Q3 2024 VSE Corp Earnings Call
are me everyone. The VFC Corporation 3rd quarter, 2024 results call will begin in a few minutes. We appreciate your patience.
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Speaker Change: Good day and welcome to the VSC Corporation, 3rd quarter, 2024 results conference call.
Speaker Change: All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's remarks, it will be an opportunity to ask questions.
Speaker Change: To ask a question you may press star then one on your touchstone phone. To withdraw your question, please press star then two.
Speaker Change: Please note this event is being recorded. I would not like to turn the conference over to Michael Perlman, Vice President, Ambassador Relations and Treasury. Please go ahead.
Michael Perlman: Thank you. Welcome to VSC Corporation's third quarter 2024 results conference call. We will begin with remarks from John Cuomo, President and CEO followed by a financial update from Adam Cohen, our chief financial officer.
Michael Perlman: Presentation we are sharing today is on our website and we encourage you to follow along for courting.
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.
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.
Speaker Change: All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John.
John: Good morning. Thank you, Michael, and thank you for being a part of today's third quarter conference call. This morning, I would like to first officially welcome Adam, our new Chief Financial Officer, to his first VSE earnings call.
John: Adam joined VSC in early September and has already made a significant impact providing valuable support for the recently completed equity raise and the negotiation and signing of the CalSTRM acquisition. Adam, it's great to have you as my partner and welcome to the team.
John: I'd like to begin my prepared remarks by discussing the current market environment for our aviation segment.
John: followed by an update on our progress to date on our 2024 strategic priorities.
John: The aviation segment now supports more than 70% of total company revenues.
John: Those revenues are derived from both the commercial and business and general aviation aftermarkets.
John: In the third quarter of 2024, global demand in the commercial aerospace aftermarket remained at near record levels, driven by high passenger traffic.
John: The market is navigating declining OEM production rates and ongoing supply chain disruptions, which continue to hinder the availability of new aircraft.
John: The shortage of new aircraft is a significant obstacle for airlines looking to increase capacity and retire less efficient, older aircraft.
John: As a result, airlines are extending the operational life of existing fleets, which continue to fuel demand for aftermarket parts and maintenance services.
John: The business and general aviation aftermarket is also operating near historic highs and has entered a period of stability compared to previous cycles.
John: Private air travel sentiment remains robust.
John: In summary, we expect strong demand in the commercial aftermarket, with near double-digit revenue growth to continue into 2025, supported by high passenger volumes, OEM production challenges, and an aging global fleet.
John: The outlook for business and general aviation also remains positive, with more stable low to mid-single digit growth into 2025.
John: Let's now move to slide 3, where I'll provide an update on our strategic priorities.
John: Let's begin with our recently announced acquisition of Calstrom Aerospace.
John: Last month, we announced that we entered into a definitive agreement to acquire Calstrom Aerospace, a leading full-service aftermarket solutions provider of value-added distribution and technical services for the commercial aftermarket.
John: Kjellstrom is a strong strategic fit and aligned with VSE's core strategic focus areas. First, Kjellstrom increases VSE Aviation's customer base and market exposure to the commercial aerospace aftermarket with the focus on engines.
John: Second, CalSTRM expands our distribution products and aftermarket service offerings.
John: Third, Kjellstrom aligns with BSE's core OEM-centric strategy, with over 95% of Kjellstrom distribution revenue being generated from exclusive, long-term relationships with marquee aerospace OEMs.
John: Fourth, KELSRM expands our international reach. KELSRM operates across 75 countries and approximately half of revenue is generated outside of North America. And finally, the acquisition presents significant synergies with a planned integration.
John: Kjellström generated approximately 175 million of revenue and approximately 20 million of adjusted EBITDA for the trailing 12-month period ended September 2024.
John: We expect to generate run rate synergies of approximately $4 million within 18 months of close and are confident that we will be able to deliver greater than 15% EBITDA margins for the business as we integrate and optimize the businesses together.
John: The total consideration for the acquisition is $200 million, comprised of $185 million in cash and approximately $15 million of common shares of the company, subject to working capital adjustments.
John: The acquisition is expected to close in December.
John: I would now like to provide an update on our 2024 strategic priorities for our two segments, beginning with aviation.
John: Our European distribution expansion, initially supported by the Pratt & Whitney Canada Europe, Middle East and Africa aftermarket product support program, is ahead of schedule and remains on pace to reach a full year run rate by the end of the fourth quarter.
John: We have begun expanding our product line offerings in Europe, with plans to support additional product lines in the near future.
John: Next, the financial performance and implementation of our OEM licensed fuel control manufacturing program continues to outpace expectations.
John: The implementation of the manufacturing capabilities supporting the launch of this new program are expected to continue into 2025.
John: The integration of the Dessert Acquisition U.S. distribution business, which included integrating systems, processes, organization, and branding, was completed in the third quarter.
John: Supporting this integration, we launched a new e-commerce platform, shop.bscaviation.com, where all Legacy Desert products, including tires, retreads, tubes, and batteries, are now available for purchase.
John: Finally, following the acquisition of Turbine Controls in April 2024, we remain focused on adding incremental capacity and increasing our scope with existing OEM partners before integrating the business.
John: The performance for this business remains well ahead of our expectations.
John: Moving now to our fleet segment.
John: During the third quarter, the United States Postal Service completed the implementation of its new Fleet Management Information System, with all 307 vehicle maintenance facilities now live.
John: Following this system implementation and beginning this quarter, we expect to see a gradual increase of repair activity and subsequently an increase in the usage of our parts.
John: and we remain committed to supporting the USPS through this period of transition. Within our commercial sales channel,
John: We are focused on scaling our e-commerce fulfillment facility, diversifying our customer and supplier base, and adding new products and brands to our portfolio.
John: Complete segment strategic review remains in process, and we will provide an update in the near future as the USPS revenue continues to stabilize.
John: Corporate level, we completed a very successful following an offering of approximately 2 million shares at $87 per share in October 2024.
John: The net proceeds from the offering will be used to fund a portion of the CAASC consideration for the acquisition of Caltram Aerospace. The remaining balance will be funded through the revolver.
John: Now let's move to slide 4 where I will provide an update on our business segment Q3 performance.
John: In the third quarter, we delivered both record revenue and record profitability for our aviation segment, driven by a 34% increase in aviation sales in the quarter.
John: Our aviation segment balanced revenue growth was driven by strong execution on new and existing distribution programs, an expanded portfolio of MRO capabilities, and contributions from the TCI acquisition.
John: The aviation segment also reported record profitability driven by balanced contributions from new distribution programs, the optimization of existing distribution programs, MRO market share gains, and our new OEM licensed manufacturing programs and contributions from the TCI acquisition.
John: During the third quarter, fleet segment revenue declined 11%.
John: USPS revenue declined as forecasted due to the final phase of implementation of a new fleet management information system.
John: The conversion of their facilities to this new ERP platform resulted in a temporary slowdown in maintenance-related activities and parts usage, with recovery anticipated to begin this quarter.
John: The USPS revenue decline was offset by 20% organic growth from the fleet's e-commerce fulfillment business and expanded product offerings supporting new and existing customers within our commercial fleet sales channel.
Speaker Change: With that, I will now turn the call over to Adam to discuss the details of our financial performance.
Adam Cohen: Thank you, John. Let's turn to slides 5 and 6 of the conference call materials, where I will provide an overview of our third quarter financial performance.
Adam Cohen: VSE generated $274 million of revenue in the quarter, an increase of 18%, led by a 34% increase in aviation revenue, partially offset by an 11% decline in fleet revenue.
John: Adjusted EBITDA of $33 million increased 3% compared to the third quarter of 2023. Aviation drove this growth, up $7 million compared to the same period in the prior year, partially offset by a $5 million decline in adjusted EBITDA for fleet.
Speaker Change: Adjusted net income was $13 million, and adjusted diluted earnings per share was $0.71 per share.
John: Now turning to slide 7, where we will review our aviation segment's record third quarter results in more detail.
John: Aviation revenue increased 34% to a record $204 million as compared to the third quarter of 2023. Both distribution and MRO businesses were strong contributors, up 12% and 86% respectively.
John: The 12% increase in distribution revenue was driven by strong execution of existing OEM programs.
John: and the ramp of new OEM programs.
John: This growth rate remains above market on a blended basis as the business and general aviation distribution market is growing at mid-single digits and the commercial aerospace distribution market is growing at low double-digit growth rate.
Speaker Change: For more information, visit www.FEMA.gov
John: Our MRO revenue grew by 86% in the quarter, driven by the expansion of new repair capabilities, market share gains, improved throughput across our MRO facilities, and contributions from the TCI acquisition.
John: Excluding contributions from the TCI acquisition, MRO revenue increased organically approximately 17% in the quarter.
John: Aviation adjusted EBITDA increased by 29% in the quarter to a record $33 million. The increase in adjusted EBITDA was driven by scaling of due distribution programs,
John: strong performance from existing distribution programs, an increase in MRO activity, and contributions from TCI and our newly launched OEM licensed fuel control manufacturing program.
John: Aviation's near-record adjusted EBITDA margin of 16% was negatively impacted by lower margin TCI contributions.
John: We are increasing our full-year 2024 revenue growth range from 34% to 38% to 39% to 41%. Revenue contributions from the Kelstrom acquisition, which is expected to close in the fourth quarter of 2024, are not included in our updated guidance.
John: We are also maintaining our adjusted EBITDA margin guidance of 15.5% to 16.5% respectively.
Speaker Change: As John mentioned earlier, we are very excited about our recently announced acquisition of Kjellstrom Aerospace. The acquisition is strongly aligned with VSC Aviation's distribution business and highly complementary to our recent TCI acquisition focused on the commercial engine aftermarket.
John: The combination of the two businesses is expected to yield significant sales and operating synergies, better positioning BSE in the global aviation aftermarket.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Now turning to slide 8 for our fleet segment's third quarter results. In the third quarter, fleet segment revenue declined 11% to 70 million dollars, driven by lower USPS revenue, partially offset by e-commerce fulfillment and commercial fleet sales growth.
Speaker Change: Commercial revenue is $45 million in the third quarter, an increase of 20% compared to the prior year. Commercial revenue represents 64% of total 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 40% compared to the third quarter of last year, which was at the lower end of our previously provided guidance range.
Speaker Change: We expect to see USPS sales begin to recover in the fourth quarter, resulting in 30-35% decline for the full year.
Speaker Change: Moving on to fleet profitability, segment adjusted EBITDA decreased 59% to $4 million, driven by the decline in USPS sales volume. Fleet's adjusted EBITDA margin was 5.4% for the third quarter.
Speaker Change: For the full year 2024, we are lowering our fleet segment revenue growth range from 0-5% to a decline of 5-10% compared to the prior year based on actual revenue to date and planned customer growth in the fourth quarter.
Speaker Change: We remain confident in our ability to support USPS revenue recovery and continued above-market growth within our commercial business segment in the fourth quarter and continued into 2025.
Speaker Change: With respect to fleet-adjusted EBITDA, we are maintaining the previously provided margin range of 6 to 8 percent.
Speaker Change: Turning to slide 9, in the third quarter we generate $10 million of operating cash flow and $4 million of free cash flow driven by disciplined working capital management and strong operating results.
Speaker Change: following our recently completed equity raise, which has temporarily reduced our adjusted net leverage ratio to 2.1 times.
Speaker Change: and the planned completion of the Kjellstrom acquisition in the fourth quarter, we anticipate our third quarter 2024 adjusted net leverage ratio to improve to approximately three times.
Speaker Change: Our adjusted net leverage is expected to further improve in the fourth quarter, driven by stronger free cash flow conversion on adjusted EBITDA basis in the fourth quarter as compared to the third quarter of 2024.
Speaker Change: With that, I will turn it back over to John.
John Cuomo: Thank you Adam. I would like to conclude our prepared remarks by recapping our 2024 priorities on slide 10.
John Cuomo: It's been a busy year at BSE. We divested all non-core federal and defense assets, acquired two market-leading commercial aftermarket engine-focused businesses, expanded our footprint, and won and implemented significant new business.
John Cuomo: Let's begin with our aviation segment.
Speaker Change: First, our Pratt & Whitney Europe, Middle East, and Africa program implementation is ahead of schedule and we have introduced new product lines in our new Hamburg, Germany distribution center.
Speaker Change: We will finalize these implementations before year-end as we continue to position the facility to support additional product lines in the near future.
Speaker Change: Second, our OEM-licensed Fuel Control Manufacturing Program launch continues to outpace expectations.
Speaker Change: The implementation of the manufacturing capabilities supporting this program are expected to continue into 2025.
Speaker Change: Third, the integration of the Desert Acquisition U.S. distribution business was completed during the third quarter. The remaining business integrations are expected to be completed within the next year.
Speaker Change: Supporting these integrations, we launched a new e-commerce platform. We will continue to optimize this platform in the quarter ahead.
Speaker Change: Fourth, we remain focused on adding incremental capacity and expanding turbine control partnerships with existing customers and OEM partners while working through our integration plan.
Speaker Change: And fifth, we expect to complete the acquisition of Calstrom Aerospace in December and look forward to begin integration activities in the first quarter of 2025. Moving now to our fleet segment.
Speaker Change: First, leadership transition will lead the priorities for the fourth quarter. As reported earlier this year, Chad Wheeler, Group President of the Fleet Segment, is transitioning from his leadership role this month to a consultant.
Speaker Change: Chad will support with the transition over the next 12 months.
Speaker Change: I would personally like to thank Chad for his incredible partnership and countless accomplishments achieved over his 33 year tenure with the company.
Speaker Change: Third, we will continue to support all USPS vehicle types, including legacy and new vehicles, while managing through the temporary disruption in activity brought on by their new system conversion.
Speaker Change: Fourth, we remain focused on our organic growth and customer diversification within our commercial fleet businesses as we look to add partners, products, and exclusive offerings.
Speaker Change: In summary, we continue to make significant progress on our aviation operating priorities and remain focused on delivering another year of year-over-year revenue growth and improved profitability.
Speaker Change: Within Fleet, we remain committed to scaling our commercial fleet business and managing through the near-term and temporary challenges within the USPS.
Speaker Change: We are focused on generating much stronger free cash flow in the fourth quarter as compared to the third quarter of 2024.
Speaker Change: I would like to conclude by thanking the VSE team for all they do daily to support our stakeholders. We are building a recognized industry brand and it is all the result of our outstanding teams around the globe and how they support their customer and supplier partners and each other each and every day.
Speaker Change: Operator, we are now ready for the question and answer portion of the call.
Speaker Change: 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster.
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Speaker Change: And our first question comes from Sheila Kayoglu from Jeffries. Please go ahead.
Sheila Kayoglu: Hey, good morning guys. I'm Zae Kordarin. Welcome, Rob. Welcome on. Maybe, John, for you, let's talk about aviation growth. Just another phenomenal quarter, up 13% organically. How much of a guidance range would you say was organic outperformance?
Speaker Change: versus better contribution from PCI that you're seeing running ahead of plans.
Speaker Change: Thank you.
Speaker Change: The, wait, so Michael and Adam, the third, good morning Sheila, so the 13% was ex-TCI, correct? Correct, yeah. So 13% is without TCI. TCI had a phenomenal, phenomenal growth quarter on their own. Is that, I want to make sure I understood your question.
Speaker Change: Some of our capabilities on the MRO side... Some nice, new smaller business wins that are turning out to be nicer than we had anticipated. It's a great, balanced quarter, so it's not like one thing drove it. ..which is, you know, the best answer you can have.
Speaker Change: Okay, maybe that leads to my second question. And John, since it was pretty balanced distribution of 12, so neck-and-neck in terms of organic growth, maybe how do you think about the exit rates as we exit the year?
Speaker Change: underlying market for MRO versus distribution and maybe share gains given the wins you have. How do we think about that as we exit the year and into 25?
John Cuomo: Yeah, I think as we get into 25, you know, I think in totality we feel very, you know, comfortable We've been said that we'll continue to outpace the market growth and be in a double-digit margin growth You know organic growth perspective for next year and that includes a definitely I wouldn't say a softening of business in general aviation, but a moderation so that that market is probably, you know Gonna grow somewhere, you know 6% on the high end, you know kind of 4% on the low end And but we still feel with the share gain that we have won and what has not yet been realized That it puts us in a you know, a double-digit growth trajectory for next year Okay. Thank you
Speaker Change: Thanks, y'all.
Speaker Change: The next question comes from Ken Herbert from RBC Capital Markets. Please go ahead.
Speaker Change: For more information, visit www.FEMA.gov
Ken Herbert: John and Adam and Michael, good morning.
Ken Herbert: Maybe, John, looking at the growth you're seeing within your end markets, within aviation, how much for the industry do you think distribution is taking share as a part of overall parts sales into the aftermarket?
Speaker Change: Yeah, I think it's a great question. I think, you know, on a personal level, I think I've shared with you a number of times, Ken, I think the market's growing a little slower on the distribution side than, you know, what you see in totality. I think many of us...
Ken Herbert: have been gaining share over the last number of years and we're starting to realize those gains. So I think that on the commercial side, you're really looking at kind of mid to high single digits and I think on the business and general aviation side, it's like mid single digits in terms of where I think the market is and then the rest is us outperforming that market with share gains and kind of share wallet expansion and the like with our existing OEMs and our existing product lines.
Speaker Change: Okay, that's helpful. And as we look into 2025, can appreciate the commentary.
Speaker Change: on the top line.
Speaker Change: Maybe without getting specifics in terms of margin expectations, maybe you can just walk through a couple of the maybe moving pieces as we think about aviation segment margins next year and how they could look compared to 24.
Speaker Change: Yeah, I think we have some work to do internally on how to present it because we obviously have a $200 million business coming on board in the fourth quarter that's at a lower margin percentage. So how we kind of share both the impact of TCI and Kells from next year. So to give investors and yourselves confidence that our kind of core business and integrated assets that that margin is kind of stabilized, let's say 16 plus, and then you're going to see an impact on that.
Speaker Change: you know.
Ken Herbert: DCI and Kjellstrom until we start integrating. We will start integrating pretty quickly, but we need to find the right way to demonstrate that because you've got some puts and takes. But I'd say if you do the math that way, you know, you can get a feel of the core organic business and the biggest driver of margin improvement there is going to be the Honeywell Fuel Control Program and that implementation.
Ken Herbert: And then, you know, you've got those other two businesses, which is on a margin percentage is slightly dilutive, but there's integration and other activities that will happen throughout 25 to put them in a stronger position as we get into 20 at the end of the year.
Speaker Change: Okay, very helpful. So, obviously, as we look at the core organic business, aside from the fuel control or the, you know, sort of the licensing EBITDA contribution next year, we should expect just the base MRO and distribution business to see margin expansion off 16, or I mean, sorry, off the 24 levels.
Speaker Change: Right, that's where they look at it. I would say, you know, based on what we said, Ken, going back to November of 2023, on our guidance that we provided...
Speaker Change: The initial increase in 2025 over 2024 was related to the implementation of the fuel control program. So, we've been able to take some of those benefits up front in 2025, but we see incremental benefits in 2025 as well as we fully build out those capabilities and burn off that higher cost inventory.
Ken Herbert: Okay, perfect. Thanks, Michael. Thanks, John and Adam.
Speaker Change: Thanks. Thanks. OK.
Speaker Change: The next question comes from Michael Ciaramoli from Truist. Please go ahead.
Michael Ciaramoli: Hey, good morning guys. Nice results. Thanks for taking the question.
Michael Ciaramoli: Maybe just to stay on this topic of kind of market share and growth. I mean, are you seeing or taking shares specifically or seeing opportunities from Boeing Global Services? And then I guess.
Speaker Change: You know, on the MRO side too, I mean, it seems like there's a real shortage of capacity. It seems like, you know, we've got some established players adding new capacity. Does that, do either of those dynamics have any impact on sort of your growth on a go-forward basis?
Speaker Change: Yeah, I mean, Mike, you love to ask the competitive questions, so I was thinking about how much I want to share, you know, publicly, but I would say there's three real areas of growth for us. Number one is, you know, we're very OEM-centric in what we do, and as our model is starting to resonate with OEMs.
Speaker Change: The OEMs are coming to us and we're having strategic conversations of, hey, here's work I'm doing today that I don't want to do, or I shouldn't be doing, or I need to find another solution for. And we're winning a lot of work that way.
Speaker Change: So, that's work that's not competitively been in the market. My competition is not running after that work and it's not kind of in the market today. It's being done by the OEM. The second group is definitely traditional share gain and you are thinking of the largest player out there specifically in terms of distribution and I think, you know, many of us in the market are looking at opportunities to gain share against that large player. And you are correct on the third, you know, we saw really strong growth in our MRO businesses in the third quarter including TCI and it's really a function of creating capacity.
Speaker Change: So, we're really doing a lot of capacity planning, you know, looking at different shifts, looking at how we manage our shop floor, because opening up that capacity in and of itself is what's driving the revenue. Turnaround time continues to be, you know, the most significant kind of differentiator in the market in terms of MRO ability to win new business.
Speaker Change: Got it, that's helpful. And what about pricing? Is there any pricing contribution to kind of your growth or above market growth? Are you able to get price? I mean obviously yes, turn times and able to win business, but are you seeing price across, you know, distribution in tomorrow?
Speaker Change: Yes, we look at price and volume when we look at growth, so price always has an element to volume. I would say, since I've been at the business, I kind of joined during that COVID period and that post-COVID period where you saw price have a bigger impact than we saw kind of in the preceding cycle. I would say it's moderating a bit. It's still an element of the total growth rate, but it's definitely moderating a bit
Speaker Change: you know, two years ago.
Speaker Change: Perfect. Thanks, guys. I'll jump back in the queue here.
Speaker Change: The next question comes from Jeff Van Sinderen from B. Riley Securities. Please go ahead.
Speaker Change: Hey, good morning everyone. I just wanted to follow up a little bit on the fuel control business.
Speaker Change: If you could just remind us what's driving the, I guess what's driving that that segment to run ahead of plan and then based on the current run rate of that fuel control business, when do you expect to burn off the high-cost inventory?
Speaker Change: Yeah, I mean, you just answered the question. It's all about burning off the inventory.
Speaker Change: So, you know, it's the model in and of itself is pretty tight and clean and it's all about how fast the supply chain can, you know, the new inventory comes in at the new cost and how fast we can sell either full units or partial units or kits or the like at the old cost. So that's, you've got exactly the model of what's going to determine what's there.
Speaker Change: in terms of improvement. So it's a combination. The market is very robust. So it's really a supply chain that's driving it because sometimes even though I've got 80% of the parts, I can't ship a full unit until I have 100% of the parts. So getting supply chain really shored up and getting the product that we need in in totality so I can, you know, put together full units, that's what's going to drive the burndown of the legacy inventory. So we had a forecast going through 2025. We're slightly ahead of plan. I wouldn't say that I expect anything to dramatically shift from here.
Speaker Change: Yeah, I mean we don't break out margin by sector. I can tell you that the margins, you know, that there's this portfolio, things in our portfolio that are all different margins for different reasons.
Speaker Change: We have seen continued total, you know, if you look at the business on a total EBITDA basis, or kind of a, you know, a segment P&L within, you know, the aviation MRO businesses, you know, we have a general manager of each shop, and we are seeing, you know, kind of,
Speaker Change: I'd say income margins improve, and it's a combination of factors. It's running supply chain better, it's more efficiency in the shop, you know, it's managing labor better. It's a combination of factors, but we are continuing to see, you know, consistent improvement as part of our kind of continuous improvement philosophy in those shops. And so I'd say it wouldn't be a one and done on any of that, it's a number of factors.
Speaker Change: John Cuomo, John Cuomo, Michael
Speaker Change: Okay, great.
Speaker Change: That's helpful. And then I guess just any other caller, I realize it's still early and you haven't even closed the acquisition yet, but just thinking about 2025 with Kjellström, realize you still have integration to go, but I guess any thoughts on how the integration might proceed in 2025, kind of when you get through that, what the cadence might look like?
Speaker Change: Yeah, I mean they run their business in a few different business segments.
Speaker Change: So, you know, our next earnings call is about the end of February, early March. We'll be in a position then to kind of walk you through the integration plan and kind of what to expect. So we plan to look at it in integrating it, you know, kind of business segment by business segment. But I would tell you that at this point, it'll probably go ahead of TCI. TCI, you know, our work there is more about adding capacity in the shop floor and it needs less kind of integration support. And we'll probably, you know, work on the Kelstrom integration piece first because it'll drive some sales and other types of synergies that we want to realize as soon as possible. So we're actually meeting with the team today to kind of finalize how we feel about 25 and, you know, put ourselves
Speaker Change: all in a position to hit the ground running January 1.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Okay, great. Thanks for taking my questions.
Speaker Change: Thanks, Jeff.
Speaker Change: Again, if you have a question, please press star then 1. And the next question comes from Noah Levitz from William Blair. Please go ahead.
Noah Levitz: John, Adam, and Michael, good morning. This is Noah, I'm for Lilly DePalma. Thanks for taking my questions.
Speaker Change: Hey Noah, how are you?
Noah Levitz: Doing well, thank you. To start off, you've acquired now both Turbine and Keltrim, which serve the commercial engine aftermarket. Can you talk a little bit about...
Noah Levitz: what you're finding particularly attractive about the commercial engine aftermarket space as you're expanding beyond the business and general aviation side, and the $4 million in synergies, is that expected to be more cost synergies, or will there be some revenue contribution as well? Thanks.
Speaker Change: Yeah, I mean I think, first I'll talk about the market. You know, and if you look at, you know, a lot of public companies out there like Standard Aero or Eptide, there's a lot of, you know, great businesses that are, I wouldn't say are competitive to us.
Speaker Change: I think it's a combination of factors of why that market is really robust, you know, in terms of aircraft that are aging, that are going through more unplanned repairs than anticipated because of, you know, build rate declines at the OEMs, coupled with some new engine types that are coming to market where the OEMs are now focused on those engines. So there's more work on legacy engines that are going to, you know, that are going to hit third parties like ourselves. I think those are the two reasons that we see the market very, very attractive. You know, the other thing, it's a complex market and it's one that distribution and MRO really serve and add real value in the space.
Speaker Change: With regard to synergies, I mean, they come from a variety of places. I would tell you that, you know, we have a strong core competency in terms of integration and, you know, we feel very confident, and I would say we publicly shared a number, in our ability to drive that to closure over the next, you know, 12 to 15 months.
Speaker Change: Got it. Thank you. And then a follow-up. Now that you've done the secondary and given yourself a little bit more wiggle room with leverage, can you talk about future M&A? You've been highly inquisitive this year in particular.
Speaker Change: the new commercial engine aftermarket that you've
Speaker Change: kind of focused on with the past two.
Speaker Change: It's a great question. We've been acquisitive and will continue to be acquisitive. I would say it's not a necessity to our story. This is not a roll-up story. We're adding capabilities, customers, products, and the like. So the right assets that are out there, we obviously want to be a player in that space.
Speaker Change: because a lot of assets didn't trade during COVID as they waited for the market to recover. There happens to be a decent number of assets that hit the market this year. And we found the two that really kind of matched our strategic portfolio the best and thought that was best to execute on those two. The difference in what others do versus what we do is we fully integrate our businesses.
Speaker Change: So, when you ask me today, 2025 is going to be about integrating the businesses, optimizing the businesses, getting our platform and our foundation ready for that next phase of both organic and inorganic growth.
Speaker Change: That said, we always keep a pipeline of M&A. Is there anything absolutely pending? No. But if the right transaction comes along, we look at it. But I would say right now our near-term focus is...
Speaker Change: closing on Kjellstrom. Again, as I mentioned a minute ago, probably Kjellstrom will be integrated first. Getting TCI, you know, expand that shop floor and get them ready. The growth and the opportunities are plentiful out there and really positioning our business for the next phase of organic growth as well. If tuck-in M&A happens, great. If it doesn't happen, we'll keep our balance sheet nice and clean and continue to hopefully generate stronger free cash flow in the back end of this year and into next year, so we can make the balance sheet look even stronger and focus on execution.
Speaker Change: Great, thank you. That's all from me.
Speaker Change: The next question comes from Josh Sullivan from Benchmark. Please go ahead.
Josh Sullivan: Good morning.
Speaker Change: Thank you.
Speaker Change: Good morning, John.
Josh Sullivan: What's your sense of the overall aftermarket cycle at this point? You know, the conversation around aftermarket versus OEM momentum is picking up. You know, Boeing resolving the strike.
Speaker Change: supply chain slowly improving, but maybe not fast enough. What's your view of the aftermarket, both from demand side as well as supply side, as you guys are exposed at this point?
Speaker Change: Yeah, I mean I continue to think the market is a little softer than others like meaning, you know I think the market naturally it's kind of, you know, on the commercial side closer to 10% than it is kind of above 10% And I think that because of the combination of factors. I think there's capacity constraints. I don't think supply chain is really that that thick
Speaker Change: It's like a whack-a-mole. Once one thing gets fixed, another issue pops up in the market. I feel that there's an abundance of factors out there.
Speaker Change: If you look at 25 and even into 26, I don't believe you're going to see build rates back to kind of historic levels, and you're going to see kind of slow and steady growth in build rates for new aircraft, so I do believe we've got, you know, two more years of nice, strong organic growth into the cycle.
Speaker Change: There may be one on the fleet segment. Is the post office operating system any different now with this new ERP in place as it relates to your business historically?
Speaker Change: No, I would say from the new FMIS system, our position with them is as strong as it has been. We are very much embedded within their supply chain. So it's a matter of just working with them.
Speaker Change: working through the kinks and the processes.
Speaker Change: The system still is not, I would say, the most efficient. So we're not seeing, even at the sites that went live a year ago, we're not seeing those levels.
Speaker Change: we're not seeing kind of pre-systemic
Speaker Change: you know, levels of what it was before the system.
Speaker Change: transition happened. So it's a slow, gradual kind of increase as we get into the next year. The big question is where does it level off because the fleet transition kind of happened? It's probably more like 85-ish percent of kind of where it was at the peak.
Speaker Change: Great. Thank you for the time.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: 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: Thank you, everybody, for making time for us today. I look forward to a strong finish to the year and speaking with you early in 2025. Have a great day.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: The End
Speaker Change: [music]