Q2 2023 VSE Corporation Earnings Call
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[music].
Welcome to T V. If he corporation second Cortez 2023 results countries Cole.
At this time all participants are in a listen any night.
Brief question at all sufficient for.
Formal presentation.
If anyone should require operators assistance during the conference. Please <unk>.
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As a reminder, this country is being recorded.
Hold I'll turn the call over to my Kuperman He's gonna hit.
Thank you welcome to D. O C Corporation second quarter 2000, twenty-three result conference call.
Call today, or John Cuomo, President and CEO and be aggressive and Chief financial Officer.
Residents Haitian we're sharing today is on our website and we encourage you to follow along according to.
Today's 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 S. P C.
Except as required by law, we undertake no obligation to update a forward looking statements.
We are using non-GAAP financial measures in her presentation.
Procreate 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.
As a reminder, beginning in the second quarter of 2023.
Dolts exclude the federal defense business segment, which has been moved to discontinued operations.
Does he announced sale of the business segment.
We look forward to welcome you to our first Investor Day scheduled for November 14th 2023 in New York City and broadcast virtually more details will be shared soon please contact me with any questions.
At the conclusion of her prepared remarks, we will open the line for questions with that I'd like to turn the call over to John .
He might go welcome everyone and thank you for joining our call today.
The second quarter was highlighted by record company revenue, which grew 21 per cent and a quarter driven by contributions and growth in both our aviation fleet segments.
Thank you must fly three where I will provide an update on the performance of our business statements.
We delivered another record setting performance in the second quarter setting the stage for an exceptional year.
Operational performance and attractive market conditions stepped forward, a double digit revenue growth and improved profitability and bold or aviation and please segments.
Aviation segment revenue increased 19 per cent and a quarter.
We continue to see robust and market activity across all channels.
The aviation distribution revenue increase was driven by new product edition expansion of existing OEM partnerships and improved pricing.
Aviation MRO revenue increased 37 per cent and a quarter.
Increase was supported by strong commercial flight activity market share gains.
Then expanded portfolio of service capabilities.
The fleet segment also experienced a record revenue quarter.
Revenue increased 24% in the second quarter.
The growth was led by contributions from all revenue channels within the statement, including increased throughput at our recently launched Memphis distribution facility.
The United States Postal service revenue increase in the quarter was supported by demand from the growth and the total installed base of U S. P. S vehicles, and they continued investment Ah the legacy U S. P S sleep.
We continued to see increased spend on both legacy and newer vehicles.
<unk> segment expands product offerings for all vehicles in the U S. P S installed base.
Moving out to slide four.
In recent announcements and strategic updates.
It's been a productive quarter as we continued to advance our business transformation strategy.
Last week, we completed and oversubscribed follow on equity offering optimizing our balance sheet and improving the liquidity in our stock.
$113 million of net proceeds.
The offering supports accelerating our deleveraging commitments and increases balance sheet flexibility to support current and future growth opportunities.
Early in the second quarter, we announced the repositioning of our business I sounding a definitive agreement to sell our federal defense business statement.
The total cash consideration for the transaction of $100 million includes an earn out of up to $50 million subject to the achievement of certain milestones.
With this repositioning V. S. He is now a 100 per cent sure play to segment aftermarket business.
Let's focus distribution and MRO capabilities.
Surfing high growth and high margin aviation and fleet aftermarkets.
This creates a distinct and compelling aftermarket services investment profile, one, which will drive long term shareholder value and appeal to a broader and deeper investor base.
The pre closing in transition work related to the sale of F. D. S is progressing well.
Supporting the closing of this transaction in late 2023 or early 2024.
Lastly on July 3rd we completed the acquisition of Desert Aerospace.
A global aftermarket solutions provider specialty distribution MRO services.
Yes, Sir aerospace is the world's leading independent distributor of aircraft tires and tubes, a leading global distributor or breaks and batteries and a component MRO services provider for capabilities like wheel and brake repair.
Yes, there is global locations in the U S.
I didn't kingdom in Australia.
You have a diverse and attractive aftermarket customer base across all aviation industry statements, including commercial business in general aviation and military aftermarket customers.
The acquisition supports our tip to tail aircraft distribution and MRO service strategy in the highly fragmented after Patrick.
<unk> and their family of businesses also provide a platform for geographic expansion in high growth International markets.
This value and enhancing acquisition, it's consistent with Vse's capital allocation and return on investment priorities.
Will be we will begin integration activities immediately starting with the U S operation and look forward to sharing performance and growth updates in the quarters ahead.
Now move to slide by.
As mentioned, we delivered record quarterly results highlighted by a 21% increase in revenue.
112 increase in net income and a 44 per cent increase in adjusted EBITDA as compared to the prior year.
Our aviation segment posted yet another record quarter with revenues of $125 million and 19% year over year increase with balanced growth across the commercial and business in general aviation customers.
And through both distribution MRO sales channels.
Jested EBITDA for this day that of $19 million for the quarter increased by 61% versus the prior year yet another record for this business segment.
Aviation statement adjusted EBITDA market increased by approximately 400 basis points year over year to 15.4% a P.
Asian segment adjusted EBITDA represented 72% of total companies second quarter, adjusted EBITDA versus 65 per cent last year.
Our fleet segment also recorded record revenue in the quarter increase in 24% to $81 million driven by growth across all end markets.
Plead segment adjusted EBITDA increased 24% driven by commercial sales growth and solid contributions from the United States Postal service.
It's been an outstanding quarter I'm very pleased to see that vse transformation story really taking shape, we reposition the company for the announcement of both the statement divestiture and material aviation aftermarket acquisition, we optimized our balance sheet and accelerated our deleveraging efforts.
And we recorded record revenue and earnings growth the order in the first half of 2023, all while maintaining industry, leading levels of customer service and support.
I will now turn the call over to Steve for a detailed review of our second quarter financial performance.
Thanks, John .
Four I begin I will repeat Michael earlier comment about the movement of the federal defense segments of discontinued operations.
As it is now held for sale.
The results for the quarter and prior periods reflect the aviation fleet segments only moving forward.
I will now turn to five six and seven of the Congress Thomas Yoyos provide an overview of our second quarter performance.
As I mentioned earlier, we reported record revenue in both our aviation fleet segments, driven by expanded capabilities and springs.
Sure games and robust demand across all of our end markets.
We recorded $205 million of revenue in the second quarter, an increase of 21% versus the prior year period.
Aviation recorded another record quarter, driven by strong program execution of new and existing distributional worse.
Increased commercial and business in general aviation Moyo activity and.
And strengthen customer supplier relationships, all of which have led to market share gains.
Police segment growth was supported by strong E Commerce Department and commercial fleet sales together with higher contributions from the United States Postal service.
We generate a $27 million and $11 million adjusted EBITDA and adjusted net income and increase at 44% and 59 per cent respectively.
Adjusted EBITDA glue by $7.4 million and $1.9 million from aviation and fleet broke respectively, partially offset by the gaffer counting impact on corporate expenses from discontinued operations.
Now I'm trying to slide eight will cover our aviation segment results.
Revenue increased 19% versus the second quarter last year to a record $125 million.
Both distributions and MRO businesses grew up 13% and 37 per cent respectively.
Distribution growth was driven by scaling existing OEM programs.
<unk> into new markets and improved customer Mexican pricing.
MRO continues to benefit on both higher commercial flight activity and our expanded portfolio of services and capabilities to new and existing customers.
Aviation adjusted EBITDA increased by 61 per cent and a quarter to $19 million, while adjusted EBITDA margins increased by 400 basis points to 15.4%.
The improvement in profitability was driven by robust M. A rope revenue growth.
Yeah, we we do distribution programs and favorable product mixed in price.
Within our aviation segment.
Increasing our full year 2023 revenue guidance range from 10% to 15% to 25 to 30 per cent to account for a recent acquisition of desert Aerospace and a strong first half results.
We estimate definitely will contribute approximately $35 million in revenue in the second half of 2023.
We expect full year adjusted EBITDA margins at the higher end of the previously provided range of 13 to 15 per cent.
Strong segment margins are modestly upset by the anticipated impact for the desperate acquisition.
Now turning to five nine.
Police segment revenue increased 24% to $81 million driven.
Driven by strong growth in e-commerce fulfillment.
Social fleet sales along with increased U S. T S demand.
Total commercial revenue was $38 million in the second quarter, an increase of 46% versus the prior year period.
Now represent 47% of total fleet segment revenue of 700 basis point increase over the same period in the prior year.
In the quarter commercial revenue grew by $12 million and year to date has.
11 by $17 million as we remain on track to deliver an incremental $50 million a commercial revenue for the year.
U S. Postal service revenue was up approximately 13% versus the second quarter of last year, which is included within our other government channel.
Postal service demand has exceeded our initial expectations for 20th twenty-three driven by demand for aftermarket products supporting all of the U S. P. S flew types.
Segment, adjusted EBITDA increased 24% to $10 million driven by an increase in sales volume.
Adjusted EBITDA margin was down 10 basis points to 11.9% driven by customer mix. It goes up 100 basis points versus the first quarter increased throughput at our newly launched from Memphis distribution facility.
For the full year 2023, we are increasing our revenue growth expectation from 12 to 20 per cent to 20% to 25% year over year, driven by strong first half results in higher than anticipated contributions from the United States Postal service.
We are maintaining our adjusted EBITDA margin guidance range of 11% to 13%.
Turning to slide 10.
At the end of the second quarter, we had $71 million in cash and unused commitment availability under our 350 million dollar credit facility.
For the quarter, when you $16 million of operating cash flow and $20 million, a free cash flow driven by previously announced inventory investments to support our commercial growth.
Memphis distribution facility.
As of the end of the second quarter via completed the initial inventory investments associated with launching this facility and expect positive free cash flow to fund any future investments.
At the end of the quarter, we have total net debt outstanding a $371 million and trailing 12 months of adjusted EBITDA of approximately $100 million.
Net leverage with 3.7 times at the end of the second quarter.
We expected that leverage ratio to be below 3.5 times by the end of the third quarter.
This is driven by growing adjusted EBITDA and positive free cash flow and the upcoming tour.
Proceeds from the recently announced Thomas stop offer it.
Partially offset by the acquisition of desperate aerospace.
We're also maintaining our outlook for positive free cash flow in the second half of 2023.
In conjunction with the desk for acquisition early July we executed the $100 million floating to fixed interest rate swap.
In total we now have $250 million about standing hedges.
The recent secondary offerings, along with the amendment to our existing debt facility and improving second hash that can have cash flow profile provide a solid footing for the next leg it broke and market outperformance.
With that I'll now turn it back over to John <unk>.
Thanks T.
I would like to include our prepared remarks by reviewing the opportunities ahead for our aviation and fleet segments and our priorities for the business.
Our focus remains on driving sustainable profitable growth, while enhancing the operating performance of these two businesses.
These advanced to slide 12 to review our near term priorities.
First complete the sale and business separation of the federal defense business statement.
Second integrate both are precision fuel and desert aerospace acquisitions. This provides our customer base with a more comprehensive product and services offering.
Our integration strategy remains one or we fully integrate assets into systems processes and organization structure to provide customers with one supplier source for products and services and drive synergies and greater combined value and in desperate returns for our shareholders.
Third expand our full service unique product distribution and M. R O capabilities within high growth under certain portions of the aviation aftermarket.
We remain focused on offering a bespoke solutions oriented approach that addresses both our customer and supplier demands we.
We look forward to sharing more about our organic growth opportunities in 2024 pipeline.
Fourth drive commercial growth, while supporting legacy programs within our fleet business <unk>.
This includes continuing to scale and grow revenue at our newly launched distribution and E Commerce fulfillment center to address the robust commercial fleet customer demand.
And finally deliver second quarter of 2023 free cashflow, driven by disciplined cash management.
We are incredibly proud of the work in progress made to advance our business transformation story.
Since we last spoke we announced the repositioning of the company, including the divestiture of our federal and defense statement.
Acquisition in closing a desk or aerospace another quarter of record revenue and improve profitability for both business segments.
A strong and oversubscribed equity raised to support our deleveraging efforts and balance sheet Optionality.
Teams continued to flawlessly execute against our strategic and operating plans supporting our customers suppliers and each other I'm very thankful for the outstanding performance of R. V. S. C teams.
We look forward to our November Investor day, and sharing what's ahead for V. S. C. As we enter our next chapter of growth.
Operator, we are now ready for the question and answer portion of our call.
Thank you we will now be conducting a question and answer session.
<unk> <unk> and then one on your telephone keypad.
The confirmation 10 will indicate your line is in the Christian K.
Yeah, My <unk> I'm going to if you attach them really a question from the queue.
Full participants using speak equipment, he might be necessary to pick up your handset before pushing this talkies.
One moment, please call me postal questions.
This is Christian is from King habit of RBC These kind of hate.
Hi, Good morning, John and Steve Yeah. Congrats on all the recent recent activities.
Thank you thanks.
Hey, Hey genre, Steve I wanted to first ask within within aviation the gardens implies sort of sequentially down margins a little bit in the second half versus first have I know you called out the integration of the incremental costs associated with Jester <unk>.
Excluding gesture was there anything else going on in the business that that you'd comment on the the it'd be you know it may be a bit of a headwind margins or how do we think about the business X test or in the second half.
I think the businesses performing very well as you can see from the second quarter results. The business continues to be at the longterm or two longer to arrange a mid teens margins. When we look towards the second half, we expect that to be where I'm. The same I think the bitcoin as a question you're getting that is now we have seen some favorite though would be associated with prices will just start the year.
And I think that has benefited at fault in the first and the second quarter. We do believe that matters to some degree in the second half of the year, but as the guidance, but we just gave you can see we're still getting towards the high end of that range, which I think is demonstrating the strength of the business.
No that's helpful and I I know in the past I think you've talked about sort of an ideal.
You've been split roughly between distribution and repair and and I know in the past you've talked about repair maybe being providing a better margin profile over time, obviously the recent activities you you're currently weighted more towards distribution should we think about that sort of rough even split is still a long term goal and how do you think about the path to me.
We get back to those levels.
Yeah can I wouldn't look I I think I wouldn't look at it is 50 50, but I would say the balance is something that you know as we look to November investor day, and kind of share longer term strategies, both organic and inorganic opportunities that you'll see us focus on you know we look at it first in terms of the offer.
<unk> is that we made to our supply base and for our supply base, we wanna be in a position to support new product distribution, you know a small amount of rotable in exchange work for them and then be able to have a strong OEM authorized repair network. So you will get you you should look at the kind of made it longterm is growth opportunities in that segment.
Steve any other color you want to add there.
Yeah can you hit on it you know, we do see higher margin rates to put me on a real business. So it does benefit us in that respect into the longer term to have that balance the job. This reference.
Great and just finally, if I could a finer point on the second half free cash <unk>, how do we think about sort of third quarter relative to fourth quarter and that is that guidance framework.
We have given the specifics, but I would say probably more heavily weighted towards the fourth quarter, but as <unk> as you know as we get towards the end of the <unk> play out I think the punch line is that we expect to see strong free cash flow cause now we are complete with the inventory investments associated with our newly launched is your program as well as my best though by the time, we get around to recording the third quarter was able to get a mortgage.
So the fourth quarter.
Great. Thanks, Steve I'll pass it back to you every quarter.
<unk>.
The next question <unk>. Please go ahead.
Mmm, John Steven and Michael Good morning.
Good morning <unk>.
Uhm Aviation and fleet continued their recent momentum with the <unk> <unk>.
Precision feel and global parts acquisitions, you gained more scam aviation aftermarket and you describe that Mark is still highly fragmented from a big picture perspective is is having scale.
A major advantage that will allow you to differentiate from the other smaller players is scale.
Scale, a big deal here.
It it it it is really for a number of reasons to think through one of the you know think about a large OEM that wants us to support thereafter market needs in you know in the in the market. There the customer markets are global and you know the global footprint in <unk> and us being in a position to support their glow.
Little aftermarket is critical so that's one element of scale. The other piece that would add as as you're coming to V. S. C for Pratt Whitney Canada engine Park.
<unk> you know we have extra level of exclusivity on that product line, it's an opportunity for those same customers to buy you know.
Similar products or Tan gentle products that those buyers are looking for as well, so again that scale and our ability to offer those products that supports the some of the customer demand. So scale continues to be important and we'll both you know support increased above.
Market revenue growth as well as margin improvement as we continue to grow the business in the next chapter.
Great and.
May.
<unk> announced that it is in the process of acquiring when core in a fairly large transaction when quite has some overlap with you.
This deal have any implications on D. S E aviation besides the fairly premium valuation.
Well I think I think coming from a valued let's start with the valuation for evaluation perspective, but I think it validates the what the market thinks about aftermarket services businesses like Glencore like Vse, and like you know and others Uhm. So that's validating as you're building a you know a business to the future I think it puts.
Two great. It's a great business and they put two great businesses together, our businesses have a a level of similarity in both distribution and some of the R. M. R. O capabilities I'd say the biggest difference is does bit bolsa heiko business in the wind core business you know have a PMA portion to their business, where we are large differentiator.
<unk> compared to the two of them is our level of Oh Williams Centricity. So it continues to the combination of those two businesses continues to differentiate.
Differentiate b S C in the market as in <unk>, you know focused partner.
Great and for for Steven You mentioned the interest rate swap that you entered into for July how should we think about modeling cash interest with the swap for the the rest of the year.
Well the cash interest is gonna be.
Somewhat consistent to the second quarter, but declining relative to the fact that they expect to see that free cash flow improved I would say you know some modest improvement, but it the other day from an interest rate perspective, I don't think the rate is gonna change all that much just primarily driven by the fact that the rates are obviously much higher than last.
Last year, so cashdollar wise slightly improve driven by the free cash flow in the business.
Sounds good and one final want them what is the timeline for the precision feel integration and potential synergies there.
Yeah, I mean, the the the integration plan is that we're.
In the middle of integration it will be completed this year and you know we're gonna keep the facility. It's a a nice niche MRO facility. There are some cost synergies, we realized some of them animal realize the remainder at the back end of the year.
Great. Thank God, it's a <unk> on a on a on a relative basis is not material, but it's it's a great niche.
Capability that we added to the business.
Great. Thanks.
Thankfully.
The next question. We have is some chase <unk> I'll see my security. Please go ahead.
Morning, Jeff Good morning, everyone and let me add my congratulations on your strong metrics in progress on all fronts.
Thank you kind of a multipart question can you give us a little more detail on the desk and peered all metrics, maybe multiple of EBITDA paid I think you mentioned second half revenue contribution clan.
And then maybe just touch on the international opportunity. There is you grow that business shortly.
Sure Steve you Wanna talk about the financials and I'm talking about the strategy International.
Yeah, <unk> I would say you know will be given the guidance range for about $35 billion in expected revenue in the second half of this year implied in the guidance associate the margins of the total business reset the garage modestly lower end of the range from the desperate business. So you use that margin right in that revenue and then multiply that you can get some <unk>.
Fox Nation for <unk> <unk>.
Right around kind of 10 times my multiple perspective, when you do that math and I think when we look at this business. We look at it as one word is below what the market is trading out with opportunities for us to drive old cost synergy as well as top line revenue synergy Johnny want to share a bit more about the international sort of revenue expansion on yeah yeah.
Yeah, I mean jet first I I, you know I'm I'm pleased with the acquisition. We believe are good acquires the businesses and the markets. We will drive cinergy off of that multiple number as well putting us and what we believe is a very below market multiple situations driving solid returns as we integrate that business from.
An international perspective, you know V. At these is very.
Very domestic company today, and we see large opportunities for international expansion. The desert team is full to distribution facility and I'm I'm, a real facility in the U K and will speak more about it in the back end of the year, but will properly to leverage what they have and also look at how we grow in and more.
Continental Europe for 2024, as well so Stephen I wherever in the UK about a week ago and I'm very pleased with both the two businesses there as well as you know you you when you bottle things out any due diligence you have obviously a thesis that you're coming forward with its greatest to <unk>, even a strong.
Or a level of confidence post closing and what we believe we can do together be convicted in D. C. In the desert heat.
Okay, great to hear and then if we can shift to the the U S. P. S outlets for a minute just wondering if you knew kind of what the outlook is there. If you think the growth is sustainable.
We think it's you know we we we've continued to share B model the business over kind of Ah.
Period of time is relatively flat a few dynamics to change number one you have a larger installed base. So you know the installed base of vehicles has increased which means vehicles were parked his new vehicles came on board and they're actually being repaired as well the second.
Thing is the next generation delivery vehicle there will be no deliveries. This year as originally planned and you know we're anticipating a slow ramp up starting in the back end of next year. So we believe the current revenue and profitability of the business will will remain.
We haven't given that any further guidance for 24 in terms of gross but I'd say stability at the new levels as anticipated.
Okay, and then if I could just squeeze in one more.
F. D. I was just wondering if there's anything you can touch on or or anything you can update us on it seems the milestone contract what impact the in N out.
Yeah, and we don't have any update as of now I can tell you. It's based on Recompete and all of the work is done and that's where we can be just submitted or hoping and I used to say that with a level of skepticism.
Skepticism you know to hear in the third quarter you know it's at this point you know it's it's waiting on you know award dates and a word updates, but we are hoping for some update and a quarter. What I can share is clothing kind of conditions, you'll be called the step plan of action that <unk>.
Need to happen. So we can close and again, we said these are not traditional regulatory clothing conditions, we have to kind of stand up a facility with the security clearance transfer assets over but we are progressing on our staff plan and you know and feeling confident about the closing time on that we shared if not bringing that a little slower.
<unk>.
Alright excellent thanks for taking my questions and continued success.
Thanks, I appreciate the support.
Ladies and gentlemen, just a final reminder, if you would like to ask a question you're welcome to <unk> <unk> one <unk>.
Next question is from <unk>. Please go ahead.
Hey, good morning, Thanks for taking my question.
<unk>.
So first I'm just as the police segment becomes more heavily focused on E. Commerce. What are you seeing from customer conversations in terms of underlying demand are there any signs of weakness heading into the back half of the year and in the event that demand does stuff and how does that impact your value proposition or your <unk> prospects for continuing to take market share in that business.
Yeah, I'm looking at Steve smiling across from me as you ask the question. We have the opposite problem demand is so strong but performance has to be perfect. So I always describe it to investors. If you think about how you order something on Amazon and it shows up on time, the ecosystem of e-commerce and the expectation for bolt business to consumer of <unk>.
<unk> business is very high so we stood up a new facility, new ERP system, New warehouse management system stocked it within inventory in the first quarter of the year and we are seeing consistent month over month increases and I'll put from that facility. So right. Now we are controlling the work we've taken and there is.
Very very very large opportunity set out there for two reasons number one is you're seeing this is a late in the game you no later than other industries transition from brick and mortar to ecommerce. The second is we do believe we're better position than most in terms of our ability to.
Size and scale these businesses to support the large number fulfillment partners out there that have a demand for our products. So I'd say that demand is not the issue or a discussion at this point.
Alright, excellent and then.
You know I understand that it's in the early stages of immigrating, but that's a requisition, but how does the acquisition impact how you were thinking about free cash flow conversion do you have any long term targets you can share it with a company there.
We have not shared long, yeah, but I'm not sure there long-term charges run free cash flow, but what I would say it's in the back half of this year does it change your expectations at all you know we've invested quite heavily into our business. We expect the businesses are generally strong free cash on the back half of this year. You know we may use the combined capability of duster and D as in <unk>.
To kind of go through some expansionary opportunities and make some smaller investment for the business. So that we can all set necessarily alright expectations for song free cash on the back half a beer.
Okay. Okay. Okay.
Trump guidance as in November and best of your day.
Okay. That's helpful. Thank you and then just on your commentary around and positive free cash flow in the second half is the target just to be above breakeven are you expecting that free cash flow could be more meaningful just you know any color you can sure there would be helpful.
You'll be happy to give it a specific dollar target necessarily but I would say you know when I say strong free cash flow I'm not expecting a dollar positive I, we're expecting strawberry capital of both sides both aviation athlete.
When do we get through the third quarter of she'll have a similar discussion about court ordered I'd be expected to be a positive.
Alright, thanks for taking my questions.
Thank you.
For the Christians at this time I would like to <unk> go ahead and come in please come in.
Thank you for your continued support I appreciate you joining us today and look forward to speaking with you in October and seeing many of you at our November Investor Day have a great day.
This concludes today's teleconference. You may disconnect your lines at that time. This time. Thank you for your participation.
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Mmm.
And then.