Q3 2023 VSE Corp Earnings Call
Speaker 1: You can register for the event on our IR website at ir.vscorfe.com. Please feel free to contact me directly with any questions.
Website at IR Dot V S C Corp dotcom.
Please feel free to contact me directly with any questions.
Speaker 1: At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John .
At the conclusion of our prepared remarks, we will open the line for questions with that I'd like to turn the call over to John.
Speaker 2: Thank you, Michael. Good morning, everyone, and welcome. Thanks for joining our call today. Let's begin with slide three, where I will provide an update on the performance of our business site.
Thank you Michael Good morning, everyone and welcome Thanks for joining our call today, let's begin with slide three where I will provide an update on the performance of our business segments.
Third quarter 2023 results were highlighted by record revenue and financial performance and our aviation segment strong revenue growth in our fleet segment and the closing of both the <unk> acquisition and a transformational asset an intellectual property license agreement with Honeywell.
Speaker 2: Third quarter 2023 results were highlighted by record revenue and financial performance in our aviation.
Speaker 2: strong revenue growth in our fleet segment and the closing of both the death or acquisition and a transformational asset and intellectual property license agreement with Honeywell.
Speaker 2: Aviation segment revenue increased 48% in the quarter. This strong performance was driven by strong program execution, market share gains, the expansion of our products and repair capabilities, and positive end market activity.
Aviation segment revenue increased 48% in the quarter.
This strong performance was driven by strong program execution market share gains.
Spansion of our products and repair capabilities and positive end market activity.
Speaker 2: We continue to experience great success from our aviation segment organic and inorganic investors.
We continued to experience great success from our aviation segment organic and inorganic investments.
Aviation distribution revenue growth of 46% was driven by strong program execution on new and existing distribution awards, the entrance into new markets and an expansion of product offerings along.
Speaker 2: Aviation distribution revenue growth of 46% was driven by strong program execution on new and existing distribution awards, the entrance into new markets, and an expansion of product offerings, along with improved pricing and product mix.
Along with improved pricing and product mix.
Speaker 2: Aviation MRO revenue growth of 54% was driven by strong and market activity, market share gains, and expansion of repair capabilities and contributions from new customers.
Aviation MRO revenue growth of 54% was driven by strong end market activity market share gains and expansion of repair capabilities and contributions from new customers.
Speaker 2: The Fleet Segment Experienced Solid Revenue Growth across all channels with 22% total revenue growth in the course.
The fleet segment experienced solid revenue growth across all channels with 22% total revenue growth in the quarter.
Speaker 2: Our fleet segment revenue and profit dollar contribution improved year over year.
Our fleet segment revenue and profit dollar contribution improved year over year.
The fleet segment sales increase was led by revenue contributions from our new Memphis, Tennessee distribution facility as we continue to ramp our new ecommerce fulfillment business.
Speaker 2: The fleet segment sales increase was led by revenue contributions from our new Memphis, Tennessee distribution facility as we continue to ramp our new e-commerce fulfillment business.
Speaker 2: The increase in USPS revenue in the quarter was supported by an expansion of the install base of their vehicles and continued maintenance investments in both legacy and new vehicles.
The increase in USPS revenue and in the quarter was supported by an expansion of the installed base of their vehicles and continued maintenance investments in both legacy and new vehicles.
Speaker 2: Let's now move to slide four, where I will provide a strategic update.
Let's now move to slide four where I will provide a strategic update.
First on July three we acquired <unk> aerospace, our global aftermarket solutions provider, our specialty distribution and MRO services.
Speaker 2: First, on July 3rd, we acquired Deser Aerospace, a global aftermarket solutions provider, a specialty distribution and MRO service.
Speaker 2: Desert Aerospace is a leading independent distributor of aircraft tires and tubes, a global distributor of brakes and batteries, and a component MRO services provider for wheel and brake repair.
Desert Aerospace is a leading independent distributor of aircraft tires into a global distributor of brakes in battery and a component MRO services provider for wheel and brake repair.
Speaker 2: The acquisition supports our tip-to-tail aircraft distribution and MRO services strategy and provides VSE aviation with increased access to the highly fragmented aviation aftermarket.
The acquisition supports our tip to tail aircraft distribution and MRO services strategy and provides vse aviation with increased access to the highly fragmented aviation aftermarket.
Speaker 2: Having DESER within the VSC aviation portfolio of assets has already begun to deliver sales synergy benefits.
Having <unk> within the Vse aviation portfolio of assets has already begun to deliver sales synergy benefits.
Speaker 2: We have begun the integration of DESER starting with the U.S. operations, which is expected to be completed by the second quarter of 2024. As a reminder, integration means full system, process, and organizational integration into the VSE system with the goal of reducing costs, improving productivity, and providing our customers and suppliers with a one-company seamless approach to the market.
We have begun the integration of <unk>, starting with the U S operations, which is expected to be completed by the second quarter of 2024.
As a reminder, integration means full system process and organizational integration into the DSD system with the goal of reducing cost improving productivity and providing our customers and suppliers with a one company seamless approach to the market.
Speaker 2: Second, we announce that we entered into a transformational purchase and perpetual license agreement with Honeywell that will allow us to exclusively manufacture, sell, distribute, and repair over 340 unique fuel control systems on four engine platforms, including three platforms that are still in production.
Second.
We announced that we entered into a transformational purchase and perpetual license agreement with Honeywell that will allow us to exclusively manufacture sell distribute and repair over 340 unique fuel control systems on four engine platforms, including three platforms that are still in production.
This new agreement expands vse aviation existing capabilities.
Speaker 2: This new agreement expands VSE Aviation's existing capabilities supporting these Honeywell fuel control systems and associated subcomponents.
Porting these honeywell fuel control systems and associated sub components.
Speaker 2: Since 2015, the ACDation has served as the exclusive distributor of these products. In addition,
Since 2015 Vse aviation has served as the exclusive distributor of these products. In addition.
Speaker 2: VSE Aviation has a long established and successful history as an MRO provider to support these fuel control systems.
Vse Aviation has a long established and successful history as an MRO provider to support these fuel control systems.
Speaker 2: Through this new agreement, BSE expands the relationship to become the licensed manufacturer with perpetual rights to the intellectual property of these components.
Through this new agreement expands their relationship to become the license manufacturer with perpetual rights to the intellectual property of these components.
Speaker 2: We are very excited about this announcement and what it represents for VSEAV.
We are very excited about this announcement and what it represents for Vse aviation.
Speaker 2: The announcement not only allows us to significantly strengthen our current and long-term relationship with Honeywell, the engine manufacturers, and the aftermarket users, but it's also a testament to the differentiated OEM-centric value proposition, which continues to resonate with suppliers and provides us additional opportunities to add value through the supply
The announcement not only allows us to significantly strengthen our current and long term relationship with Honeywell.
Engine manufacturers and the aftermarket users, but it's also a testament to the differentiated OEM centric value proposition, which continues to resonate with suppliers and provides us additional opportunities to add value through the supply chain.
Speaker 2: In addition, this adds a high-margin revenue channel and partnership opportunity to our aviation portfolio. We'll share more details about this program during our November 14th Investor Day.
In addition, this adds a high margin revenue channel and partnership opportunity to our aviation portfolio, who will share more details about this program during our November 14th Investor Day.
Speaker 2: Finally, last month we announced a mutual agreement to terminate the sale of the federal defense segment to burn her capital partner.
Finally last month, we announced the mutual agreement to terminate the sale of the federal and defense segment to Bernhard capital partners.
Speaker 2: While we were disappointed with this outcome, we remain very focused on the near-term divestiture, and we are moving quickly towards the sale of these assets. We have relaunched the process and expect to provide a more detailed update early in the first quarter of 2024. In the interim, the FDS business will remain in discontinued operations as we pursue divestiture opportunities for this business.
While we were disappointed with this outcome, we remain very focused on the near term divestiture and we are moving quickly towards the sale of these assets. We have relaunched the process and expect to provide a more detailed update early in the first quarter of 2024 in the interim the fts business will remain in discontinued operations as we pursue.
Divestiture opportunities for this business.
Let's now move to slide five.
Yes.
Speaker 2: The FEC delivered solid and well-rounded third quarter results highlighted by a 38% increase in revenue, a 57% increase in net income, and a 56% increase in adjusted EBITDA compared to the prior year.
PSEG delivered solid and well rounded third quarter results highlighted by a 38% increase in revenue of 57% increase in net income and a 56% increase in adjusted EBITDA compared to the prior year.
Speaker 2: Our aviation segment posted its fourth record quarter in a row with revenues of $152 million, a 48% increase year over year, and our first quarter over $150 million.
<unk> Aviation segment posted its fourth record quarter in a row with revenues of $152 million a.
A 48% increase year over year in our first quarter over $150 million.
Driving the record revenue with balanced growth across both commercial and business in general aviation customers increased activity through both our distribution and MRO sales channels and the addition of <unk> aerospace.
Speaker 2: Driving the record revenue was balanced growth across both commercial and business and general aviation customers, increased activity through both our distribution and sales channels and the addition of Deseret.
Speaker 2: Adjusted EBITDA for the aviation segment of $25 million, increased by 87% versus the prior year. Yet another record for this business segment.
Adjusted EBITDA for the aviation segment of $25 million increased by 87% versus the prior year yet another record for this business segment.
Speaker 2: Aviation segment adjusted EVA.Margin increased by approximately 340 basis points year over year to 16.6%.
Aviation segment, adjusted EBITDA margin increased by approximately 340 basis points year over year to 16, 6%.
Aviation segment adjusted EBITDA represented 78% of total company third quarter, adjusted EBITDA versus 65% last year.
Speaker 2: Our free segment also reported strong revenue growth in the third quarter on a year-over-year basis, increasing 22% to $79 million, driving growth across all active sales.
Our fleet segment also reported strong revenue growth in the third quarter on a year over year basis, increasing 22% to $79 million driving growth across all active sales channels.
Speaker 2: Police segment adjusted EBITDA dollars increased by 5% driven by strong commercial sales growth and solid contributions from the U.S. Postal Service Program.
<unk> segment adjusted EBITDA dollars increased by 5% driven by strong commercial sales growth and solid contributions from the U S. Postal service program.
Speaker 2: We are proud and thankful for our BSE teams and the strong commitment to our customer and supplier focused values.
We are proud and thankful for our BSA teams and a strong commitment to our customer and supplier focused values.
Speaker 2: and pleased to see that this work translated to a record financial performance in the quarter. I will now turn the call over to Steve for a detailed review of our third quarter financial performance.
I'm pleased to see that this work translated to a record financial performance in the quarter I will now turn the call over to Steve for a detailed review of our third quarter financial performance.
Speaker 3: Thanks, John . As a reminder, our results exclude the federal and defense segment, which remains in discontinued operations as it is held.
Thanks, John.
As a reminder, our results exclude the federal and defense segment, which remains in discontinued operations as it as held for sale.
Speaker 3: I'll now turn to slide six and seven of the conference call materials to provide an overview of our third quarter.
I'll now turn to slide six and seven of the conference call materials to provide an overview of our third quarter performance.
Speaker 3: As John mentioned, we reported record revenue in our aviation segment and strong year-over-year performance within our fleet.
As John mentioned, we reported record revenue in our aviation segment and strong year over year performance within our fleet segment.
Speaker 3: Our results across both segments were driven by strong program execution, expanded capabilities and offerings, market share gains, and robust demand across all end marks.
Our results across both segments were driven by strong program execution expanded capabilities and offerings market share gains and robust demand across all end markets.
Speaker 3: We generated $231 million in revenue in the third quarter, an increase of 38% versus the prior year period.
We generated $231 million in revenue in the third quarter, an increase of 38% versus the prior year period.
Speaker 3: Aviation reported another record quarter, driven by strong program execution of new and existing distribution awards. An expansion of product offerings.
Aviation reported another record quarter, driven by strong program execution of new and existing distribution awards and expansion.
<unk> of product offerings and repair capabilities.
Speaker 3: increased commercial and business and general aviation MRO activity.
Increased commercial and business in general Aviation MRO activity.
Strengthened customer and supplier relationships all of which would have led to market share gains and new profitable revenue opportunities and lastly contributions from the recent deaths are aerospace acquisition.
Speaker 3: Strengthened customer and supplier relationships all of which which have led to market share gains and new profitable revenue
Speaker 3: And lastly, contributions from the recent Deser Aerospace Act was...
Fleet segment growth was driven by solid e-commerce fulfillment and commercial fleet sales together with higher contributions from the USPS program.
Speaker 3: Fleet segment growth was driven by solid e-commerce fulfillment and commercial fleet sales, together with higher contributions from the USPS.
Speaker 3: We generated $32 million of adjusted EBITDA and $14 million of adjusted netting.
We generated $32 million of adjusted EBITDA and $14 million of adjusted net income.
Speaker 3: an increase of 56% and 75% respectively.
An increase of 56% and 75% respectively.
Speaker 3: Adjusted EBITDA increased $11.5 million, driven by an $11.7 million contribution from aviation and a $500,000 contribution from fleet, partially offset by the GAAP accounting impact on corporate expenses from discontinued operations. Now turning to slide A.
Adjusted EBITDA increased $11 $5 million, driven by an $11 7 million contribution from aviation and a $500000 contribution from fleet, partially offset by the GAAP accounting impact on corporate expenses from discontinued operations.
Now turning to slide eight.
We'll cover our aviation segment results.
Revenue increased 48% versus the third quarter last year to a record $152 million.
Speaker 3: Revenue increased 48% versus the third quarter last year to a record $152 million.
Speaker 3: Both distribution and MRO businesses were strong contributors of 46% and 54% respectively.
Both distribution and MRO businesses were strong contributors up 46% and 54% respectively.
Speaker 3: Aviation grew 24% excluding the death-ser-acquisition, driven by strong execution of recent investments and growth initiatives and strong remarks.
Aviation grew 24%, excluding the <unk> acquisition, driven by strong execution of recent investments and growth initiatives and strong end markets.
Speaker 3: Distribution revenue growth was driven by strong execution of existing OEM programs, expansion in the new markets, improved pricing and customer mix, and contributions from DECR. African40legs and titles will follow in the same time.
Distribution revenue growth was driven by strong execution of existing OEM programs and expansion into new markets improved pricing and customer mix and contributions from denser.
MRO continues to benefit from higher commercial flight activity.
Speaker 3: and expanded portfolio of repair services and capabilities, improved productivity, and the addition of our deserero space acquisition.
An expanded portfolio of repair services and capabilities.
Prove productivity and the addition of our industrial Aerospace acquisition.
Speaker 3: Aviation Adjusted EBITDA increased by 87% in the quarter to $25 million, while Adjusted EBITDA margins increased 340 basis points to 16.6%.
Aviation adjusted EBITDA increased by 87% in the quarter to $25 million, while adjusted EBITDA margins increased 340 basis points to 16, 6%.
Speaker 3: The improvement in profitability was driven by contributions from new programs, robust, MRO revenue growth.
The improvement in profitability was driven by contributions from new programs robust MRO revenue growth.
Speaker 3: Operating Leverage and Progress on Margin Improvement Initiative.
Operating leverage and progress on margin improvement initiatives.
Speaker 3: Additionally, we were pleased with the results of the deser business as it exceeded our initial third quarter expectation.
Additionally, we were pleased with the results of the <unk> business as it exceeded our initial third quarter expectations.
Speaker 3: Within our aviation segment, we recently increased our full year 2023 revenue growth guidance range to 30 to 35 percent to account for our strong third quarter results and the addition of deaths.
Within our aviation segment, we recently increased our full year 2023 revenue growth guidance range to 30% to 35% to account for our strong third quarter results and the addition of <unk>.
Speaker 3: We initially estimated that Deserwood contribute approximately $35 million of revenue to our second half result.
We initially estimated the industrial would contribute approximately $35 million of revenue to our second half results.
Speaker 3: While we are on track to exceed our initial expectations, we do expect slightly softer fourth quarter deser revenue as compared to the third quarter due to seasonality within their business.
While we are on track to exceed our initial expectations, we do expect slightly softer fourth quarter dessa revenue as compared to the third quarter due to seasonality within their business.
Speaker 3: We expect our full year adjusted EBITDA margins to be towards the higher end of our previously provided range of 14 to 16%. As strong year to date margins are modestly offset by fourth quarter investments, including standing up the supply chain for our newly acquired Honeywell fuel control systems business and the expansion of our operating footprint throughout your own.
We expect our full year adjusted EBITDA margins to be towards the higher end of our previously provided range of 14% to 16%.
Our strong year to date margins are modestly offset by fourth quarter investments, including standing up the supply chain for our newly acquired Honeywell fuel control systems business and the expansion of our operating footprint throughout Europe.
Regarding the recent Honeywell fuel control announcement, we do not anticipate any material revenue impact in the fourth quarter. However, we do anticipate higher sequential operating expenses interest expense and amortization as we establish manufacturing capabilities to support the program.
Speaker 3: We do not anticipate any material revenue impact in the fourth quarter. However, we do anticipate higher sequential operating expenses, interest expense, and amortization as we establish manufacturing capabilities to support the program.
Speaker 3: In 2024 and in 2025, we anticipate $7 million and $14 million of EBITDA contributions from the program for respect to...
In 2024, and in 2025, we anticipate $7 million and $14 million of EBITDA contributions from our program respectively.
Speaker 3: improving rapidly throughout each year, as we realize the lower cost of inventory purchase.
Improving ratably throughout each year as we realize the lower cost of inventory purchases.
Speaker 3: We also expect to realize $10 million in lower networking capital by the end of 2024.
We also expect to realize $10 million and lower net working capital by the end of 2024.
Now turning to slide nine.
Speaker 3: Now turning to slide 9, fleet segment revenue increased 22% to $79 million, driven by strong growth in e-commerce fulfillment and commercial fleet sales, along with increased USPS demand to support their growing fleet.
Fleet segment revenue increased 22% to $79 million driven by strong growth in e-commerce fulfillment and commercial fleet sales along with increased USPS demand to support their growing fleet.
Speaker 3: Total commercial revenue was $37 million in the quarter, an increase of 47% versus the prior year period, and now represents 47% of total fleet seconds revenue, an approximate 800 basis point increase over the same period in the prior year.
Total commercial revenue was $37 million in the quarter.
An increase of 47% versus the prior year period, and now represents 47% of total fleet segment revenue and approximate 800 basis point increase over the same period in the prior year.
Speaker 3: Commercial revenue growth remains on track with our initial expectations as we launch our new Memphis distribution facility as we continue to scale our infrastructure and workforce to meet the robust end market demand.
Commercial revenue growth remains on track with our initial expectations as we launch our new Memphis distribution facility as we continue to scale, our infrastructure and workforce to meet the robust end market demand.
Speaker 3: Commercial revenue, while we see strong growth year-to-year, commercial revenue decline, modestly on a sequential quarterly basis, driven by what we believe to be a temporary market supply chain disruption.
Commercial revenue while.
While we see strong growth year over year commercial revenue declined modestly on a sequential quarterly basis, driven by what we believe to be a temporary market.
Apply chain disruptions.
Speaker 3: We continue to launch the Mentor's Distribution Facility as we navigate this new market.
We continue to launch the mentioned Memphis distribution facility as we navigate this new market.
We remain confident in our ability to continue to grow the business.
Speaker 3: U.S. Postal Service revenue was up approximately 6% versus the third quarter of last year, which is included within our other government channels.
U S. Postal service revenue was up approximately 6% versus the third quarter of last year, which is included within our other government channels.
Speaker 3: Our best-in-class customer service and supply chain management program allows us to continue to maintain market share on all legacy USPS platforms while we service newly introduced vehicles.
Our best in class customer service and supply chain management program allows us to continue to maintain market share on all legacy USPS platforms, while we service newly introduced vehicles.
Segment, adjusted EBITDA increased 5% to $9 million driven by increased sales volume.
Speaker 3: A Jeff Dedeva-Domarjan was down 190 basis points to 11.6%. Driven by the mix of commercial costs.
Adjusted EBITDA margin was down 190 basis points to 11, 6% driven by the mix of commercial customers.
Speaker 3: For the full year 2023, we expect revenue growth of 20 to 25% year-over-year and adjust the the EBITDA margin in the range of 11 to 13%.
For the full year 2023, we expect revenue growth of $20 to 25% year over year and adjusted EBITDA margin in the range of 11% to 13%.
Speaker 3: We continue to focus on driving year-rear profit growth for the segment, as we drive to scale our recently launched distribution facility to reach its full potential.
We continue to focus on driving year over year profit growth for the segment as we drive the scale of our recently launched distribution facility to reach its full potential.
Turning to slide 10.
Speaker 3: At the end of the third quarter, we had $89 million in cash and unused commitment availability under our $350 million credit facility.
At the end of the third quarter, we had $89 million in cash and unused commitment availability under our $350 million credit facility.
Speaker 3: For the quarter, we generated $15 million of operating cash flow and $11 million of free cash flow driven by discipline, cash management, and strong operating results.
For the quarter, we generated $15 million of operating cash flow and $11 billion of free cash flow driven by disciplined cash management and strong operating results.
Speaker 3: At the end of the quarter, we had total net debt outstanding of $440 million.
At the end of the quarter, we had total net debt outstanding of $440 million.
Speaker 3: We currently have $250 million about scanning interest rate swaps following the execution of a $100 million swap in July concurrent with the deser acquisition.
We currently have $250 million of outstanding interest rate swaps following the execution of a $100 million swap in July concurrent with the <unk> acquisition.
Speaker 3: Proform and Net Leverage, which includes the trailing 12 month results from our prior acquisitions, was 3.7 times at the end of the third.
Pro forma net leverage which includes the trailing 12 months of results from our prior acquisitions was three seven times at the end of the third quarter.
We expect our pro forma net leverage ratio to be below three five times by the end of the fourth quarter driven by growth in trailing 12 months of adjusted EBITDA and positive free cash flow in the fourth quarter.
Speaker 3: We expect our pro-form and net leverage ratio to be below 3.5 times by the end of the fourth quarter, driven by growth in trailing 12 months of adjusted evitance and positive free cash flow in the fourth quarter.
Speaker 3: We expect fourth quarter free cash flow to improve sequentially as compared to the third quarter, as we continue to realize returns on working capital investments from earlier in 2022.
We expect fourth quarter free cash flow to improve sequentially as compared to the third quarter as we continue to realize returns on working capital investments from earlier in 2023.
Speaker 3: With that, I will now turn the call back over to John for his final remarks.
With that I will now turn the call back over to John for his final remarks.
Speaker 2: Thank you, Steve. I'd like to conclude our prepared remarks by reviewing the opportunities ahead and priorities for our business. Our focus remains on driving sustainable, profitable growth while enhancing the operational performance of our two business segments. Please
Thank you Steve I'd like to conclude our prepared remarks by reviewing the opportunities ahead and priorities for our business. Our focus remains on driving sustainable profitable growth, while enhancing the operational performance of our two business segments. Please advance to slide 11.
Speaker 2: First, continue to pursue the near-term sale of the federal defense business. As I stated earlier, we remain confident in our ability to monetize these assets and will work towards an expedited sale of this business. We expect to provide an update in the coming months.
First continue to pursue the near term sale the federal defense business as I stated earlier, we remain confident in our ability to monetize these assets and will work towards an expedited sale of this business, we expect to provide an update in the coming months.
Speaker 2: Second, transition and implement our newly acquired Honeywell Fuel Controls product line and associated subcomponents program.
Second transition and implement our newly acquired Honeywell fuel controls product line and associated sub components program.
Speaker 2: Third, complete the integration of our Precision Fuel MRO Acquisition, which will happen this quarter, and continue the integration of our DESER Aerospace Acquisition.
Third complete the integration of our precision fuel MRO acquisition, which will happen this quarter and continue the integration of our desktop Aerospace acquisition. We remained focused on our model to fully integrate all acquired assets into our systems processes and organizational structure in order to provide our customers with a single source.
Speaker 2: We remain focused on our model to fully integrate all acquired assets into our systems, processes, and organizational structure in order to provide our customers with a single source for our products and services and drive synergies in greater combined value and investment returns for our shareholders.
For our products and services and drive synergies and greater combined value and investment returns for our shareholders.
Speaker 2: Fourth, continue to expand our full service, unique product distribution and MRO repair capabilities within high growth, underserved portions of the aviation aftermarket. We remain focused on offering of the spoke solutions oriented approach that addresses our customer needs. We look forward to sharing more about growth opportunities and 2024 pipeline in the coming weeks.
Fourth continue to expand our full service unique product distribution and MRO repair capabilities within high growth underserved portion of the aviation aftermarket we remain focused on offering of the spokes solutions oriented approach that addresses our customer needs. We look forward to sharing more about.
Growth opportunities and 2024 pipeline in the coming weeks.
Fifth.
Speaker 2: Fifth, drive commercial growth while supporting legacy programs within our fleet business. This includes scaling and growing revenue and improving profitability at our Memphis distribution and e-commerce fulfillment center to address robust and commercial fleet customer demand. And finally, deliver accelerated free cash flow specifically in the fourth quarter driven by discipline cash management and strong operating results.
Commercial growth, while supporting legacy programs within our fleet business. This includes scaling and growing revenue and improving profitability at our Memphis distribution and E Commerce fulfillment center to address robust and commercial fleet customer demand and finally deliver accelerated free cash flow specifically.
In the fourth quarter, driven by disciplined cash management and strong operating results.
Speaker 2: I'm very proud of our third quarter operating performance and the tremendous progress we have made here today to advance both our aviation and fleet business strategy.
I'm very proud of our third quarter operating performance and the tremendous progress we have made year to date to advance both our aviation and fleet business strategies.
Speaker 2: I'm very thankful to our teams and the results that they have been able to deliver. The culture and teams at VSE continues to be our greatest asset and our greatest differentiator. I look forward to sharing what's ahead for VSE at our November Investor Day in less than two weeks. Operator, we are now ready for the question and answer portion of our call. Thank you.
I am very thankful to our teams and the results as they have been able to deliver the culture and teams at Vse continues to be our greatest asset and our greatest differentiator I'll look forward to sharing what the head for vse at our November Investor day in less than two weeks. Operator, we are now ready for the question and answer portion of our call.
Thank you.
We will now begin the question and answer session.
Speaker 4: To ask a question, you may press star then 1 on your telephone keypad.
To ask a question you May press Star then one on your telephone keypad.
Speaker 4: If you are using a speakerphone, please pick up your handset before pressing the keys.
If youre using a speakerphone please pick up your handset before pressing the keys.
Speaker 4: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
If at any time. Your question has been addressed and you would like to withdraw your question.
Please press Star then two.
Speaker 4: At this time we will pause momentarily to assemble our roster.
At this time, we will pause momentarily.
To assemble our roster.
Speaker 4: The first question comes from Louis de Pommeau with William Blair.
The first question comes from Louie Dipalma.
With William Blair.
Please go ahead.
Speaker 5: Morning, Louis. John , even Michael, good morning.
Good morning Louise.
John Steven.
Michael Good morning.
Good morning.
Speaker 5: The aviation aftermarket remained very strong. It appears that there's...
The aviation aftermarket remained very strong it appears that there is.
Speaker 5: really robust industry growth and you also gain share. But as we look to the fourth quarter, how should we think about seasonality relative to the third quarter?
Really robust industry growth <unk> also gained share, but as we look to the <unk>.
Fourth quarter, how should we think about seasonality relative to the third quarter.
Yeah, I think I mentioned it in my prepared remarks, Louis, but obviously, we're extremely pleased with the results of the aviation business in the third quarter. When we look towards the fourth quarter. There is an element of seasonality so a little bit lighter on revenue was what we would anticipate.
Speaker 3: Yeah, I think I mentioned it in my prepared remarks, Lurie, but obviously we're extremely pleased with the results of the aviation business in the third quarter. When we look towards the fourth quarter, there is an element of seasonality, so a little bit lighter on revenue is what we would anticipate, and probably some of that mostly coming from the most recent Desert acquisition. I referenced that it's above our expectations as we initially set out for, but it will have a seasonality effect. So, we're very pleased with that. Thank you.
Probably some of that mostly coming from the most recent deaths or acquisition I referenced that it's above our expectations as we initially set out for but it will have a seasonality effect I think when we look for the full year, we're very pleased with the contributions for the aviation business.
Speaker 3: I think when we look for the full year, we're very pleased with the contributions for the aviation business. You know, we've increased our revenue guidance range, you know, for the full year 30 to 35%. And we look forward to talking more about 24 and beyond when we get to the investor day, but you know, very, very pleased with the results thus far.
We've increased our revenue guidance range now for the full year of 30% to 35% and we look forward to talking more about 'twenty four and beyond when we get to the Investor day, but.
Very very pleased with the results thus far.
Speaker 5: Thanks, Steven. Sorry that I missed that. For the federal and defense segment, despite some of its struggles, it still seems as though it has some attractive assets with the energetic consulting business, and you also have a $565 million
Oh, sorry.
With that.
Before the the federal and defense segment.
Right.
Some of it's struggle.
Seems as though it has some attractive assets with the energetics consulting business and you also have a $565 million.
Speaker 5: aircraft IDIQ. Have you seen interest to buy these assets on a standalone basis as opposed to potential acquirers for the whole business?
Five aircrafts IDI Q have you seen interest to buy these assets on a standalone basis as opposed to.
Central acquirers for the whole business.
Speaker 2: Yes, so the way you're looking at it exactly correct. So we're obviously looking for the most expedited process possible that can monetize the asset with the highest value that could include selling the segment in totality or selling pieces or contracts independently. And we are pursuing both past simultaneous.
Yes, so the way.
Youre looking at it exactly correct. So we're obviously looking for is most expedited process as possible that can monetize the asset with the highest value that could include selling the segment in totality or selling pieces or contracts independently and we are pursuing both paths simultaneously.
Speaker 5: Great. And one final question. Earlier this year, you expanded your Pratt & Whitney Canada partnership into Asia, and it appears that the execution for that geographic expansion has been going well. Are there opportunities for you with your other OEM partners in Asia and other geographies?
Great.
One final question earlier this year you expanded your Pratt <unk> Whitney, Canada partnership into Asia, and it appears that the execution.
For that geographic expansion has been going well are there opportunities.
For you with your other OEM partners in Asia and other geographies.
Speaker 2: There are. We hope to be in a position to share a little bit more detail about that at our Investor Day coming up. We're really focused on Europe for 2024 with the acquisition of Dessert, which gives us a strong, solid
There are we hope to be in a position to share a little bit more detail about that at our Investor day coming up we're really focused on Europe for 2024 with the acquisition of <unk>, which gives us a strong solid <unk>.
Speaker 2: team in Europe but that team is very UK centric. We have
In Europe, but that team is very U K centric.
We have some <unk>.
Speaker 2: plans to expand outside of the UK and that both leveraging the debt service and some of our OEM partnerships to do so and we'll be in a position to share some more detail about that at the investor day.
Plans to expand outside of the U K and that both leveraging the depth of our business and some of our OEM partnerships to do so and we'll be in a position to share some more detail about that at the Investor day.
Awesome.
Speaker 5: Thanks, John , even Mike, for looking forward to the analyst day. Thanks, Louise.
Thanks, John and Mike looking forward to the analyst day.
Thankfully, we look forward to closing.
Thank you.
The next question comes from Michael <unk> with Truest. Please go ahead.
Speaker 4: The next question comes from Michael C. Armoli with Trueist. Please go ahead.
Speaker 2: Hey, yeah, morning guys for morning. Thanks for taking the question.
Hey, good morning, Good morning, guys. Thanks for good morning, Thanks for taking my questions.
Speaker 2: Just to close the loop on that on Fed and trying to sell that, I mean, do you guys have to realistically lower...
Just to close the loop on that are on fed.
China itself that I mean, do you guys have to realistically lower.
Speaker 2: your expectations in terms of what you think the asset could fetch now. I know it was kind of with that earn out $100 million. Are you just trying to do this as quick as possible? Obviously, you're still trying to monetize it in the most efficient fashion and get the most value, but do you think you've got to lower your expectations for a sale price?
Your expectations in terms of what you think the asset could fetch now I know it was.
Kind of what that earn out of $100 million I mean are you just try and.
Do this as quick as possible and obviously youre still trying to.
Monetize it.
The most efficient fashion and get the most value.
You've got a lower your expectations for a sale price.
Speaker 6: We are very focused on I we believe we can manage both value and time. I think it's important to highlight that The majority of the turnout was associated with one contract, which we were not successful with
We are very focused on.
Believe we can manage both value and time I think it's important to highlight that the majority of the earn out was associated with one contract, which we were not successful with.
Speaker 6: We are under protest at this time, so if you look at the $50 million base purchase price, we're very focused on the core assets at that value and doing our best to manage both getting to that value as well as doing it in the most expedited timeline possible. We had anticipated a first quarter closing, so we're, you know, very focused on what can we do within the same time period.
We are under protest at this time. So if you look at the $50 million base purchase price, we're very focused on the core asset that that value and and doing our best to manage both getting to that value as well as doing it in the most expedited timeline possible we had anticipated a first quarter closing so we're very.
On what can we do within the same time period.
Speaker 2: got it got it okay that's helpful um and it's just on aviation obviously very strong strong demand backdrop there i just can you help me reconcile it i think steve you called out the organic growth maybe 24 percent excess or um i don't know if i have the math correct but that that seemingly implies maybe a 25 million dollar contribution do i have that right and i know you said
Got it got it okay. That's helpful.
And then just on aviation, obviously very strong strong demand backdrop. There just can you help me reconcile it I think Steve you called out the organic growth may be 24% ex assessor.
I don't know if I have that math correct.
Implies maybe a $25 million contribution.
Is that right and I know you said $35 million for the year, but I didn't know if there was anything else sort of incorporated in that organic.
Speaker 2: 35 million for the year, but I didn't know if there was anything else, you know, sort of incorporated in that, that organic.
Speaker 3: You have the math correct. And so it goes contribute $25 million in the quarter. And that's why I referenced the business just performing better than expectations for the second half here. But could be super candid with you. As we get to know the business better and work with the teams more, they're, I referenced the seasonality effect. Their third quarter does tend to be quite strong given the flight dynamics in the Europe region specifically, which is where they've got a large business. And we expect to see some level of decline there headed into the fourth quarter, hence the commentary. But yeah, we're very pleased with the business performance thus far and excited about working with the integration.
You have the math correct.
And so we are going to contribute $25 million in the quarter and that's why I referenced that the business is performing better than expectations for the second half.
Super Candid with you as we get to know the business better and work with the teams more there I referenced the seasonality effect there third quarter does tend to be quite strong given the flight dynamics in the Europe region specific rate, which is where they've got a large business and we expect to see some some level of decline theyre headed into the fourth quarter, hence the commentary, but yes, we're very pleased with that.
<unk> performance, thus far and excited about working through the integration efforts.
Speaker 2: Got it. Can you help us out? I knew you called out the distribution of 46 and MRL 54. You know, what can you parse out maybe the organic growth rate on those two lines?
Got it can you help us out on you called out the distribution of <unk> 46 in MRO up 54, what can you parse out maybe the organic.
Growth rates on those two lines.
Speaker 3: Yeah, I'm happy to. The distribution side of the business is up 23% on an organic basis, and the repair business is up 26% on an organic basis. Repair tends to still kind of lead at this point. It's still driven a little bit by the commercial recovery dynamics, but I'd say in both sides, distribution and repair, we still continue to see better than overall market results from an organic basis, so we're pleased.
Yes, I'm happy to the distribution side of the business is up 23% on an organic basis and the repair business was up 26% on an organic basis.
Repair tends to still kind of lead at this point, it's still driven a little bit by the commercial recovery dynamics, but I would say in both sides distribution and repair we still continue to see better than overall market results from an organic basis. So we're pleased.
Speaker 2: Got it. And then I think you call that pricing as well. I mean, we heard from, you know, some other suppliers out there, you know, they've gotten, you know, double digit last year, high single this year. Can you maybe talk to what you're seeing on pricing, you know, maybe across both distribution and kind of MRO?
Got it and then I think you called out pricing as well I mean, we've heard from.
Some other suppliers out there they've gotten double digit last year high single. This year can you maybe talk to what youre seeing on pricing maybe across both distribution and kind of MRO.
Speaker 6: Yeah, I think Mike, so I'd say that obviously 2023, we're done. So what we have experienced is some results of some of the pricing efforts from the OEM.
Yes, I think Mike So I would say that.
Obviously 2023, we're not done so.
So what we have experienced is some results of some of the pricing efforts from the Oems.
Speaker 6: We're starting to get the catalogs in now for 2024. My anticipation is that it's going to be a little bit more muted than we've seen in 23 and 22.
We're starting to get the catalog has been now for 2024, my anticipation is that its going to be a little bit more muted than we've seen in 'twenty three and 'twenty. Two so we're just getting initial kind of data and.
Speaker 6: So we're just getting initial kind of data in. Ask me that question in two weeks at the, you know, at Investor Day, and I'll probably have more detail of what once we start going through the data, but I would anticipate 2020 for price being less of an impact than we've seen in the last year.
Ask me that question in two weeks at the Investor Day, and I'll, probably have more detail of whats of once we start going through the data, but I would anticipate 2024 price being less of an impact.
And then we've seen in the last two years.
Speaker 2: Okay, got it. Last one, then I'll get out of the way here. Any implications for you guys on the positive side, given what's going on with the GTF and obviously airlines may be being forced to fly over equipment longer or not having enough lift. And I just think it's true for just where the max is. I mean, you guys see in potential tailwinds there.
Okay got it last one then I'll get out of the way here.
No implications for you guys on the positive side, given what's going on with the GTS.
Obviously airlines, maybe being forced to fly older equipment longer or not having enough lift in I guess the same holds true for where.
Where the Max's I mean, what are you guys seeing potential tailwind there.
Speaker 3: Yeah, I'd say direct corollaries, you know, not a ton. Obviously, we don't support that program today, but I'd say to the second part of your question, will that lead to a longer life on some of these legacy assets and therefore more repair opportunities? We believe the answer is yes.
Yes, I would say direct corollary not a ton obviously, we don't support that program today, but I'd say for the second part of your question.
Will that lead to a longer life on some of these legacy assets and therefore more repair opportunities I believe we believe the answer is yes.
Speaker 3: And we continue to want to make sure that we're there to support our programs, whether they be on the newer side or on the end of life side. So we're kind of trying to support all length of the year craft. And I think at this point, we continue to see robust demand. You know, I think when we get to the investor day, we'll share more about our outlook headed into 24 and 25. Give you a sense to where we think they're marketed. They're certainly going to slow down from a year over year comp perspective. You know, commercial at this point has been such a strong 23. It'll start to moderate. We're seeing that in our business, you know, even in the third quarter of the year over your comp basis.
And we continue to want to make sure that we're there to support our programs whether they be on the newer side or on the end of life side. So we're kind of trying to support all lengths of the aircraft and I think at this point, we continue to see robust demand.
I think when we get to the Investor day, we will share more about our outlook headed into 'twenty. Four 'twenty. Five gives you a sense of where we think the markets are headed theyre certainly going to slowdown from a year over year comp perspective commercial at this point has seen such a strong 23, it will start to moderate and we're seeing that in our business even in the third quarter on a year over year comp basis.
Speaker 2: Yep, of course. Got it. All right, I'll jump back in the queue. Thanks, guys.
Yes of course got it.
Alright, I'll jump back in the queue. Thanks, guys.
Thanks, Mike.
Thank you.
Speaker 4: The next question comes from Josh Sullivan with the Benchmark Company. Please go ahead.
The next question comes from Josh Sullivan with the Benchmark Company. Please go ahead.
Speaker 7: Hey, good morning. Good morning, Josh. Good morning. Just as far as the Honeywell IP acquisition, you know, what does that ramp look like? You know, you talked about expanding the supply chain. Is there a qualification timeline or a hiring need that we should think about?
Hey, good morning, good morning, Josh.
Morning.
Just as far as the Honeywell acquisition.
Does that ramp look like you talked about expanding the supply chain is there a qualification timeline or hiring need that we should think about.
Speaker 6: There is bold actually thinking about it the right way. So what I'd say is this is a great entry for us into this market.
There is both actually you're thinking about it the right way with so what I'd say is this is a great entry for us into this market.
Speaker 6: We, you know, I highlighted that we both have been distributing the product and repairing the product. This is much more of an assembly than a secure manufacturing. So we're working with the supply base and essentially assembling the fuel controls. That's our portion of the manufacturing. So if you think about it in our repair business today, we disassemble it and we assemble it. So we've got tremendous experience, but we do need, you know, the FAA approvals for a manufacturing perspective. That takes, you know, weeks and months, not years.
I highlighted that we both had the distributing the product in repairing the product. This is much more of an assembly than a pure manufacturing. So we're working with the supply base and essentially assembling the fuel controls that's our portion of the manufacturing. So if you think about it in our repair business today, we disassemble it and we assemble it so we've got tremendous experience.
But we do need the.
The FAA approvals offer a manufacturing perspective that takes weeks and months not years.
Speaker 6: And then we have a very strong team who understands this product line, but obviously we're increasing staffing around that. The second thing I would add, because you see the revenue and earnings,
And then we have a very strong team who understands this product line, but obviously, we're increasing staffing around that the second thing I would add because you see the the revenue and earnings.
Speaker 6: forecast that we had put out with the initial release and that Steve highlighted again today, is that we're sitting on legacy inventory. So we acquired inventory from Honeywell, you know, with obviously a Honeywell markup on it. We have to burn through that inventory and then, you know, that margin capture that went to them now will come to us in the future. So as you look at the ramp, those are the steps.
Forecast that we had put out with the initial release and that Steve highlighted again today is that we're sitting on legacy inventory. So we acquired inventory from Honeywell with obviously, a honeywell markup on it we have to burn through that inventory and then.
Margin capture that went to them now will come to us in the future. So as you look at the ramp those are the steps to us getting to kind of the full ramp of both revenue and earnings potential on this program.
Speaker 6: to us getting to kind of the full wrap of both revenues and earning potential on this program.
Speaker 6: And I'm curious if the deal has driven any incoming from other aerospace OEMs looking at the transaction as attractive, or is this still in the outgoing effort right now? Yeah, what I would say is that, and I'll highlight this more on the investor day, when you look at the life cycle of the product.
And then curious if the deals driven any incoming from other aerospace Oems looking at the transaction is attractive or is this still in the outgoing effort Red zone, yes.
What I would say is is that.
I'll highlight this more in the Investor day, when you look at the lifecycle of the product you have at some point in time many times an OEM says okay. This is still in production, but it's the majority of the usage and the aftermarket I want to use my R&D dollars and my shop floor space to focused on newer production products.
Speaker 6: You have at some point in time, many times in the Williams' this is still in production, but it's the majority that uses in the aftermarket. I want to use my R&D dollars and my shop floor space to focus on newer production products.
Speaker 6: that they're looking for an alternative source.
That they're looking for an alternative source for that production and there are some.
Speaker 6: for that production. And there are suppliers and companies in the industry that do this. I think we have pleasantly surprised the market with our ability to additionally support this. And this coupled with our ability to distribute the product successfully and repair the product successfully.
Our suppliers and companies in the industry that do this I think we have pleasantly surprised the market with our ability to additionally support this and this coupled with our ability to distribute the product successfully and repair the product successfully which is what our core businesses Theres really just this adds an additional channel for us.
Speaker 6: you know, what our core business is. This really just, this adds an additional channel for us, and we are having dialogue with OEMs at this point. What I would tell you, though, is don't expect, and I don't normally get forecast on deals, don't expect us to announce another deal like this in the coming months. We really want to make sure we do this right. This is the first time we're doing this, and we're going to do this right and really impress the market before we consider another transaction of this type. But there are definitely others out there for the future.
And we are having dialogue with Oems at this point, what I would tell you, though is don't expect and I don't normally give forecast on deals don't expect us to announce another deal like this in the coming months, we really want to make sure. We do this right. This is the first time, we're doing this and we're going to do this right and really impressed the market before we consider another transaction at <unk>.
This tight but there are definitely others out there for.
For the future.
Speaker 7: And then maybe just pushing over to fleet, the expansion has been installed, USPS fleet. Now we've seen some large auto OEMs pull back on some EV development plans. Now how is the post office looking at it to just be ice-sleep at this point?
Got it.
Maybe just switching over to fleet.
Expansion of the installed USPS fleet.
We've seen some large auto Oems pull back on some EV development plans.
How is the post office looking at its existing ice fleet at this point.
Speaker 6: Yeah, I think the numbers, the forecasts that have been previously shared.
Yes, I think I think the numbers the forecast that had been previously shared.
Speaker 6: You know, there doesn't appear to be any tremendous shift in that forecast.
There doesn't appear to be any tremendous shift in that forecast. So there will be a small portion of their fleet that will be easy, but the biggest thing. That's happened is number one they've grown the fleet size and Thats a permanent growth to the fleet size. The second thing is.
Speaker 6: So there will be a small portion of their fleet that will be EV. But the biggest thing that's happened is number one, they've grown the fleet size, and that's a permanent growth to the fleet size. The second thing is how they've grown that is not through the NGDV, the next generation vehicle, whether electric or combustible engine, what they're doing is buying commercial off the shelf,
How they've grown that is not through the <unk>. The next generation vehicle, whether electric or combustible engine, what theyre doing is buying commercial off the shelf vehicles, so whether that Mercedes metrics, whether there are some other types of commercial off the shelf vehicles. So they are building a more complex fleet type that we will continue to have a.
Speaker 6: so whether they're Mercedes Metris, whether they're some other type of commercial off-the-shelf vehicles. So they're building a more complex fleet type that will continue to have a tremendous amount of non-EV-type vehicles. That said, our plan is to support all fleet types.
This amount of non EV type vehicles.
That said our plan is to support all fleet types and we look at.
Speaker 6: And we look at the, the postal services are really launch pilot customer to us in supporting EV, medium-duty fleet vehicles.
The postal services are really launch pilot customer to us and supporting EV medium duty fleet vehicles. So continue to see strong activity there.
Speaker 6: So continue to see strong activity there for the near term. And we don't have the real forecast yet of when that NGDV will be delivered. As we get that, we'll share any impacts we think that may have to the business.
For the near term, we don't have the real forecast yet of when that <unk> will be delivered as we get that we will share any impacts we think that may add to the business.
Great. Thank you for the time.
Thanks, Josh.
Thank you.
Speaker 4: Again ladies and gentlemen if you have a question please press star then one.
Again, ladies and gentlemen, if you have a question. Please press Star then one.
Speaker 4: The next question comes from Jeff Van Sinderen with B. Reilly, please go ahead.
The next question comes from Jeff Van <unk> with B Riley. Please go ahead.
Speaker 8: Good morning, everyone, just want to follow up on the methods facility just wondering, maybe you can touch on incremental efficiencies to be realized there in the future.
Hi, good morning, everyone.
Just wanted to follow up on the Memphis facility. Just wondering maybe you can touch on incremental efficiencies to be realized in the future.
Speaker 6: Yeah, thanks, Jeff. And the morning, the way that we've built this, you know, this kind of model, remember we started literally from zero in January , we launched in the middle of the first quarter and completely new IT system, new facility, new infrastructure. So we're essentially, if you look at a chart, you're kind of increasing productivity and revenue out of the site, then we're plateauing and stabilizing, and then we're doing the same thing again, plateauing and stabilizing.
Yeah, Thanks, Jeff and good morning.
The way that we've built this.
This kind of model and remember we started literally from zero in January we launched in the middle of the first quarter.
<unk>, new it system new facility new infrastructure. So we're essentially if you look at a chart you are kind of increasing productivity and revenue out of the site. Then we're plateauing in stabilizing and then we're doing the same thing again plateauing and stabilizing so what you saw in the third quarter was really a more plateau period, and what youll see in the fourth quarter.
Speaker 6: So what you saw in the third quarter was really a more plateau period. And what you'll see in the fourth quarter is the next phase of kind of revenue ramp, and then again, plateau again. So as we go through that ramp, we continue to look at where we're gonna have productivity improvement.
As is.
The next phase of kind of revenue ramp and then again plateau again, so as we go through that ramp we continue to look at where we're going to have productivity improvements to what is going to drive margin improvement over time. There is an element on supply chain on cost and pricing, but the other element is just a scale through that facility and be then.
Speaker 6: What is going to drive margin improvement over time? There's an element on supply chain on cost and price.
Speaker 6: But the other element is just a scale through that facility and b then we look at continuous improvement in terms of processes. And really in late 2024, we'll talk about automation and the impacts that we'll make. But we've got to get the facility stabilized before we have the automation in. But you can expect this to be a continuous improvement and margin improvement.
We look at continuous improvement both in terms of processes and really in late 2024, we'll talk about automation and the impacts that will make but we've got to get the facility stabilized before we add the automation in but you can expect this to be a continuous improvement and margin improvement.