Q2 2024 VSE Corp Earnings Call

Speaker Change: [inaudible]

Speaker Change: [inaudible]

Operator: Good day, and welcome to the VSE Corporation second quarter 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Unknown Executive: Good day, and welcome to the VSE Corporation's second quarter 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker Change: Good day and welcome to the VSE Corporation second quarter 2024 results conference call.

Speaker Change: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Unknown Executive: After today's remarks, it will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded.

Michael Perlman: After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Michael Perlman, Vice President of Investor Relations and Treasury. Please go ahead.

Michael Perlman: I would now like to turn the conference over to Michael Perlman, Vice President of Investor Relations and Treasury.

Unknown Executive: Please go ahead. Thank you.

Michael Perlman: Welcome to VSE Corporation's second quarter 2024 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO. Also on the call this morning is Tarang Sharma, Chief Accounting Officer and Interim Chief Financial Officer.

Speaker Change: Thank you. Welcome to VSE Corporation's second quarter 2024 results conference call. We will begin with remarks from John Cuomo, President and CEO . Also on the call this morning is Tarang Sharma, Chief Accounting Officer and Interim Chief Financial Officer.

Unknown Executive: The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in statements forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements.

Unknown Executive: The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements.

Speaker Change: The presentation we are sharing today is on our website, and we encourage you to follow along accordingly.

Speaker Change: 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 those described in our periodic reports filed with the SEC.

Speaker Change: Except as required by law, we undertake no obligation to update our forward-looking statements.

Unknown Executive: We are using non-GAAP financial measures in our presentation. We are available. The appropriate gap financial reconciliation are incorporated into our presentation and posted on our website. All percentages and state's discussion refer to year-to-year progress, except we're noted.

Speaker Change: We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted.

Michael Perlman: 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 Change: 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 .

John Cuomo: Good morning. Thank you for joining VSE's second quarter conference call today. This morning, I would like to begin by discussing the current market environment for our aviation segment. I will then provide an update on our 2024 strategic priorities and review both our second quarter financial performance and outlook for the remainder of the year. Let's begin with a market update on the aviation commercial market. Global airline passenger traffic remains robust and has returned to, and in many cases exceeded, record pre-pandemic levels. 2024 revenue passenger miles are forecasted to be approximately 4% above 2019 levels and are expected to continue to increase annually over the next 10 years.

John: Good morning. Thank you for joining VSE's second quarter conference call today.

Unknown Executive: This morning, I would like to begin by discussing the current market environment for our aviation sector. Let's begin with a market update on the aviation commercial market. Over the same period, the global in-service fleet is expected to expand by approximately 3% annually to accommodate increased passenger demand. However, quality and supply chain constraints have impeded their efforts.

John: This morning, I would like to begin by discussing the current market environment for our aviation segment.

Speaker Change: I will then provide an update on our 2024 strategic priorities and review both our second quarter financial performance and outlook for the remainder of the year.

Speaker Change: Let's begin with a market update on the aviation commercial market.

Speaker Change: Global airline passenger traffic remains robust and has returned to, and in many cases exceeded, record pre-pandemic levels.

John Cuomo: Over the same period, the global in-service fleet is expected to expand by approximately 3% annually to accommodate increased passenger demand. While Boeing and Airbus are attempting to ramp up production to meet increased demand, quality and supply chain constraints have impeded their efforts. As an interim solution, airlines are delaying aircraft retirements, driving increased demand for aftermarket parts and maintenance-related services on aging aircraft. Within the business and general aviation market, we've seen a structural shift in the use of private aircraft following the pandemic, and as a result, more stability when compared to prior cycles. Edels. Business jet activity was the first to recover following the pandemic, and we have seen this activity stabilize near historically high levels and anticipate low single-digit growth rates in the near term.

Speaker Change: Over the same period, the global in-service fleet is expected to expand by approximately 3% annually to accommodate increased passenger demand.

Unknown Executive: As an interim solution, airlines are delaying aircraft retirements, driving increased demand. Business jet activity was the first to recover following the pandemic, and we have seen this activity stabilize near historically high levels and anticipate low single-digit growth rates in the near term. Moving now to slide three, where I will provide an update on our 2024 strategic priorities, beginning with aviation, which is expected to be at the full year run rate by the end of the year.

John Cuomo: Moving now to slide three, where I will provide an update on our 2024 strategic priorities, beginning with the aviation statement. First, we continue to scale our new European Distribution Center of Excellence in Hamburg, Germany, launched earlier this year. The facility supports an expansion of our Pratt & Whitney Canada aftermarket program, which is performing in line with our expectations and is expected to be at the full-year run rate by the end of the year. The facility will support additional distribution products, including tires, tubes, and batteries from our deser acquisition later in 2024. Second, the launch of our new OEM license fuel control manufacturing program is outpacing early expectations and contributing to segment profitability.

Unknown Executive: The facility will support additional distribution products, including tires, tubes, and batteries from our DESER acquisition later in 2024. Additionally, our Kansas facility expansion, which will support the manufacturing of this new product line, is expected to be operational by year end. Next, we are building a core competency in acquisition integration. Supporting this integration, we are developing a new e-commerce site that will support all VSE Aviation and legacy guests or customers. This new VSE aviation site will be launched in the third quarter of this year.

Speaker Change: First, we continue to scale our new European Distribution Center of Excellence in Hamburg, Germany, launched earlier this year.

John Cuomo: Our Kansas facility expansion, which will support the manufacturing of this new product line, is expected to be operational by year-end. The investment in its facility expansion accounts for most of the growth capex spent in the second quarter.

John Cuomo: Next, we are building a core competency in acquisition integration. The deser acquisition integration, which includes integrating systems, processes, organizations, go-to-market strategy, and branding, remains on track and is expected to be completed over the next 12 months. The porting this innovation, we are developing a new e-commerce site that will support all VSE aviation and legacy deser customers. This new VSE aviation site will be launched in the third quarter of this year. And finally, our recent acquisition of Turbine Controls, or TCI, has exceeded our initial expectations and assumptions. Our initial focus for this business is adding capacity and expanding our scope with existing engine OEM partners.

Speaker Change: Supporting this integration, we are developing a new e-commerce site that will support all VSE Aviation and Legacy Desk Air customers.

Speaker Change: This new VSE aviation site will be launched in the third quarter of this year.

Speaker Change: Our initial focus for this business is adding capacity and expanding our scope with existing engine OEM partners.

John Cuomo: Moving now to fleet. Earlier this year, we announced the initiation of a process to explore and evaluate strategic alternatives involving our fleet segment. The review is progressing and in process. And we expect to provide additional updates after both the USPS ERP transition is complete and the USPS revenue recovery is stabilized, both of which are anticipated by year end. In the interim, we have undergone several initiatives to better position as segment for future revenue growth, profitability, and a potential divestiture. We remain committed to managing the fleet segment through the near-term temporary disruptions caused by the USPS transition to a new ERP or fleet management system.

Unknown Executive: Moving now to Fleet. Earlier this year, we announced the initiation of a process to explore and evaluate strategic alternatives involving our fleet segment, both of which are anticipated by year end. We continue to focus on customer diversification and scaling our e-commerce fulfillment and commercial fleet business, which are up approximately 30% organically year-to-date in the. At the corporate level, we completed a successful follow-on equity offering of 2.4 million shares at $71 per share in May.

Speaker Change: Moving now to Fleet.

Speaker Change: The review is progressing and in process, and we expect to provide additional updates after both the USPS ERP transition is complete and the USPS revenue recovery is stabilized, both of which are anticipated by year end.

John Cuomo: We continue to focus on customer diversification and scaling our e-commerce fulfillment and commercial fleet businesses, which are up approximately 30% organically year-to-date in the EGRA.

Speaker Change: We continue to focus on customer diversification and scaling our e-commerce fulfillment and commercial fleet businesses.

John Cuomo: Herbert. At the corporate level, we completed a successful follow-on equity offering of 2.4 million shares at $71 per share in May. The net proceeds from the offering were used to repay outstanding borrowings under our revolving loan facility, including borrowings to fund our acquisition of TCI. Additionally, and as previously disclosed, the company expected to recognize restructuring charges related to the relocation of our corporate and federal defense headquarters and other corporate restructuring initiatives supporting the finalization of the federal defense business segment, the vestiture. In connection with these activities, we recorded a $17 million charge in the second quarter.

John Cuomo: We have also made the decision to relocate our corporate headquarters to one of our existing aviation segments operating facilities later this year.

John Cuomo: We will provide a detailed update next quarter. Finally, our CFO search is progressing well, and we expect to announce a permanent CFO and onboarding plan soon, specifically before the end of the third quarter.

Unknown Executive: We will provide a detailed update next. Finally, our CFO search is progressing well, and we expect to announce a permanent CFO and onboarding plan soon, specifically before the end of the third quarter. Let's move on to slide four, where I will provide an update on our Q2 performance. Contributions from Solid Program Execution on Existing Distribution Awards, the Scaling of New Awards, and Expansion of MRO Capabilities, resulting in a temporary slowdown in maintenance-related activities and parts use.

Tarang Sharma: Let's move on to slide four, or I will provide an update on our Q2 performance. In the second quarter, we delivered revenue growth of 30%. This included a second quarter in a row of both record revenue and record profitability for our aviation segment. The record aviation revenue and record profitability were driven by balanced performance, contributions from solid program execution on existing distribution awards, the scaling of new awards, expansion of MRO capabilities, the new OEM license manufacturing program, and contributions from both the desert aerospace and turbine control acquisition supported these results. During the quarter, fleet segment revenue declined 9%, driven by a decline in revenue from the United States Postal Service as they implement a new fleet management information system, resulting in a temporary slowdown in maintenance-related activities and parts usage.

Tarang Sharma: To date, 235 facilities have migrated to the new system versus 107 since our last update. The remaining 72 sites are expected to be transitioned by the end of the third quarter. The negative USPS performance was partially offset by increased sales volume from e-commerce customers and fulfillment partners supported by continued discipline volume expansion at our Memphis Distribution Center and expanded product offerings supporting new and existing customers within our commercial fleet sales channel.

Unknown Executive: The remaining 72 sites are expected to be transitioned by the end of the third quarter, supported by continued volume expansion at our Memphis Distribution Center and expanded product offerings supporting new and existing customers within our commercial fleet sales. With that, I will now turn the call over to Tarang to discuss the details of our financial performance.

Tarang Sharma: With that, I will now turn the call over to Tarang to discuss the details of our financial performance. Thank you, John. Let's turn to slides five and six of the conference call materials, where I'll provide an overview of the second quarter of financial performance. VSE generated $266 million of revenue in the quarter, an increase of 30%, led by a 55% increase in aviation revenue, partially offset by a 9% decline in fleet revenue. Adjusted EBITDA of $31 million increased 18% or $5 million compared to the second quarter of 2023. ABAsion drove this growth of $12 million compared to the prior year's period.

Tarang Sharma: VSE generated $266 million of revenue in the quarter, an increase of 30% led by a 55% increase in aviation revenue, partially offset by a 9% decline in fleet revenue. Aviation drove this growth of $12 million compared to the prior year's period. Now turning to slide 7, we'll review our aviation segment's record second quarter results.

Tarang Sharma: This was partially offset by $6 million decline in fleet. Adjusted net income increased 5% to $11 million, and adjusted diluted earnings per share declined 22% to 64 cents per share. Now turning to slide seven, we'll review our aviation segment's record second quarter results. ABAsion segment revenue increased 55% compared to the second quarter of 2023 to a record $193 million. Both distribution and MRO businesses were solid contributors of 32% and up 112%, respectively, compared to the prior year period. The 32% increase in distribution revenue was driven by strong and market activity and strong execution of existing billion programs, the ramp of new programs, including our Pratt and Whitney Europe, Middle East, and Africa agreement and contributions from the deser acquisition.

Unknown Executive: Aviation segment revenue increased 55% compared to the second quarter of 2023 to a record $193 million. The 32% increase in distribution revenue was driven by strong end market activity and strong execution of existing OEM programs, the ramp of new programs, including our Pratt & Whitney Europe, Middle East, and Africa Agreement, and contributions from the Dessert Acquisition Fund. The 112% increase in MRO revenue was driven by strong end market activity and the addition of new repair capabilities, market share gains, and improved throughput across our MRO facilities as well as contributions from DEFSER and TCI acquisitions.

Tarang Sharma: The 112% increase in MRO revenue was driven by strong and market activity and the addition of new repair capabilities, market share gains, and improved throughput across our MRO facilities and contributions from deser and TCI acquisitions. Excluding recent acquisitions, ABAsion segment revenue increased by approximately 14% organically compared to the prior year. ABAsion adjusted EBITDA increased by 61% in the quarter to a record $31 million, while adjusted EBITDA margins increased by 70 basis points to 16.1%. The increase in margin was driven by contributions from new and existing distribution programs, MRO market share gains, and our newly launched OEM license manufacturing program.

Unknown Executive: Excluding recent acquisitions, aviation segment revenue increased by approximately 14% organically compared to the prior year. Aviation adjusted EBITDA increased by 61% in the quarter to a record $31 million, while adjusted EBITDA margins increased by 70 basis points to 16.1%. The increase in margin was driven by contributions from new and existing distribution programs, MRO market share gains, and our newly launched OEM licensed manufacturing program. Now, turning to slide 8 to discuss second quarter results for the fleet segment.

Tarang Sharma: Lightly offset by lower margins from recent acquisitions.

Tarang Sharma: For our ABAsion segment, we are maintaining 4-year 2024 revenue growth guidance of 34% to 38% and adjusted EBITDA margin guidance of 15.5% to 16.5%.

Tarang Sharma: Now turning to slide 8 to discuss second quarter results for the fleet segment. During the second quarter, fleet segment revenue declined 9% to $73 million, driven by lower USPS revenue, partially offset by e-commerce fulfillment and commercial fleet sales growth. Commercial revenue was $46.5 million in the second quarter, an increase of 22% compared to the prior year. Commercial revenue now represents 64% of fleet segment sales compared to 47% in the prior year period. USPS revenue, which is included within our other government channel, declined approximately 37% compared to the second quarter of last year. As previously guided, USPS sales are expected to be down 40 to 45% in the third quarter and down 30 to 35% for the full year.

Speaker Change: Segment revenue declined 9% to $73 million driven by lower USPS revenue, partially offset by e-commerce fulfillment and commercial fleet sales growth.

Speaker Change: Commercial revenue was $46 $5 million in the second quarter, an increase of 22% compared to the prior year commercial.

Speaker Change: Revenue now represents 64% of fleet segment sales compared to 47% in the prior year period.

Speaker Change: USPS revenue, which is included within our other government channel declined approximately 37% compared to the second quarter of last year.

Unknown Executive: USPS revenue, which is included within our other government channel, declined approximately 37% compared to the second quarter of last year. As previously guided, USPS sales are expected to be down 40% to 45% in the third quarter and down 30% to 35% for the full year.

Speaker Change: As previously guided U S kit sales are expected to be down $40 to 45% in the third quarter and down 30% to 35% for the full year.

Tarang Sharma: Moving on to fleet profitability, fleet segment adjusted EBITDA decreased 66% to $3 million. Driven by the decline in USPS sales volume, fleet adjusted EBITDA margin was 4.5% compared to 11.9% in the prior year. For the full year 2024, we maintain our fleet segment revenue growth range of 0 to 5% compared to the prior year and our adjusted EBITDA margin range of 6 to 8%. We expect both revenue and adjusted EBITDA margins at the low end of the provided ranges.

Unknown Executive: Moving on to fleet profitability, fleet segment adjusted EBITDA decreased 66% to $3 million, driven by the decline in USPS sales volume. Fleet's adjusted EBITDA margin was 4.5% compared to 11.9% in the prior year. For the full year 2024, we maintain our fleet segment revenue growth range of 0 to 5% compared to the prior year and our adjusted EBITDA margin range of 6 to 8%. Turning to slide 9, in the second quarter, we used $18 million of operating cash flow primarily driven by strategic inventory investments supporting new aviation awards.

Tarang Sharma: Turning to slide 9, in the second quarter we used $18 million of operating cash flow, primarily driven by strategic inventory investments supporting new aviation awards. Capital expenditures for the second quarter were $4 million, supporting new facility and equipment for our OEM license manufacturing program. Total net debt outstanding at quarter end was $445 million. Pro-former net leverage, which includes the trailing 12-month results from prior acquisitions, was 3.2 times. We are in a position to further improve net leverage in the second half of the year, driven by stronger free cash flow generation and the optimization of our inventory investments and working capital.

Unknown Executive: Total net debt outstanding at quarter end was $445 million. Proforma Net Leverage, which includes the trailing 12-month results from prior acquisitions, was 3.2 times. We are in a position to further improve net leverage in the second half of the year, driven by stronger free cash flow generation and the optimization of our inventory investment and working capital. With that, I'll turn it over back to John.

John Cuomo: With that, I'll turn it over back to Joan. Thank you, Durang.

John A. Cuomo: Thank you, Durang. I would like to conclude our prepared remarks by recapping our 2024 priorities on slide. Our new Hamburg, Germany, Distribution Center is now being positioned to support additional product lines in the back half of 2020. Next, the fuel control program launch continues to outpace early expectations, and the Kansas facility expansion supporting this program is expected to be operational by year end. Thirdly, we expect the integration of DESERT to be completed within the next 12 months.

John Cuomo: I would like to conclude our prepared remarks by recapping our 2024 priorities on slide 10. As previously communicated, 2024 is a year of execution.

John Cuomo: Let's begin with our aviation segment. First, our prior year of program implementation is on schedule. Our new Hamburg, Germany distribution center is now being positioned to support additional product lines in the back after 2024. Next, the fuel control program launch continues to outpace early expectations, and the Kansas facility expansion supporting this program is expected to be operational by year end. Third, we expect the integration of desert to be completed over the next 12 months. Alongside the integration, a new e-commerce site will be launched in the third quarter supporting both VSE Aviation and legacy desert customers.

John A. Cuomo: Alongside the integration, a new e-commerce site will be launched in the third quarter, supporting both VSE Aviation and legacy Dessert customers. And finally, for our TCI acquisition, we are focused on adding additional capacity and increasing our scope with existing engine OEM partners. Moving to our fleet segment, we remain focused on our organic growth and customer diversification strategy and plan to drive commercial growth as we continue to scale our new Memphis Distribution and E-Commerce Fulfillment Center.

John Cuomo: And finally, for our TCI acquisition, we are focused on adding additional capacity and increasing our scope with existing engine OEM partners.

John Cuomo: Moving to our fleet segment, we remain focused on our organic growth and customer diversification strategy and plan to drive commercial growth as we continue to scale our new Memphis distribution and e-commerce fulfillment center. We continue to support legacy and USPS new vehicles while managing the temporary disruption and activity brought on by their new system conversion. Within fleet, we remain committed to scaling our commercial fleet business and managing through the near term and temporary challenges within the USPS.

John A. Cuomo: We continue to support Legacy and USPS new vehicles while managing the temporary disruption in activity brought on by their new system conversion. Within Fleet, we remain committed to scaling our commercial fleet business and managing through the near-term and temporary challenges within the USPS. I would like to conclude by thanking the VSE team for all they do daily to support our stakeholders. We are really building something special here.

John Cuomo: Finally, from a cash flow perspective, we expect to generate solid free cash flow in the second half of the year, improving our net leverage and lowering our debt balance. I would like to conclude by thanking the VSE team for all they do daily to support our stakeholders. We are really building something special here.

Unknown Executive: Operator, we are now ready to the question and answer portion of our call. Thank you. We will now begin the question and answer session. Just for question, you may press star then one when you're touched on phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To address your question, please press star, then two.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And our first question comes from Ken Herbert from RBC Capital Markets. Please go ahead.

Unknown Executive: At this time, we'll pause momentarily to assemble our roster.

Kenneth Herbert: Our first question comes from Ken Herbert from RBC Capital Markets. Please go ahead. Hi, good morning. Hey, John, maybe just to start out within the aviation segment, the guidance implies, you know, sort of consistent margins of these levels in the back half of the year. Can you just, you've got obviously a lot of activity, a lot of things ideally wrapping up. Can you just walk through the puts and takes as you see the second half sort of aviation margin progression playing out? And if there's any particular risks around whether it be the integration of some of these acquisitions, obviously the new facilities, the ramp, anything else?

John Cuomo: Yeah, I mean, I think, you know, we posted a really strong operating margin in the first quarter, and then the guidance has been slightly lower. We've got a bit of a mix with the acquisitions. We have TCI, which is not a lower margin, not a low margin business, but slightly lower than the 17 plus percent that we posted in the first quarter. We have really significant activities in a desert acquisition happening, starting actually next week, that, you know, you'll have a little bit of a slowdown for four to six weeks while we get the systems migrated in the US.

Speaker Change: Actually next week that will.

Speaker Change: You'll have a little bit of a slowdown for four to six weeks, while we get the system has migrated in the U S.

John Cuomo: So, you know, and we continue to ramp. It's all about mix. So, you know, I think we feel comfortable with the guidance that we put out. If TCI was not part of the equation, you know, we would probably be at the higher end of that guidance. With TCI, and I think, you know, the mid-range of the guidance is where we expect to be at this point. My pleasure, and any other puts and takes you think out of it? Yeah, I'll just reiterate that, you know, the TCI margin is diluted, so that'll certainly have an impact on the variability towards the back out of the year.

Speaker Change: So.

Speaker Change: And we continue to ramp up.

Speaker Change: It's all about mix. So I think we feel comfortable with the guidance that we put out.

Speaker Change: If <unk> was not part of the equation, we would probably be at the higher end of that guidance.

Speaker Change: <unk> I think the midrange of the guidance is where we expect to be at this point Michael are trying any other puts and takes you think of it.

Speaker Change: I'll, just reiterate that the TC TPI margin dilutive so that will certainly have an impact on the variability towards the back half of the year and right. Now we're just holding the plan I mean, we've owned PCI for less than a quarter and so we will update guidance when we think it's appropriate.

John Cuomo: And right now, we're just holding a plan.

Kenneth Herbert: I mean, we've owned TCI for less than a quarter, and so we'll update the guidance when we think it's appropriate. Perfect.

Speaker Change: Perfect and coming out of the Air show commentary on maybe some softness at the.

Kenneth George Herbert: Perfect. And coming out of the air show, you know, a lot of commentary on maybe some softness at the lower end in terms of some of the airlines and their capacity growth or capacity reductions. Are you seeing any change in your airline customers on either spare parts purchasing or sort of MRO spend as a result of maybe some slowing with low-cost carriers?

John Cuomo: And coming out of the air show, you know, a lot of commentary on maybe some softness at the lower end in terms of some of the airlines and their capacity growth or capacity reductions. Are you seeing any change in your airline customers on either spare parts purchasing or sort of MRO spend? As a result of maybe some slowing with low-cost carriers? We aren't yet. I mean, you know I tend to be on the more conservative side of the market outlooks, but we have not seen any changes in demand. And they know our activity at FOMBO really centered around meetings with large OEMs and working with them in our model is very OEM-centric.

John Cuomo: And there continues to be a lot of very robust opportunities in terms of work that could be, you know, offloaded to us, back shop work for MROs, different distribution opportunities. But as of today, we're not seeing any impact or any changes. Okay, perfect.

Unknown Executive: Okay, perfect. And just finally, free cash in the second half, can you provide any more specifics on sort of how much you expect to generate or where we should think about free cash for the full year?

Kenneth Herbert: And just finally, a free cash in the second half can you provide any more specifics on sort of how much you expect to generate or where we should think about sort of free cash for the full year? I mean, certainly we expect to generate free, strong cash flow in the second half of the year. I mean, our cash for the year has been impacted by the sale of FDS and the damage-related costs. And also the fleet's revenue declines. Then we've got new program executions the first half of the year. I'd say we're on track to just generate free cash flow and certainly anticipate that in the back half.

Unknown Executive: Then we've got new program executions in the first half of the year. I'd say we're on track to just generate free cash flow and certainly anticipate that in the back half.

Speaker Change: Free cash flow and certainly.

Speaker Change: I anticipate that in the back half.

Speaker Change: <unk>.

Speaker Change: Great I'll pass it back there. Thank you.

Unknown Executive: Great. I'll pass it back there.

Kenneth George Herbert: Great. I'll pass it back there. Thank you.

Unknown Executive: Thank you.

Michael Ciarmoli: The next question comes from Michael Ciarmoli from Truest. Please go ahead. Hey, good morning, guys. Thanks for taking the question. Just, just maybe to pick right up on that cash. Is that cash positive second half for you guys think you could be cash positive for the full year? I'd say it's cash positive second half. Yeah, good question. Second half. Okay. And Mike or so in the fourth quarter versus the third quarter, I would expect free cash flow generation third quarter and more prominent in the fourth quarter. Okay, perfect. And then John, I think you said PCI outperforming expectations.

Speaker Change: The next question comes from Michael carrier of Moly from Truest. Please go ahead.

Michael Frank Ciarmoli: The next question comes from Michael Ciarmoli from Truist. Please go ahead.

Unknown Executive: Hey, good morning guys. Thanks for taking the question. Just maybe to pick right up on that cash. Is that cash positive second half, or do you guys think you could be cash positive for the full year?

Speaker Change: Hey, good morning, guys. Thanks for taking my question, just maybe to pick right up on that cash.

Speaker Change: Is that cash positive second half or you guys think you could be cash positive for the full year.

Scott: Thanks Scott.

Unknown Executive: I think it's cash-positive in the second half. Yeah, good question. The second half. Okay.

Speaker Change: Yes, good question second half okay.

Unknown Executive: And Mike, more so in the fourth quarter versus the third quarter. I would expect pre-casual generation in the third quarter and be more prominent in the fourth quarter. Okay.

Speaker Change: Mike more so we're still in the fourth quarter versus the third quarter I would expect free cash flow generation in third quarter and more prominent in the fourth quarter.

John A. Cuomo: Okay, perfect. And then, John, I think you said DCI was outperforming expectations. I think you originally said $55 to $60 million revenue contribution. Is that still the right bogeyman for the full year, or is that truly coming in, you know, maybe above that?

Speaker Change: Okay, Perfect and then John I think you said.

Speaker Change: Outperforming expectations I think you originally said $55 million to $60 million revenue contribution.

John Cuomo: I think you originally said 55 to 60 million revenue contribution. Is that still the right for the full year, or is that truly coming in, you know, maybe above that high end? PCI is coming in above the high end. They certainly expedited expectations for the month that we own them. You'll see that it goes through the $23 million mark for the time period. But again, one day for two months. It's hard for us to put a solid forecast after 90 days, but as of right now, we feel that they don't have the higher end. I just want to have a little caution because we're still learning.

Michael Ciarmoli: We're actually in Connecticut this week, but it's a lot of learning right now. Got it. And then John, you know, I think that I always kind of appreciate the conservatism. The reaffirmed aviation guidance. I mean, you know, it's kind of, I guess at the high end, maybe a slight uptick, but the midpoint or even low end. You know, kind of assumes revenues kind of stall here at this, this kind of 193 million run rate on a sequential basis. You know, what sort of contemplated, you know, that that would make, you know, revenues go down, you know, sequentially in 3Q and 4Q.

John Cuomo: You know, knowing just kind of what we've seen with some of the lower-end, low-cost airlines, but anything to read into on the guy there? No, I would say it's really important to look at the year-over-year comms rather than the sequential comms. There is an element of finality in the markets. Number one, number two is, you know, we will have a more conservative third quarter on the desk or side because we're going to go through the system integration, you know, in the US. So that starts literally in about 10 days, you know, and you've got six weeks of integration work where you will see an impact in revenue as we integrate.

John A. Cuomo: No, I would say it's really important to look at the year-over-year comps rather than the sequential comps. There is an element of seasonality in the markets, number one. Number two is we will have a more conservative third quarter on the DESER side because we're going to go through the system integration in the U.S. That starts literally in about 10 days, and you've got six weeks of integration work where you will see an impact on revenue as we integrate, but it's obviously all for the positive, and we'll realize synergies as we get to the back end of the year. But I would say there' We still feel confident in posting growth based on that seasonality.

Speaker Change: Integration work, where you will see an impact in revenue as we integrate but it's obviously all for the positive is we and we will realize synergies as we get to the back end of the year, but I would say, there's nothing to read into it from a quarter over quarter and year over year perspective, we're still feel confident in posting growth based on that seasonality.

John Cuomo: But it's, you know, obviously all for the positive as we, and we'll realize synergies as we get to the back end of the year. But I would say there's nothing to read into it from a quarter or a quarter, near-over-year perspective. We're still, you know, feel confident in posting growth based on that. seasonality.

Speaker Change: Okay last one for me just.

John Cuomo: Okay, last one for me, just Southwest. They've obviously have a lot going on there, a lot of changes. Anything you could say about your current program with them, does this create more opportunities for you, less opportunities, or just any kind of directional color there? Yeah, I mean, we have a strong partnership with them. We are managing all of the 737-700 tear downs for them, 200 plus aircraft over to find the period because it all depends on when they're able to receive new aircraft. You know, it's a solid program with strong contributions. It's the acceleration of revenue and earnings on that program is more dependent on Boeing's ability to deliver aircraft to them than Southwest itself.

Speaker Change: Southwest they've obviously have a lot going on there are a lot of changes.

Speaker Change: Any anything you can say about your current program with them does it create more opportunities for you less opportunities or just any any kind of directional color there.

Michael Ciarmoli: So right now it's stable and strong, but we don't anticipate any kind of strong growth that's going on there. Based on the current Boeing 737 Max Pilgrads. Got it. Appreciate it. I'll jump back in the queue. Thanks, Scott.

Michael Frank Ciarmoli: Got it. Appreciate it. I'll jump back in the queue. Thanks, guys. Thanks. Bye.

Louis Dipalma: Thanks, Mike. The next question comes from Louis DiPalma from William Blair. Please go ahead. John Torang and Michael, good morning. Morning, Louis. Aviation, organic growth, remained solid, 14%. And that shows continued market share gains with your view that the BGNA industry growth has decelerated to the low single digits.

Michael Louie D DiPalma: The next question comes from Louis DiPalma, from William Blair. Please go ahead.

John A. Cuomo: John Tarang Morning, Louis. Aviation organic growth remained solid at 14%, and that shows continued market share gains. Given your view that the BG&A industry growth has decelerated to the low single digits, are you able to categorize where these market share gains are coming from, and what is your view in terms of

John Cuomo: Are you able to categorize where these market share gains are coming from? And what is your view in terms of when the commercial industry growth will start to mirror the BGNA growth? Yeah, I mean, first of all, with regard to share gains, it's interesting. I'd say we're winning more work from OEM partners as we talk about how to solve problems for them to support them in the aftermarket where there's distribution, MRO, or some type of combination between parts and services needs. More of the work is coming from those conversations than it is actually from a battle with competition over, you know, over new business and taking share that way.

John A. Cuomo: Yeah. I mean, first, with regard to share gains. It's interesting. I'd say we're winning more work from OEM partners as we talk about how to solve problems for them to support them in the aftermarket, whether it's distribution, MRO, or some type of combination between parts and services needs. More of the work is coming from those conversations than it is actually from a battle with competition over, you know, new business and taking share that way. And we are seeing it quite balanced across both markets, across business and general aviation and commercial, and across both capabilities, MRO and distribution. Your second question specifically was about commercial.

John Cuomo: And we are seeing it quite balanced across both markets: across business and general aviation, and commercial, and across both capabilities: MRO and distribution.

Speaker Change: All cross business, and general aviation and commercial and across both capabilities MRO and distribution.

John Cuomo: Your second question specifically was about. I'm slowing down some thinking about it. Again, I take a more conservative approach. I think we're going to see another year of growth in the market in 2025. I tend to think it's going to be more in that mid-single-digit range. And I think as you get into 26, 27, you're going to see it start to flatten out.

Speaker Change: Your second question, specifically was about promotional commercial yes.

John A. Cuomo: I'm slowing down because I'm thinking about it. I, you know, again, I take a more conservative approach. I think we're going to see another year of growth in the market in 2025, but I tend to think it's going to be more in that mid single-digit range. And I think as you get into twenty six, twenty seven, you're going to see it start to flatten out. That's just my perspective on it, which is slightly lower than what you see in kind of larger, more macro market, you know, communication.

Speaker Change: Slowing down so I'm thinking about it.

Speaker Change: Again, I take a more conservative approach I think we're going to see another year of growth in the market in 2025 I tend to think it's going to be more in that mid single digit range and I think as you get into 'twenty six 'twenty seven youre going to see it start to flatten out that's just my perspective of it.

John Cuomo: That's just my perspective of it, which is slightly lower than what you see in kind of larger, more macro market, you know, communications.

Speaker Change: Slightly lower than what you see in.

Speaker Change: Kind of larger more macro market.

John Cuomo: And before these... For the 14% organic growth, it's a very sizable spread relative to industry growth. Do you have confidence that you can maintain that spread? I want to say every quarter is going to look exactly the same in terms of organic growth. It depends on how programs ramp as well. We'll continue to give as much clarity and guidance as possible as we win new business. I think you see the transparency that we deploy in terms of winning new business. There's any upfront cost to execute on the business, and then when that revenue and earnings will start to flow through the P&L.

John A. Cuomo: And for these. For the 14% organic growth, it's a very sizable spread relative to industry growth. Do you have confidence that you can maintain that spread?

John Cuomo: It's hard to just give a generic answer because each program does execute and implement differently. That makes sense.

John Cuomo: And one more, at your analyst day, John and Tarang, you forecast for 100 basis points of aviation margin expansion in 2025 relative to 2024. Is that still a viable target as the utilization of a Hamburg facility increases and as you gain the efficiencies of the fuel control asset? Yes, it's really three factors. It's the Honeywell fuel control and the higher inventory that we had initially that burned down to that as we bring on inventory where they manufacture at a lower cost and that margin pick up there. The second is as we continue to grow the business, we're leveraging our operational cost and the platform that we built.

John A. Cuomo: Yes, it's really three factors. It's the Honeywell fuel control and the kind of higher inventory that we had initially, the burndown of that as we bring on inventory where we're the manufacturer at a lower cost, and that margin picks up there. The second is as we continue to grow the business, we're leveraging our operational costs and the kind of platform that we built. So the SG&A is a percentage of sales; a client will provide some margin opportunity.

Speaker Change: The burn down of that as we bring on inventory that we're aware of the manufacturer at a lower cost and that margin pick up there. The second is as we continue to grow the business, we're leveraging our operational cost and kind of the platform that we built so the SG&A as a percentage of sales decline will provide some margin opportunity and the <unk>.

John Cuomo: So the SGNAs and percentage of sales decline will provide some margin opportunity. And the third is, you know, we're starting to, we've got some integration activities happening in the back end of the year and through 2025. And there are synergies involved with those integration activities, which provide a little bit of margin uplift.

John A. Cuomo: And the third is, you know, we're starting to, we've got some integration activities happening at the back end of the year and through 2025. And there are synergies involved with those integration activities, which provide a little bit of margin opportunity.

Speaker Change: Third is we're starting to we've got some integration activities happening in the back end of the year and through 2025, and there are synergies involved with those integration activities, which provide a little bit of margin uplift.

Unknown Executive: Sounds good.

John A. Cuomo: Sounds good. And one more of the USPS sites that have transitioned to the new IT system have the volume recovered back to where they were prior to the transition?

Speaker Change: And one more.

John Cuomo: And one more of the USPS sites that have transitioned to the new IT system have the volumes recovered back to where they were prior to the transition? No, so the first few sites that went live went live in the first quarter. We have seen those bottom out, and we've seen the recovery start to happen. But there are no sites that have gone live that are at pre-go live revenue run rates at this point. And that's why we have given kind of that V shape guidance in terms of postal, where we anticipate the remainder of the sites going live this quarter.

Speaker Change: The U S P S.

Speaker Change: Sites that have transitioned to the new it system have the.

Speaker Change: Volume.

Unknown Executive: And really the bottom of, you'll see a decline in revenue and earnings this quarter. And then you'll see a slow uptick in the fourth quarter and going into 2025. Sounds good.

Michael Louie D DiPalma: Sounds good. It's awesome.

Jeff Van Cinderin: Awesome. Thanks, John, Terang, and Mike. I really appreciate it. Thank you.

Jeffrey Wallin Van Sinderen: I totally appreciate it. The next question comes from Jeff Van Sinderen from B Riley. Please go ahead.

Jeff Van Cinderin: The next question comes from Jeff Van Cinderin from B. Riley. Please go ahead. Good morning, Jeff. Hi, good morning, everyone.

Jeff Van Cinderin: So realize it's early on TCI, but why not just see if we can circle back to that just for a minute. Do you think there's margin expansion potential there as you grow it based on what you're seeing so far? Yes, I mean, each deal kind of has a different financial model. Some deals are; we fully integrate and the synergies come from cost takeout. That is not the situation with TCI. TCI is about how do we expand and grow the business, because we see a tremendous amount of market potential, and then where we have, I'd say, on the product or service margin level, where we have opportunities to expand margins there.

Speaker Change: I'd say on the product or service margin level, where we have opportunities to expand margins. There are approaches typically first 90 days watch learn especially this is an asset make sure we feel comfortable before we put any plans in place and now and Youll see us start to focus much more on growth in <unk>.

John Cuomo: Our approaches typically, first 90 days, watch, learn, especially this is an A-asset, make sure we feel comfortable before we put any plans in place, and you'll see a start to focus much more on growth in capacity expansion plans in the back end of the year into 2025. As we bring on new programs, we'll be in a position to talk more about margin expansion. Okay, so run up.

Speaker Change: <unk> expansion plans in the back end of the year and into 2025 and as we bring on new programs will be in a position to talk more about margin expansion.

Speaker Change: Okay Fair enough and then on desk or it sounds like Youre focused on the near term system integration you are about to execute.

John A. Cuomo: Okay, fair enough. And then on DESER, it sounds like you're focused on the near-term system integration you're about to execute. What are the next key things remaining to complete the integration of DESER over the next year?

John Cuomo: And then I guess, or something, you're focused on the near-term system integration; you're about to execute. What are kind of the next key things remaining to complete the integration of DECR over the next year? Yeah, I mean, DECR is a complicated integration because it was a non-integrated business. So you have, you know, two MRO shops that are operating under separate systems and separate, you know, kind of legal entities, and then you have, I think, three distribution businesses that we're all operating somewhat independently. So we're bringing those together, and it's almost like five many integrations that, coupled with that, there's more commoditized products in their mix, which is a good thing.

Speaker Change: The next key things remaining to complete the integration of Denver over the next year.

John A. Cuomo: Yeah, I mean, Dessert is a complicated integration because it was a non-integrated business. So you have, you know, two MRO shops that are operating under separate systems and separate, you know, kind of legal entities. And then you have, I think, three distribution businesses that were all operating somewhat independently. So we're bringing those together. And there are, it's almost like five mini integrations.

Speaker Change: Yes, I mean, there is a complicated integration because it was a non integrated business. So you have.

John A. Cuomo: Coupled with that, there are more commoditized products in their mix, which is a good thing because it's a lot of touch points with customers. And we're, you know, enhancing our e-commerce site and taking a new e-commerce site live in the third and fourth quarter of this year. So what you'll see is the U.S. distribution integration happen throughout the remainder of this year. And then, as we get into next year, it'll be MRO systems and processes integration. We've already done the HR stuff, payroll benefits, and organizational integration. So now it's all about systems and how we go to market.

John Cuomo: It's a lot of touch points with customers, and we know we're enhancing our e-commerce site and taking a new e-commerce site live in the third and fourth quarter of this year. So what you'll see is the U.S. distribution integration happened throughout the remainder of this year and then as we get into next year of the MRO systems and processes integration.

John Cuomo: We've already done the HR stuff, payroll benefits, organizational integrations, and now it's all about systems and how we go to market. Okay, great.

John A. Cuomo: Okay, great. And then if I could just squeeze in one more, just any more color you can give us on what you're seeing in the honey well business.

John Cuomo: And then, if I can just squeeze in one more. Just any more color you can give us on what you're seeing in the Honeywell business? Yeah, I mean, it's scaling exactly or better than anticipated. And we still feel we've given pretty robust guidance around that, including margin expansion in 2025, and still feel very confident in our ability to deliver on the performance that we've already communicated. Okay, great. Thanks for taking my questions. I'll take the rest of one. Thank you.

Jeffrey Wallin Van Sinderen: Yeah, I mean, it's scaling exactly or better than anticipated. And, you know, we still feel we've given pretty robust guidance around that, including margin expansion in 2025, and still feel very confident in our ability to deliver on the performance that we've already communicated.

John A. Cuomo: Okay, great. Thanks for taking my questions. I'll take the rest offline. Thank you.

Charles Sullivan: The next question comes from Charles Sullivan from Benchmark. Please go ahead. Hey, good morning. Good morning, John. It's always the post office changeover. You know, if you look back historically when the U.S. PS went through a similar or similar actions. What metrics is that tracking to your historical experience versus this cycle? It's a good question. And, you know, I want to be very cautious because I don't know. We feel very comfortable in our guidance. And I would say at this point we don't see any additional opportunity above the guidance. But what it's tracking similar, I think the difference in what we saw in the past as we did see pent-up demand.

Unknown Executive: As far as the post office changeover, you know, if you look back historically when the USPS went through a similar or similar action, you know, what metrics are that tracking to your historical experience versus this cycle?

John A. Cuomo: It's a good question. And, you know, I want to be very cautious because we feel very comfortable with our guidance. And I would say that at this point, we don't see any additional opportunity above the guidance. But if it's tracking similar, I think the difference between what we saw in the past is that we did see pent-up demand. And that pent up demand kind of released at a certain point. We haven't seen that yet.

John Cuomo: And that pent-up demand kind of released at a certain point; we haven't seen that yet. So other than that, kind of the V-shaped kind of decline and then recovery, we are seeing, and we just don't see, you know, at this point we're not seeing any kind of indication that pent-up demand will yield any revenue above that in 2024. Okay, if it's in 2025 potentially, we'll deal with that for right now.

John A. Cuomo: So other than that, kind of the V-shaped kind of decline and then recovery, we are seeing, and we just don't see, at this point, we're not seeing any kind of indication that pent up demand will yield any revenue above that in 2024. In 2025, potentially, we'll deal with that. But for right now,

Speaker Change: But right now no.

Speaker Change: <unk>.

Speaker Change: Okay.

John Cuomo: Now that you've had a deeper look at TCI understanding, it's not too deep, just a couple weeks, but you mentioned the capacity expansion that's been of focus. How should we think of those investments versus any certification timelines, and then what's been the inbound from engine OEMs since you took ownership? Yeah, I mean, I'll start with the second question first. I mean, it's such an outstanding business with such strong OEM-centric relationships in terms of back shop work, and they're doing their own full maintenance, repair, and overhaul on a commercial engine or a military engine. We've seen a tremendous amount of interest from our OEM partners in how we scale and grow capacity to support additional back shop work.

John A. Cuomo: And then now that you've had a deeper look at TCI, I understand it's not too deep, just a couple weeks, but, you know, you mentioned the capacity expansion has been a focus. How should we think of those investments versus any certification timelines? And then what's been the inbound from engine OEMs since you took ownership?

Speaker Change: And then now that you've had a deeper look at TC I understand it's not too deep just couple of weeks, but you mentioned the capacity expansion has been a focus how should we think of those investments versus any certification timelines and then what's been the inbound from engine Oems since you took ownership.

Speaker Change: Yeah, I mean I'll start with the second question first I mean, it's it's.

Speaker Change: It's such an outstanding business with such strong OEM centric relationships in terms of back shop work as they're doing their own full bain.

Speaker Change: Repair and overhaul an honor.

Speaker Change: Commercial engine or military engine.

Speaker Change: We've seen a tremendous amount of interest from our OEM partners and how we scale and grow capacity to support additional back shop work.

John Cuomo: You know, as a public company, you provide a lot of stability to large OEMs that are looking not just one year out, but three, in five years and sometimes even longer out. So the conversations and kind of our activity at the Farmer Aware Show were very much centered around these OEM relationships. With regard to capacity, you know, I'd say we're just at the, you know, there is some quick capacity expansion we can do within our capability. Our capability is we have today. I'd say, as far as the next step of growth of these OEMs, we have to determine what that looks like, and then is it a new capability or an adjacent capability or not?

John A. Cuomo: With regard to capacity, you know, I'd say we're just at the, you know, we have, there is, there are some quick capacity expansions we can do within our capability, our capabilities we have today. I would say as far as the next step of growth for these OEMs, we have to determine what that looks like and then determine whether it is a new capability or an adjacent capability or not. I'd say we're not there yet to be able to say how quick I can turn those ideas into revenue and earnings. Give me another quarter or two.

John Cuomo: I'd say we're not there yet to be able to say how quick I can turn that those ideas into revenue and earnings.

John Cuomo: Give me another quarter or two.

John Cuomo: And then just one last one on dessert. You talked about a core competency in acquisition integration. Can you just expand on that and then, you know, the e-commerce website? Is that a new approach to this market in a way your commercial fleet e-commerce approach was? Yeah. I mean, for us it is, you know, I've been with the business for five years now, and our approach initially was almost anti-e-commerce, which I know sounds counterintuitive to what's happening in most markets. But we wanted to build a lot of touch points inside the customer base. We wanted to accelerate and differentiate in terms of our service capabilities and differentiate in terms of how technical our sales teams are, how much we know and understand the product.

John A. Cuomo: Yeah, I mean, for us, it is our business, you know. I've been with the business for five years.

John Cuomo: We're now in a place where we built that level of stabilization where, you know, we believe a next way to grow and support these customers is with a semi-customized e-commerce site that's designed around the products and services that we support. So excited to get that site launched. I'll share with you the website once it's launched. You can kind of get a feel for it and with the same of other sites and kind of where we're different. But as we add more commoditized product, or about 85 plus percent of our product is exclusive. But, as we have more commoditized products, it'll also give us another opportunity to expand that sales channel.

Speaker Change: Stabilization where.

Speaker Change: We believe the next way to grow and support these customers with a semi customized E. Commerce site. That's designed around the products and services that we support so excited to get that site launched I'll share with you. The website. Once its launched you can kind of get a feel for it and with the same of other sites and kind of where we are different but as we add more commodity.

Speaker Change: <unk> product are about 85 plus percent of our product is exclusive but as we have more commoditized product that also gives us another opportunity to expand that sales channel.

Speaker Change: Great. Thank you for the time.

Unknown Executive: Great.

Unknown Executive: Great, thank you for your time.

Unknown Executive: Thank you for the time. Thank you.

Speaker Change: Thank you.

Speaker Change: Again, if you have a question. Please press Star then one.

Unknown Executive: Again, if you have a question, please press star, then one.

Bert Subin: And our next question comes from Bert Souben from Stiefel. Please go ahead. Hey guys, good morning, Sadger. Oh, good morning.

Bert Subin: And our next question comes from Bert Subin from Stiefel. Please go ahead.

Speaker Change: And our next question comes from <unk> <unk> from Stifel. Please go ahead.

<unk> <unk>: Hey, guys good morning.

Speaker Change: Oh good morning.

John Cuomo: I guess maybe jumping off of Louie's questioning a little earlier on the 10 to 13 percent targets from your investor day, the 14 percent that you're at now, do you see that incrementally getting better, or do you think it's just sustained from here? I think near-term it's sustained as we get into 2025, and we give kind of guidance and an outlook, and I've got a feeling of how the new programs that we have won are going to be implemented and executed. We can give you a little bit more clarity on that. Every program is kind of different, like a distribution program. It depends as they're inventory in the market and kind of how does that program roll out.

Speaker Change: I guess, maybe jumping off of.

Speaker Change: Louise.

Speaker Change: A little earlier on the 10%, 13% targets from your Investor Day.

Speaker Change: The 14% that Youre at now do you see that incrementally getting better or do you think it is just sustained from here.

John A. Cuomo: I think near term, it's sustained as we get into 2025. And, you know, we give a, you know, kind of guidance and outlook. And I've got a feeling of how the new programs that we have won, are going to be implemented and executed, we can give you a little bit more clarity on that, you know, every program is kind of different, it's like a distribution program, it depends as their inventory in the market, and kind of how does that program roll out, we want some new OEM authorized MRO work, you know, how long do those transitions take, because you've got to get fully authorized by, you know, the OEMs and, and sometimes get testing equipment on board.

Bert Subin: We want some new OEM authorized MRO work; you know, how long do those transitions take because you've got to get fully authorized by the OEMs and sometimes get testing equipment on board. So, as we kind of are able to layer in new program by new program, I'll give a little bit more clarity to see if we can accelerate that. But at this point, I'd say the guidance is around what we've been able to do thus far. Yeah, now that's helpful. Thanks, John. I remember we're starting to lap, you know, pretty significant comps as well. Correct.

John A. Cuomo: So as we kind of are able to layer in new program by new program, I'll give a little bit more clarity to see if we can accelerate that. But at this point, I'd say the guidance is around what we've been able to do thus far.

Unknown Executive: Yeah, no, that's helpful. Thanks, John. Remember, we're starting to lap, you know, pretty significant comp.

Bert Subin: Yeah, and I guess, you know, you mentioned the distrodeals, you've won, I mean, I think just over a billion, or at least publicly announced over a billion over, you know, since 23. How have those been ramping? How should those be ramping, maybe over the next 12 to 18 months? You know, and maybe, well, I was just going to add on like, how does that, you know, I realized that that's not all new work, some of that is expansion, some of that is renewed work, but, you know, between your aftermarket OEM split on those as well, if we do, you know, foresee weaker aftermarket, how does that affect your ramp or your margins for that matter, considering operating leverage or whatever other levers come in there?

Speaker Change: Whatever other levers coming there.

Speaker Change: Yes, I mean from a ramping perspective some of the programs are fully ramped some of the programs are kind of half ramp I think as we get to the back end of this year most of what we've announced.

John Cuomo: Yeah, I mean, from a ramping perspective, some of the programs are fully ramped, some of the programs are kind of half ramped. As we get to the back end of this year, most of what we have announced, but even by a flip, take first quarter of 25 should be relatively fully ramped. I think that from a margin perspective, the Honeywell fuel control program, which is not, you know, solely a distribution program, will ramp throughout 2025. But other than that, most of it, you know, should be fully ramped by the first quarter. With regard to the mix, you know, we're essentially 99% aftermarket supporting commercial and business in general aviation, so, you know, we continue to watch demand in those markets, and again, most of our product is exclusive, and it's more on the expensive side of the products that you're not seeing. But we know there's not a ton of inventory in the market on most of the product that we're selling. A lot of commoditized products is a different story, but for our exclusive products, you know, with a pretty tight market in terms of how much inventory is at airlines, or at kind of at MROs, or at POs, so we feel like they have a pretty good control over kind of working capital inventory spend.

Speaker Change: Even by let's say first quarter of 'twenty five should be relatively fully ramped.

Speaker Change: I think that from a.

Speaker Change: Margin perspective, the Honeywell fuel control program, which is not solely a distribution program will ramp throughout 2025, but other than that most of it should be fully ramped by the first quarter.

Speaker Change: With regard to mix.

Speaker Change: Essentially 99% aftermarket supporting commercial and business in general Aviation. So we continue to watch demand.

Speaker Change: In those markets and again most of our product is exclusive and it's more on the expensive side of our products. So youre not seeing that.

Speaker Change: Not a ton of inventory in the market on most of the product that we're selling on a commoditized products into different story, but for our exclusive products.

Speaker Change: It's a pretty tight maher.

Unknown Executive: And the one thing I'd add is our guidance built into the built-in mix and ramp dynamics that John Okay, helpful.

Tarang Sharma: Yeah, and the one thing I'm going to add is our guys built into the, built in the mix in ramp.in. makes that John just mentioned. Okay. Okay, helpful.

Unknown Executive: Okay, helpful. And then maybe just on inventory as well, you know, you're sitting on, let's see, like, 532 million in inventory. How much of that is attributed to the lower margin Honeywell fuel systems? And, you know, what you've talked about, the burn rate, you're talking about the ramp into 25. Like, what's your burn rate on that? And how are you looking at replenishing that into 25?

Tarang Sharma: And then maybe just on inventory as well, you know, you're sitting on, let's say like, 532 million in inventory. How much of that is attributed to the lower margin, Honeywell fuel systems and, you know, what you've talked about the burn rate? You're talking about the ramp into 25, like, what's your burn rate on that? And how are you looking at replenishing that into 225? I guess, as a second part of that, your DSOs are sitting also, you know, historically high levels over the last two quarters. Is that the main reason, or is there anything else driving that?

Unknown Executive: So I'll take a just to cover your Honeywell inventory question. Certainly, we are on track and burning at the rate that we previously noted. I mean, we had about a year's worth of inventory. I think that's what we built out, and that ramp is continuing, and that burndown happens. So then you can move on to building up inventory under the As far as DSOs and the impact of inventory on the second piece, that again is a mix between us ramping up new programs as we're launching new programs in Europe and also the impact of the fleet revenue decline as well. So that's certainly creating a bit of a challenge right now, but again, as John mentioned, we've got the pathway and the recovery that we anticipate for USPS coming in the back half of the year.

Tarang Sharma: So I'll take just to cover your Honeywell inventory question. Certainly, we are on track inverting at the rate that we previously noted. I mean, we had about a year's worth of inventory. I think that's what we built out in that ramp is continuing, and the burnout happens, so then, you know, move on to building up inventory under the new remit. As far as the DSOs and the impact of inventory on second piece, you know, that's that again is a mix between us ramping up new programs as we're launching new programs in Europe. And also the impact of the fleet revenue decline as well, so that's certainly creating a bit of a challenge right now.

Tarang Sharma: But again, as John mentioned, we've got the pathway and the recovery that we anticipate for USPS coming in the back half of the year. Yeah, with regard to Honeywell fuel control, I mean, we don't, you know, specifically model out or share how much inventory we have for each program. But we plan to be in a position through no later than by the end of 2025 for kind of the higher cost inventory to have been kind of utilized and the lower cost inventory to be replenished. So it's, you know, in our modeling in totality, it was like an 18 month, I mean, a 24 month, you know, kind of burned down and kind of build up a new inventory.

Tarang Sharma: If we have a chance to accelerate that it won't take the full year, it just depends on the demand profile of 2025.

John Cuomo: Okay, maybe just one last one and I'll jump back into you here, but, you know, jumping back to the started, started jump around here, but jumping back to the distribution deal commentary, if you win a deal like the Pratt and Whitney deal where it's essentially a geographic expansion. And, you know, you have your Germany facility is well going on. Does that, or should that then drive margins just through sort of the operating levels that you were mentioning earlier? Yes, so it's a great question. So, you know, I've been here for like I said about five years or so.

Unknown Executive: Maybe just one last one, and I'll jump back in the queue here. But, you know, jumping back to the, sorry to jump around here, but jumping back to the... Distribution Deal Commentary, if you win a deal like the Pratt & Whitney deal where it's essentially a geographic expansion, and you have your Germany facility as well going on, does that or should that then drive margins just through sort of the operating leverage that you were mentioning earlier? Yes, So,

John A. Cuomo: Yes, so it's a great question. So, you know, I've been here for, like I said, about five years or so. When you look at the business, the COVID time period, which is kind of when, you know, Ben, who runs the business, and I kind of arrived, you're looking at a $120 million aviation business. The platform, and the infrastructure do not support a $2 billion business. So we have built out that platform and infrastructure. So does that mean that I don't have to add any costs or any, you know, or, you know, any CapEx as we grow? No.

John Cuomo: When you look at the business, like, kind of COVID time period, which is kind of when, you know, Ben who runs the business and I kind of arrived. You know, you're looking at a hundred and twenty million dollar aviation business; the platform and the infrastructure, you know, does not support, you know, a two billion dollar business. So, we have built out that platform and infrastructure. So does it mean that I don't have to add any cost or any, you know, or, you know, any capex as we grow? No, but for the most part, there's a tremendous opportunity to scale and leverage facilities, teams, processes, systems. So, that on a total basis, you'll see the contribution margin of those programs higher than, you know, than they were historically and an opportunity to lower that SGNA as a percentage of sales with expand margins and totality.

John A. Cuomo: But for the most part, there's a tremendous opportunity to scale and leverage facilities, teams, processes, and systems so that, on a total basis, you'll see the contribution margin of those programs higher than, you know, than they were historically and an opportunity to lower that SG&A as a percentage of sales and expand margins and totality. I'd say that's a generalized statement. If there's something different, because it's a very unique program, we'll kind of model it out and share that at that point. Thank you all.

Unknown Executive: I say that's a generalized statement. If there's something different because it's a very unique program, we'll kind of model it out and share that. Point. But you're helping out the right way. Thanks, guys. Thank you.

John Cuomo: This concludes our question and answer session.

John A. Cuomo: This concludes our question and answer session. I would like to turn the conference back over to John Cuomo for any closing remarks.

John Cuomo: I would like to turn the conference back over to John Cuomo for any closing remarks. Thank you for joining our second quarter conference call. I appreciate the continued confidence in VSE, and we look forward to speaking with you in late October after our third quarter. Thank you, and have a great day.

Speaker Change: Turn the conference back over to John Cuomo for any closing remarks.

John Cuomo: Yes. Thank you for joining our second quarter conference call I. Appreciate the continued confidence in and BSC and we look forward to speaking with you.

Speaker Change: In late October after our.

Speaker Change: Third quarter, Thank you and have a great day.

Unknown Executive: The conference has now concluded. Thank you for attending today's presentation.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator: And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

unknown: ??

Unknown Executive: You may now disconnect.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].