Yes.
I would say nothing special in the quarter, a few one time orders, but okay.
Got it got it and then just I think you called out.
The.
Agreement with Lufthansa.
And now having the ability with the southwest deal. It seems like you've got a natural sort of sales channel. There can you just give us an update on what's happening and I guess looking at the headlines. This morning. It sounds like southwest is getting their jets at a slower pace wanted to know if there is.
If thats impacting sort of your expectation with that program to get access to that that material on those older claims.
That 250 aircrafts.
And I think we were a little bit more conservative in our internal forecasting than with the initial.
Brito proposal was because we needed to assume things really got pushed out more than they're going to get pulled in.
But I think we feel very comfortable with the inventory pipeline is coming in.
And we will put ourselves in a position.
Partnering with southwest to be the largest used serviceable material supplier for 737, seven hundreds and eight hundreds as those aircraft start to get continue to get torn down, but we're seeing nice activity.
Across.
Different geographies supporting that product.
Okay got it.
And then just maybe type of thing you mentioned the.
The Memphis facility and potentially investing in working capital, but you have got these range of other deals that you've also announced are there going to be.
Some of them are extension some of them are new but should we think about any potential startup costs or additional working capital investment investment inventory that might also be.
A little bit of a drag on cash even as we enter into.
<unk> 2003.
Yes, Steve.
Ill, let Steve address that the return on the on the fleet investments as is very quick.
Because that inventory does turn and getting that inventory in and seeing the revenue generation from it within the next two or three quarters is going to happen. Steve you want to give a little color on kind of investments and what that looks like yes sure.
Michael There is some elements of it that are new programs. Some that are extensions I would say in the aggregate. If you look at all the announcements, including the Memphis facility Theres, probably about $60 million of working capital investment that will make into our business over the coming six months or so and probably about $10 million of Capex next year as part of all the growth that we're experiencing.
I'd say of the $60 million in working capital there is maybe up to a third of it that could be in the fourth quarter, depending upon how things play out I know we mentioned this earlier, but we're going to look to strategically potentially bring on inventory to support customers support the partnerships with the Oems, especially and then see if there are revenue opportunities, but there is some element of uncertainty to that as we.
Played through the remainder of this year, but as we think towards next year. There is definitely investment as I referenced and then we expect as John mentioned for it to begin to turn into revenue shortly thereafter.
Got you.
One I'll get out of the way here on Memphis, I think we mentioned $50 million of revenue.
Once everything is up and running and operational youre, not saying thats $50 million of revenue and 23, youre, saying sort of on a full run rate once that facility is mature and going full tilt it will generate $50 million.
No, we're saying 50 million in 'twenty three I mean, it will obviously ramp up throughout the year.
Just again just to give you a feel of what's happening today, we're capacity constrained. So we can add skus that I talked about the SKU expansion at that facility, we can add skus.
Our e-commerce fulfillment customers or through our own E. Commerce site at this point in time. So we are ready we've done the work and the team is just needs a facility and the infrastructure to go execute on the plan. So as I was saying that the return is pretty quick on the investment there.
Got it. Okay. So then you are comfortable with US modeling. So we're going to see kind of upper teens to 20% revenue growth next year with that $50 million.
Well, yes, I mean, theres, obviously, the offsetting yes, there is the offset to that which is the U S. Postal service, which we anticipate okay. You haven't yet let me put it this way we haven't given guidance on that for the full year next year, but theres some likely some declines there, but we continue to articulate.
And then we tried to articulate is that we expect to see some margin dilution and as I mentioned, it's going to take US certainly the first quarter, we will see a bigger impact on margins, but it's going to take us some time for us to progressively get back.
As it relates to kind of getting to full ramp rate and there is a mix shift dynamic on the commercial revenue channel versus the U S Postal service.
Of course got it all right perfect. Thanks, guys. Thanks.
Thanks, Mike.
The next question, we have is from Austin <unk> from Canaccord.
Good morning, John and Steve Great quarter here. So my first question within aviation.
Sorry that we're seeing on the commercial side is that largely being driven by airlines now coming to you with some of the deferred maintenance that they put off.
Yes, I think it is a little bit of deferred maintenance that then gets.
Revenue, our PK has continued to improve compared to 2019 levels as well. So I think it's just.
It's just probably a balanced.
Demand improvement across.
Our commercial airline customers and again, we continue to see that consistent kind of improvement both in distribution and in MRO on the commercial side.
Great and then just on the fleet side Glenn.
Or are we seeing margin improvement.
Any of the commercial sales or is it primarily just as higher USPS revenue in the mix.
I'd say, we are beginning to see some improvements on the commercial side, but it still remains dilutive to the overall mix of the business. So.
So to your point there is an element of improvements with the United States Postal service being up.
About 6% to 7%, but then there's also some improvements on the commercial side, but I would say it still remains dilutive.
Yeah.
Okay, and then when we think about the multiple new contract wins that were just announced.
Within 2023, I know you sort of said phasing in the first half, but should we think about that as like late Q1 early Q2, what sort of the timing there on that phasing in.
Yes, I'd say its going to phase in over that time period. So it's not going to be fully effective for the first quarter. If you look at the aviation deals that we've announced I would say, we're looking at maybe call it $10 million to $12 million of incremental revenue for next year with opportunities for us to continue to support more customers, depending upon the timing of the transition and inventory transitions and alike.
But over that time period, <unk> is probably a fair approximation, but we'll share more updates when we get to the fourth quarter call. When we actually get through some implementation phases in the next couple of months.
Okay, great. Thanks for all the details.
Thanks Allison.
The next question we have is from.
Need to Palmer from William Blair.
Good morning, Larry.
John Stephen Nolan.
Good morning to you as well congrats on the launch of the New Memphis facility I was wondering how great of a capacity increase as the new facility versus your existing facility.
About a 100% increase from our existing footprint.
Yes.
Great.
And related to this.
Facility what types of new features does it have from a technology standpoint to incur.
Increase productivity and ultimately margins.
Yes, I mean, we're going to we're going live in the site with a new warehouse management system and a new ERP system. So we're going live in the next few weeks with that new system. We will move in 2023 to more of a robotic warehousing system, we will not do that on the launch because we want to get the site up and running and they show the ERP and the <unk>.
MFS are talking to each other well, but as we get to the back end of 'twenty. Three we will start to implement some of more robotic warehousing. That's in the queue in the pipeline to help drive productivity improvements as well as order accuracy.
And are you going to shut down the existing facility or will you operate both simultaneously so our existing facility in Pennsylvania, just outside of Pittsburgh that will maintain remain as the distribution center and corporate headquarters for the fleet business and essentially the <unk>.
<unk> traditional distribution sales and the USPS sales will still be supported out of that facility Memphis will solely support E Commerce direct and e-commerce fulfillment through our fulfillment partners.
Awesome and switching to aviation you announced an expansion of your Pratt and Whitney Canada partnership to the Asia Pacific and you also announced a distribution agreement I believe with Honeywell for their jet wave tail mounted antenna.
Or the Middle East do you already have.
We restructure to support distribution in Asia, and the Middle East.
Is this an incremental cost and also Ken.
Can you describe like overall, the the international opportunity for your distribution business has right now.
I believe it's primarily domestic.
But yes, I mean, Louisiana from a strategic perspective, we're definitely highly domestic we we have a team in Europe and have planned other plans in 2023, they continue to grow there, but the opportunity with Pratt <unk> Whitney Canada to support.
Southeast Asia is a great opportunity will be supporting out of both Brisbane and Singapore, We do have existing infrastructure in Singapore to support that we will work with a third party logistics. Initially in Britain. So we don't need is not a tremendous amount of cost and startup cost to get that program up and running and then for the Honeywell Jetway program that will.
The support out of our existing infrastructure as well so theres not a lot of upfront cost, but we do see a lot of cross selling opportunities as we bring on new customers. In these regions that we're not supporting today's specifically in the business and general aviation market.
Great and one final one what <unk>.
Impact does the.
Expansion of your NAV.
Program contract have on the renewal of the long term contract.
So the expansion is essentially to support our Egypt customer so the foreign military sales program that we have with Nancy is a U S based program, but we do support for our military through it and our customer through Egypt essentially wants to.
Get the scope of their work completed so we increased the <unk>.
His feeling was increased on that program and Thats predominantly to support Egypt. We are anticipating an award for the complete Recompete and renewal in early 2023.
Okay and in the slides you mentioned, how a portion of.
<unk>.
<unk>.
Bahrain forget it is non recurring.
That contract will there be growth in 2023 over 2022 or is most of the nonrecurring revenue in 2022.
There is a headwind for there is a shift transfer when the USW ship transfer.
We have a strong ability to have access to that through our nasty contract and integrate opportunity for us to support that program. Those are not consistent program is there one off programs. They are large programs in large in revenue and non repeatable. So the nasty program will not we will have a lower revenue in 2023.
Much more in line with the consistent revenue we've had in prior years.
Okay, and I think in your.
The 10-K it said.
I think for the past few years, it's been around 100 million dollar run rate.
We haven't finished the forecast Jed for that program, but I would say in that range is how you should be looking at it.
And how much in revenue generating.
Generating in 2022.
We haven't necessarily shared it but I'd say the Bahrain ship transfer in the quarter, specifically was up about 86% that helped do that drove the majority of the 86% increase within the Nasty program and <unk> is about a third of the business. So that should help get some approximation.
Awesome.
Thanks, Steven and thanks, everyone.
Thanks Ali.
Thank you.
And gentlemen, just a reminder, if you would like to ask a question. Please press star.
No.
The next question is from Josh Sullivan from the benchmark company.
Hey, good morning good.
Just on the new Memphis facility, great location for the organic business, but curious how much of the decision was aimed at capturing maybe larger fleet customers that operate in the area.
I guess was choosing the location opportunistic or are there larger potential customers, who might have had some input which might be driving that $50 million goal.
No. It actually wasn't based on that it's really based on the ability to get E. Commerce parts out as late as possible that business is obviously highly transactional we want to be able to take orders as late in the day as possible and get them out for same day shipment. We also want to be in a city that has.
Reasonable cost of labor and reasonable lease.
We will lease rates on onto and warehouse facilities and put us in a position.
Where we've got the existing infrastructure in a city like that in Memphis, just happened to check all those boxes, but we did look at a number of locations.
Got it got it and then on the aviation side, what do you need to hire technicians to continue the growth or maybe how much excess capacity do you have built into the current infrastructure before.
Yes.
I'd say in distribution, we still have we have we have built capacity to continue to expand and we do expect to be able to scale that business a little faster I would say when we look at the MRO businesses as they start to recover close to pre pandemic levels. We are in a position, where we don't need to add dollar for dollar.
SG&A will definitely be a technician to do the work.
Thank you for the time.
Thanks, Josh.
The next question. We have is from just Jeff <unk> from B Riley.
Hi, Good morning, everyone and maybe add my congratulations on continued strong overall metrics.
I just wanted to follow up regarding the $350 million in contracts you announced wondering if there's anything notable there relevant to margins.
Steve you want to address that yeah, no I think we maintain our longer term projections of that business being a mid teens margin rate business I don't think that the deals that we've announced would change that in terms of our expectations.
Okay, Great and then.
I think you mentioned some of the considerations around the new methods facility and why you picked that just wondering if you can touch on labor where that facility how youre working around that and then I guess generally what youre seeing most recently overall the labor front.
Yes, I mean, we're starting to see a little bit of stabilization I would say in terms of labor. We are we do have our leadership team for the Memphis facility hired and onboard and we're going through recruiting process essentially right now to get ourselves ramped up.
Q1 start.
We've we've retained that.
The local area has been great and provided a tremendous amount of state support for us and we do feel very comfortable that we're going to be able to staff to location.
Okay, Great and then.
Just wondering any update you can provide in terms of.
Your acquisition pipeline, maybe the latest that you're seeing there.
Yes, I mean M&A pipeline.
Still looks strong we've shared mostly in the aviation business.
Now with our announcement on the fleet. There is as you can see why that wasn't the focus area. We've got a tremendous organic pipeline. There. So we're continuing to look at both MRO and distribution businesses in pipeline is looking strong the markets are a little.
I'd say slower in terms of deal flow than probably anticipated but.
We still remain very focused on growing both organically and inorganically and as the right deal comes forward.
They expect us to move forward if it meets all the criteria.
That would be great.
Alrighty ill take the rest offline best of luck in Q4.
Thanks I appreciate it.
Thank you ladies and gentlemen.
Remind us if you would like to ask a question. Please press star and then one now.
The next question. We have is a follow up from Michael of tries to guarantee.
Hey, guys. Thanks for taking the follow up I guess John .
One one negative here.
In the quarter.
Federal EBITDA margins.
Looked like a multi year, maybe even an all time low I mean is there anything or are these just still bad contracts flowing through I mean, I realize there are a lot of cost plus.
No. So Mike what are the biggest driver of that is actually the bridge contract for the NASA program. So essentially when that Enbridge contract came through last year to $100 million and out of the $80 million addition, the contracts immediately flips to a cost Reimbursable program at a lower margin now over time, you can work to move task orders to fixed price.
And work on our margin improvement plan with a new contract essentially coming out in early 2023 is a very difficult.
Time to get contracting officers to go through that process. So we are in a position right now where we're essentially that almost that entire program has moved from a balanced program of fixed price and cost reimbursable to essentially all cost reimbursable. That's the biggest driver of it.
I guess I'm, a little surprised I mean, that's really low for a cost plus and presumably you can pass through all of your inflation. So it's just.
Is it just is it low fee is it just not a great contract I mean, it just seems odd.
It's an outstanding contracts. If you look at a lot of these low cost technically acceptable bids out in the market.
Traditionally had a low very low risk, but they're essentially youre seeing many of them well below 5% operating margin, that's where those contracts tend to tend to trade. This one does perform better than that.
It is again without the ability to move task orders to fixed price, it's put some margin pressure on.
That segment for sure.
Okay got it.
Thanks, guys.
Thank you Sir.
At this stage there are no further questions I would like to turn the floor back over to John Cuomo, President and CEO for closing comments.
Thanks for attending our third quarter call today and look forward to speaking with you in early.
2023 to talk about the full year and our outlook for 2023 have a great rest of your day.
Thank you, Sir ladies and gentlemen that does conclude today's conference. Thank you for joining US you may now disconnect your lines.
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