Q1 2025 VSE Corp Earnings Call
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Speaker Change: Good day and welcome to the VSE Corporation First Quarter 2025 Results Conference call. All participants will be in the listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.
Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to Michael Perlman. Please go ahead.
Speaker Change: Thank you. Welcome to VSE Corporation's first quarter 2025 results conference call. We will begin with remarks from John Cuomo, President and CEO , followed by a financial update from Adam Cohn, our Chief Financial Officer.
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.
Speaker Change: Actual results may differ significantly from those projected in today's forward-looking statements due to their various risks and uncertainties, including those described in her periodic reports filed with the SEC.
Speaker Change: Except as required by law, we undertake no obligation to update our forward-looking statements.
Speaker Change: Beginning in the first quarter of 2025, our results exclude the Fleet segment, which was moved to discontinued operations following the announced sale of that business. At the conclusion of our prepared remarks, we'll open up the line for questions. With that, I'd like to turn the call over to John .
John Cuomo: Good morning. Thank you for joining us today for VSE's first quarter 2025 conference call.
This was truly an exceptional quarter for VSE.
John Cuomo: We delivered record revenue and record profitability, a clear testament to the strength of our businesses, the resilience of our markets, the dedication of our teams, and the effectiveness of our ongoing transformation strategy.
John Cuomo: At the same time, we made significant strides in advancing our multi-year strategic transformation, positioning VSE as a more focused, integrated, and margin- and growth-oriented platform.
John Cuomo: Let's begin on slide three and discuss recent business updates and development. First, on April 1st, we completed the sale of our fleet segment.
John Cuomo: This divestiture marks the official close of a significant chapter in our multi-year strategic transformation. One that positions VSE as a focused, pure-play provider as aviation aftermarket parts and services.
John Cuomo: The divestiture represents the culmination of deliberate strategic actions, including multiple business exits, all aimed at repositioning the company for the future.
John Cuomo: With this chapter complete, we are now fully focused on pursuing higher growth, higher margin opportunities in the aviation aftermarket, creating a long-term value for our customers, the plier partners, employees and shareholders.
John Cuomo: Second, we announce the acquisition of Turban Weld Industries as specialized MRO service provider of complex engine components for business and general aviation platforms.
John Cuomo: This acquisition marks another important step in the strategic expansion of our Aviation Services business. Further positioning VSE as a comprehensive solution provider to our OEM and aftermarket partners.
John Cuomo: Durban Weld is an outstanding business and well aligned with VSE's core strategy in the following areas.
John Cuomo: Sherburn Weld enhances VSE's position in the business and general aviation engine aftermarket on two of the most widely used engine platforms, the PW100 and the PT6.
John Cuomo: Next, Turban Weld Strengthens VSE's Collaboration with OEM Partners by developing numerous proprietary repair specifications, as the sole source provider for many flight critical repairs.
John Cuomo: And finally, VSE plans to invest in Turbanwell's operational capacity to address market demand and accelerated growth opportunities.
John Cuomo: Turglewell generated approximately $20 million in revenue over the last 12 months, and a purchase price was approximately $50 million.
John Cuomo: Third, we signed a new five-year authorized service center agreement with Eden to perform MRO Services on Hydraulic Pump Products.
John Cuomo: Big Marks, Eden's first ever authorized service center collaboration and represent the significant enhancement to their aftermarket repair capabilities and customer support for these products.
John Cuomo: Disagreement reinforces VSE's OEM partner value proposition, supporting OEMs in servicing their end user customers while also helping them monetize and protect their aftermarket business.
John Cuomo: And finally, last week, we entered into a new $700 million credit facility, including a five-year, $300 million $400 million revolving credit facility to replace all existing credit facilities.
John Cuomo: Adam will discuss this in more detail, but this refinancing positions VSE to execute on our growth strategies with increased flexibility at a lower cost of capital.
John Cuomo: Over the past 12 months, we've acquired two market leading commercial aerospace engine focused after market businesses, both of which are performing a head of plan.
John Cuomo: Let's start with TCI. April marked the one year anniversary of TCI joining the VSE family. The business continues to exceed expectations, driven by strong input volumes and a robust backlog of work from our OEM engine partners.
John Cuomo: To support this growing demand and to position TCI for future expansion, we're investing an additional component repair capacity aligned with OEM requirements.
Turning out a Celstrum.
John Cuomo: Integration efforts are well underway and progressing in line with our expectations. This reinforces our confidence in this transaction strategic rationale and in our ability to create meaningful value as we integrate the businesses.
John Cuomo: We were made on track to achieve the $4 million in cost synergies we previously identified and are targeting near-term margins of 15% or greater as we optimize specific parts of the health from Portfolio.
Now moving on to program at one of the stations.
John Cuomo: The Transition of the Honeywell Fuel Control Program is progressing with full operational capability and production expected within the next 12 months.
John Cuomo: We made strong progress in building the necessary infrastructure, systems, and staffing to support this transition.
John Cuomo: The expected financial contribution from this program is fully reflected in our 2025 guidance.
John Cuomo: Additionally, as noted earlier, we recently launched the first-ever authorizer pair station for Eden in the Americas. This is a natural extension of our long-standing distribution partnership supporting Eden's fuel pumps for business and general aviation.
John Cuomo: This new agreement expands our capabilities into hydraulic repairs and overhaul for commercial aviation customers.
And finally, the Fleet Segment Divestiture.
John Cuomo: We are currently operating under transition services agreement to ensure a seamless handoff. In parallel, we are conducting a comprehensive review of our corporate and business unit cost structure, ensuring we remain lean and efficient to support our goals forward, single segment aviation strategy.
John Cuomo: I will now transition and provide an update on the current market environment for our business.
John Cuomo: Despite broader global market uncertainties, particularly those stemming from evolving terror policies. Demand remains solid.
John Cuomo: This is supported by a continued strength in global passenger traffic trends.
John Cuomo: We remain cautiously optimistic that aircraft utilization will hold strong throughout the remainder of the year, which should continue to support robust aftermarket demand outlook.
John Cuomo: That said, our team is monitoring the situation closely and remains prepared to act as needed.
John Cuomo: based on current market trends, customer feedback, and our backlog and bookings. We are reaffirming our full year revenue guidance.
John Cuomo: For 2025, we continue to expect commercial aftermarket growth in a range of 8% to 10%
John Cuomo: Likewise, for our products and services supporting the business and general aviation customers, we maintain our projected growth rate of 5% to 6%.
John Cuomo: Now turning specifically to Tariff. We've been proactive in working closely with our OEM partners to mitigate potential impacts, both for our business and our end user customers. Here's how.
John Cuomo: First, our strong inventory position provides us flexibility in how and when we make purchases.
John Cuomo: Second, our Global Distribution Footprint enables us to optimize and adjust logistic flows where needed, and we're actively coordinating with supplier partners on this front.
John Cuomo: Third, we're leveraging the USMCA exemptions to support trade flows from Mexico and Canada based products and customers. And finally, we're appropriate, we will pass through tariff-related tariff charges.
John Cuomo: We believe our diversified market exposure, including a balanced present in both commercial and business aviation, our OEM
John Cuomo: To be clear, there's work to do, processes to implement and undertake, and uncertainty does exist for all of us until we understand the final trade agreements.
John Cuomo: However, at this time, we do not expect any tariff related impacts that would require us to revise our previously issued 2025 revenue or margin guidance nor are organic growth expectations for either of our end user markets.
John Cuomo: Let's now move to slides 5 to discuss our financial performance.
John Cuomo: In the first quarter of 2025, our consolidated revenues increased 58% to 256 million, driven by strong financial performance from our core aviation distribution and MRO businesses, and contributions from both the TCI and Calstrum acquisitions.
John Cuomo: Arkansas rated adjusted EBITDA increased 60% to $40 million in the quarter, or 15.8% of revenue.
John Cuomo: These results were driven by strong and market activity, solid execution on distribution program awards, and an increase in MRO activity, solid performance from ROEM license values tax-free program, and contributions from recent acquisitions.
John Cuomo: Adjusted net income of $16 million and adjusted net income per diluted share of 78 cents increased to 125% and 73% respectively.
John Cuomo: Achieving pro forma adjusted net leverage ratio of 2.2 times following the sale of the fleet business.
John Cuomo: which provides us with significant financial flexibility. I will now turn the call over to Adam to discuss the details of our financial performance.
Thank you, John .
Speaker Change: Let's turn to slide six of the conference call materials, where I will provide an overview of our first quarter consolidated financial performance. As a reminder, a consolidated results include the plea segment which was moved to discontinued operations following the announced sale of the business.
John Cuomo: VSE generated $256 million of revenue in the quarter, an increase of 58% over the same period in the prior year.
John Cuomo: Adjusted EBITDA increased 60% to $40 million, compared to the first quarter of 2024. Beginning in the first quarter of 2025 and for future and comparative prior year periods. Consolidated and segment level adjustment EBITDA will exclude stock based compensation.
John Cuomo: Adjusted EBITDA margin was 15.8% in the quarter, and approximate 30 basis point improvement over the prior year period
John Cuomo: Adjusted net income was $16 million, and adjusted deluded earnings per share with 78 cents, an increase of 125 and 73% respectively over the prior year period.
John Cuomo: Now turn to slide seven, where I will review our aviation segment's record first quarter performance.
John Cuomo: VSE Aviation generate $256 million of revenue in the quarter and increase of 58% over the prior year period.
John Cuomo: More specifically, distribution revenue increased 49% in the period, driven by the ramp of new OEM program awards, strong operational execution and market share growth, product line expansion, and contributions from the Kellstrom acquisition.
John Cuomo: MRA revenue increased 76% in the quarter, driven by the expansion of new repair capabilities, share gains in the commercial and business and general aviation markets.
John Cuomo: Cron, and Market Demand to port from our new OEM authorized avionics program and contributions from the TCI acquisition.
John Cuomo: Excluding the impact of all recent acquisitions, Organic Aviation Segment Revenue increased by approximately 12% in the first quarter as compared to the prior year period.
John Cuomo: Aviation Adjusted EBITDA increased by 52% in the quarter to a record $43 million or $16.9% of revenue.
John Cuomo: This increase in adjusted EBITDA with driven by strong execution and distribution programs increased throughput at MRO facilities, improved pricing and product mix, solid performance from our OEM license manufacturing program, and contributions from recent acquisitions.
John Cuomo: Now, let's turn to slide a of our presentation materials to review our aviation segment guidance for the four year 2025. It is important to note that our guidance does not assume further tariff escalation or global recession. Thank you.
John Cuomo: We are reaffirming our full year 2025 aviation segment revenue growth guidance range, up 35 to 40 percent. Supporting this growth are full year revenue contributions of approximately 26-28 percent from both the TCI and tell us from acquisitions.
Speaker Change: In addition, we are expecting to outperform the market growth assumptions John discussed earlier with high single to low double digit organic growth for the whole year supported by market share gains distribution program growth and repair capability expansion.
Speaker Change: We are also reaffirming our 2025 full-year aviation-adjusted EBITDA Margin Guidance.
Speaker Change: Range of 15.5 to 16.5%, and increasing the range to 16 to 17% to include an approximate 50 basis point positive adjustment associated with the stock based compensation addback that I referenced earlier.
Speaker Change: We continue to expect TCI and Telstrom to have a near-term margin dilutive impact on aviation's margins.
Offset by an Improvement in Core Legacy Aviation Margins
Speaker Change: from by operating leverage program optimization and MRO utilization. In addition, we expect to begin realizing integration synergies in the second half of 2025. Energy benefits will continue into 2026 into all integration activities complete.
Speaker Change: In addition to our formal guidance commentary, I want to provide several clarifying financial updates related to the recent divestiture of our plea segment.
Speaker Change: Our effective tax rate is expected to be approximately 25% for the remaining three quarters of 2025. Depreciation and amortization in total are projected to be approximately $38 to $40 million for the whole year, inclusive of the Turban Wellback position.
Speaker Change: Stock-based Compensation, which beginning in Q1 is excluded from adjusted EBITDA, is expected to be approximately $3 million per quarter for their remainder of the year, but relatively evenly between aviation and corporate.
Speaker Change: And finally, unallocated corporate costs, which include incremental stranded costs associated with the fleet of ester are anticipated to total approximately $20 million for the full year or about $14 to $15 million excluding stock based compensation. Thank you.
Speaker Change: Let's move on to slide 9 to discuss our recent debt refinancing.
Speaker Change: Last week, we entered into a new $700 million credit facility, including a $300 million term loan A, and a $400 million volume credit facility, both maturing in May 2030. These facilities replaced the company's previous debt facilities, which were scheduled to mature in October 2026.
Speaker Change: Following under each of the new facilities will bear interest at the secured overnight financing rate plus 175 basis points per annum representing a 60 basis point improvement compared to the terms of the prior facilities.
Speaker Change: We are very pleased to have secured more favorable terms including a lower industry and expanded borrowing capacity which will reduce our cost of capital and enhance our liquidity.
Speaker Change: Following the recent debt refinancing, the sale of the plea business, and the acquisition of Turban Weld, we expect interest expense to be a approximately 26 to $28 million for the full year for approximately $5 million lower than our previous guidance.
Speaker Change: Turning to slide 10 to review our balance sheet. At the end of the first quarter our total net outstanding was $459 million and cash and availability under a prior $350 million Revolving for credit facility was $158 million.
Speaker Change: During the first quarter as planned, we used $49.5 million, a free cash flow, driven by strategic inventory investments to support current customer programs.
Speaker Change: This was an improvement of approximately $37 million over Q1 of last year. We are expecting to generate positive cash flow over the balance of the year.
Speaker Change: are adjusted in that leverage ratio. Pro-form up for the sale of our fleet business prove to 2.2 times in the first quarter. Our long-term target for leverage remains in a 3 to 3.25 times range.
With that, I will turn it up back over to John .
John Cuomo: Thank you, Adam. I'd like to include our prepared remarks by summarizing our 2025 priorities.
John Cuomo: First, following the sale of our fleet business, we have initiated a comprehensive review of our corporate structure and cost space to better align with our aviation focus strategy.
John Cuomo: Second, we are expanding repair capabilities and increasing operational capacity to me growing demand and accelerate organic growth across our MRO centers of excellence.
John Cuomo: Third, we are prioritizing the integrations of TCI and Calstrom to drive operational efficiencies and enhance customer value.
John Cuomo: Integration Planning for Turban Weld is already underway. To lead these efforts, we've appointed a senior internal leader to oversee all integration activities and synergy capture activities across the organization.
John Cuomo: 4th, we remain committed to capturing synergies from recent acquisitions to support margin expansion throughout this year and into 2026
John Cuomo: Next, we are advancing the full transition of our OEM license manufacturing capabilities from Honeywell to VSE.
John Cuomo: And finally, we continue to build our organic pipeline. Strengthening OEM supplier partnerships and expanding our market reach.
John Cuomo: Thank you to our shareholders, customers and employees for your continued support and confidence in our team. We remain focused on delivering long-term value and are excited about the road ahead.
Speaker Change: Operator, we are now ready to the question and answer portion of our call.
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then one on your telephone keypad.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster
Speaker Change: The first question comes from Ken Herbert with RBC Capital Markets. Please go ahead.
Just a good morning, John Adam and Michael.
Morning, kid. Morning. Morning.
Jeffrey Sinderen
Speaker Change: I just wanted to first ask on the margins in the first quarter, good performance, looks like you're calling out more of the synergy capture in the second half of the year. How should we think about the conservatism in the margin outlook and maybe opportunities there as volume growth.
Speaker Change: Sort of holds steady around this, you know, give or take, low double digit high single range through the year. How do we think about the margin opportunity in the back after the year in particular. [inaudible]
Speaker Change: Yeah, thanks for the question, Ken. I would say that Q1 typically is our strongest
Margin Period of the Year.
Speaker Change: You can see that phenomenon if you look back at last year as well. And a part of that is because we're selling, you know, lower-cost inventory that we're purchasing in the prior year period, in Q4 and selling it through. So you will see very strong margins in Q1.
Speaker Change: and we also had, you know, pretty positive mix in the quarter as well as some high margin sales, particularly in distribution.
Speaker Change: So it was a very strong period, and the acquisitions, particularly Kelstrom and TCI are performing well, as John mentioned.
Speaker Change: So you know Q1 strong margins and you know we will continue to see benefits from integration synergies as we go through the course of the year incremental benefits.
Speaker Change: and it's early in the year and we feel good about our guidance obviously a very strong margin performance and we'll reassess as we go through the course of the year.
Speaker Change: That's great, thanks Adam. And just as I think about the the end market growth you outlined for business just in commercial transport.
Speaker Change: If there is, you know, theoretically a slowdown or we see more of a pronounced slowdown in airline capacity or a broader economic slowdown macro pressure.
Speaker Change: Where do you see sensitivity in business jets relative to commercial transport and do you feel like one market might be better positioned relative to the other as you think about sensitivity through this year to some of the macro pressures.
Speaker Change: Kenneth, it's a great question. You know, as we dive in inside of each of those markets, I think that, you know, we're obviously very...
Speaker Change: Engine Heavy on both businesses, both markets, we see less pressure there because of the of the backlog and
Speaker Change: You know, and we believe that that backlog and a number of engine overhauls will continue regardless of what happens in the market because of the, you know, of the backlog there. I think that you know, we're looking more on the. [inaudible]
Speaker Change: Maybe Adionic side of the house or some of the interiors or other types of repairs that you may see them either that where when airline can make a decision to kind of delay or extend something there so I think that
Speaker Change: True Repair Perspective, probably a little bit more on those commercial non-engine related work.
Speaker Change: I think the question just is does flight hours hold up on both sides of the business? Today, we feel good about our backlog. You know we built a little bit of conservatism. [inaudible]
Speaker Change: compared to the market into our plan to the year, and we feel that conservatism is now more realism, so I think that we feel good about our guidance.
Speaker Change: Grace, thanks, John . Congratulations on the quarter and obviously the massive restructuring. I'll pass it back there.
Yes.
Speaker Change: Our next question comes from Jeff Van Sinderen with B Riley Securities. Please go ahead.
Good morning. Good morning everyone and congratulations on the strong metrics.
Speaker Change: Just wanted to touch a little bit more on the acceleration of integration of your recent acquisitions.
Speaker Change: I just wonder if there's any more color you can give us on some of the things you're doing there, and also could the timing of completion of integration happen earlier than previously expected. Thank you very much.
Speaker Change: Yeah, I think it's a good question. I'd say that there's a couple of things that we're learning. We're learning where there's value and shifting some of the integrations and
Speaker Change: You know, where we can drive Synergy's faster, organic growth on a combined basis faster.
Speaker Change: or we're enhancing some type of customer supplier benefit. So we're accelerating those areas. I think it's still when you look at, you know, TCI.
Speaker Change: The Kels from Totality, The Business, and now the new acquisition. You're still looking at, I'd say, the earliest kind of bit next year to get all of them done, which is about 18 months or so, which is about what we've shared. [inaudible]
Speaker Change: I don't see our ability to accelerate that further. I think it's just shifting it which can help drive better benefits.
Shifting priorities.
Speaker Change: Okay, fair enough. And then I know you've gotten onto some new programs, some new business of this one. Just wondering, um.
Speaker Change: which one of those or I guess how you would rank those or which are the most meaningful in terms of contribution and then kind of over what time frame should we expect to see a little bit of impact on the P and L from those.
Speaker Change: Yeah, I'd say that if you look at the guidance that we've put out for the year, that pretty much contains the organic growth kind of scaling of what we expect for 2025, you know, specifically the eating program that'll scale this year and we'll give a little bit more color into 2026.
Speaker Change: Okay, there are enough. Thanks very much. I'll take the rest off the line.
Thanks, appreciate the time.
Speaker Change: Our next question comes from Michael Ciarmoli with Truist. Please go ahead.
Michael Ciaramoli: Hey, good morning, guys. Thanks for taking the questions. Nice result.
Bum.
Speaker Change: John , just as you're looking at the business and trying to evaluate, you know, demand trends, what's the best metric to gauge the health? And obviously you've got the business general aviation side and transport. I mean, are you looking more, your reference traffic, but is it more this jet cycles? Is it more? Yes, it's more.
Speaker Change: Takeoffs and Landings, what's the better proxy? And if you do start or I guess drawn on your experience historically, from the time we start to see capacity cuts, how long does that typically take to flow through to impact demand? Yeah, that's right.
Speaker Change: Yeah, I'd say slower, let's start with the same question first, I'd say we'll see it slower on the side than you will on kind of the component.
Speaker Change: I think that actually around the cycle, I think this is slightly different. What happened during COVID when everybody just paused.
Speaker Change: Rose, it took longer to get the cycle up and running.
Speaker Change: and there's a lot of awareness in the market of that. So I don't expect to see kind of a holistic pullback in terms of overtraction of work.
Speaker Change: because people know it's not that easy to turn this pick it back on once we turn it off.
So I do expect to see some caution. [inaudible]
Speaker Change: on some runs, but a little bit more, kind of crossing tees and dotting eyes and watching depends, but I don't understand, you know, a wholesale kind of pull back. I think with regard to data, it's a great question. I think, you know, we, the traffic data is.
Speaker Change: The strongest data, I think at the end of the side, it's continuing to talk to the overall cops whether it's third parties for the OEM and understand.
Speaker Change: on literally a granular level, how full their shops are, do they plan to stay full, and do they, are they seeing any kind of ships, it were kind of full back in demand on their front, and then really, which is a near-term friend is booking a backlog turn. [inaudible]
So, got it.
Speaker Change: And we've seen a few blitz here and there, and then as soon as we get nervous, they've got to settle out of it. But you have some of the little bit of hours came out, a little quiet cut, kind of speaks, and then it's come back. So I'd say we haven't seen anything alarm yet, but we are keenly watching.
Speaker Change: Okay, okay, that's fair. And then just last one maybe as it relates to the cash I heard expect positive for the rest of the year, but then you also talked about I guess making.
Speaker Change: Some investments, specifically at recently acquired Turbine Weld and then just adding more capacity, including TCI, maybe any color there on those required investments and
Adam Cohn: Yeah, so like in terms of the quarter, Q1 usually is our larger task usage period. If you look back at Q1 last year, I think we use about $37 million more than what we use this past quarter.
Adam Cohn: And a big part of that is just the inventory purchases that we're making at the end of the year and associated payables in Q1. I think there were a few other aspects in Q1 of this year. We talked about having the old headquarters lease buyout so that impacted us by around $6 million. I think it's $1 million.
Adam Cohn: Arcaslo was presented in Solidarity Q1, and there was a usage related to the Wheeler Fleet segment in that period, and we're all going to talk about building it for a transition to Honeywell's progress through 10th year, so you had a couple of those elements hitting...
Adam Cohn: In the first quarter, we also made a couple of strategic inventory purchases ahead of the tariff noise as well [inaudible]
Adam Cohn: So that ends the meant back, but we move to the ear. Here's the ear.
Adam Cohn: and we start lapsing the inventory vise. You'll start to see working capital benefit us through the course of the year. And so, you know, getting to the second half of this year, we expect to take a strong free cash flow. You saw that in Q4 of last year as well. [inaudible]
Adam Cohn: and we are, we do have, you know, we're more CapEx heavy through the last three quarters versus two one, but that's all embedded in the kind of things that I'm talking about.
Speaker Change: Got it. Perfect. Thanks, guys. I'll turn it back in the queue.
Thanks.
Speaker Change: Our next question comes from Sheila Kahyaoglu with Jeffries, please go ahead.
Speaker Change: Thank you for joining us for this webinar. We look forward to hearing from you.
and Michael Perlman. Thank you.
Thank you.
Speaker Change: Sheila sorry to interrupt, but you are not audible at the moment.
Dr.
Thank you.
Thank you.
Thank you for your time.
Speaker Change: The operator, let's move to the next analyst and we'll see if Sheila can get back into the queue.
Speaker Change: Certainly, our next question comes from Lewis DiPalma with William Blair, please go ahead.
John , Adam, and Michael. Good morning.
Speaker Change: Morning. John , can you discuss the origin of the Eaton hydraulics deal? How did it come about? And is there opportunity to do more with Eaton? Is this just potentially a phase one?
Thank you.
Speaker Change: Yeah, thanks to the question, Louis. You know, this is exactly aligned with what we've discussed on the Zoe and centric value proposition where rather than bidding on competitive deals that are in the market against most of our
Speaker Change: competitors and being in a race to the bottom. It's sitting with OEMs talking about where they have problems in the market.
Speaker Change: coming up with solutions, so looking at kind of legacy platforms where
Speaker Change: You know, you have an OEM who maybe has lost a significant amount of share.
Speaker Change: to unauthorized shops, MRO shops in the market, and then how do we help them capture some of that share back?
Speaker Change: You know, having that dialogue really was the impetus for the program and then the award that was eventually given to us.
Speaker Change: We look at every OEM relationship as a beginning, so we look at this as a beginning of our first.
Speaker Change: Kind of MRO relationship with them. We also have a legacy distribution relationship with them. So it's a wonderful company with query products and we look forward to you know accelerating to do to other opportunities after we get this launched. Thank you very much.
Speaker Change: Right, because haven't you been able to significantly expand with Honeywell and Pratt and Whitney Canada after your original deals with those companies?
Speaker Change: John Cuomo, Michael DiPalma,
Speaker Change: Yeah, I mean, every OEM is slightly different, but I'd say that if you look historically five years back at the business, you know, we've been able to grow share with each of the OEMs once we get embedded with one program and they can actually see the performance of our business and the differentiation of what we can do that's different from others out there in the market.
Absolutely.
Thank you.
Speaker Change: Sounds good. And another one, what has been the general progress of the Honeywell fuel control OEM solutions acquisition? And like at what stage do you think VSE would be ready to do another deal of that ilk?
Speaker Change: Yeah, I've said repeatedly and I will stick to it as 2026, we'll start looking at other opportunities.
Speaker Change: So there will be nothing in 2025 and we are accelerating very much on literally a week-by-week basis of getting engineering approvals.
Speaker Change: and the big goal is to get the design authority shifted to us where we're officially the manufacturer of record. You know, hope that's well before the end of the year.
Speaker Change: That's good. And one final one, over the past two years, and I guess this is for you, John , and Adam as well. VSE has done approximately $600 million of M&A volume across your different deals. Thank you very much.
Speaker Change: Should investors generally expect VSE to make $300 million in acquisitions per year going forward as a benchmark? Or because you're larger now, do you think that your M&A volume could be larger than that?
Speaker Change: Yeah, I mean, I love the question and I would love to tell you I've got this, you know, great model that will execute perfectly according to the model. I've got a great pipeline.
Speaker Change: Smaller deals, similar to the one that we just closed last week.
of medium sized deals. [inaudible]
Speaker Change: and then a few cute kind of transformational deals that are out there in the market.
Speaker Change: The question is, what does that mean in terms of timing and reality?
Speaker Change: It, you know, we are very, very, very disciplined. I know we've done a number of deals that it looks and the pace is real. But behind the scenes is a strong level of discipline and a number of transactions that we have acted it because they're not right for the portfolio. So,
Speaker Change: You know, it's hard because of that. It's hard to predict the timing of M&A of when deals are actually actionable and then once they're actionable, is it the right fit for us once we get under the hood of the business. So I'd say it will remain part of the model, but with a very, very disciplined eye and approach.
Thank you.
Thank you.
Sounds good. Thanks. Thanks, everyone. Thanks Lou. Thanks
Speaker Change: Thank you. Again, if you have a question, please press star then one.
Speaker Change: Our next question comes from Josh Sullivan with Benchmark. Please go ahead.
Josh Sullivan: Good morning. Good morning. Good morning. Just done that. The component repair to pass to you with TCI mentioned. What's the timeline to bringing that online and then what's the potential and criminal there?
I'm sorry, the component repairer. [inaudible]
What? You missed a question.
The component repair capacity you mentioned in the repair. Oh, yeah, yeah, I mean I say it's it's
Josh Sullivan: It's in phases so we're really doing what the business is
Josh Sullivan: Going through the business together with the leaders to say, okay, these are all the capabilities we have, where do we need to go deeper and expand and improve turn time so that we can increase capacity and support the market. So some of it is equipment. Thank you very much.
Josh Sullivan: Some of it is labor, some of it is additional shifts.
Josh Sullivan: You're using the same equipment, you know, two or three times longer in a day than we're using today. So I'd say we've already started. I mean the business is up about 30% since we've owned it. And we've already started down that journey. So I'd say it's evolutionary, not kind of revolutionary. You won't just happen all at once. It'll just happen in phases.
Speaker Change: And then you mentioned that key term, you know, turn times, you know, and as you guys get deeper into, you know, the commercial engine market.
Josh Sullivan: How do you play into that conversation given all these capabilities you're bringing in and clearly a focal point for the industry is on improving turn time? How is VSEC a part of that story?
Josh Sullivan: Yeah, I mean at the end of the day it's everything in our opinion starts with the turn time first and then the cost Second and you've got to be ahead of the market in terms of turn times
Josh Sullivan: So it depends on the business, whether we're supporting the end user directly over supporting a major major engine overhaul shop for the engine overhaul shop
Josh Sullivan: We're really doing back shop work and we need to be in a position where we're faster and cheaper than they are.
Josh Sullivan: and so, so turn time and cost of repair is critical factor for us being awarded the business and us maintaining and growing that business .
Josh Sullivan: And we feel we've done a outstanding job of that and continue to have time, turn time, improvement. But I feel like we're, you know, we're at or of the head of the industry in terms of turn time's.
Josh Sullivan: and I say it's not that different with regard to the end user work, you know, being very candid since I've been at the business we've
Josh Sullivan: shifted the portfolio a bit to where we were maybe servicing very good portfolio of capabilities, but our turn times weren't good and our costs weren't good because we didn't have good cost basis on product. Thank you very much.
that we just weren't competitive. [inaudible]
Josh Sullivan: So we've narrowed the scope of our MRO shops over the last five years to places where we know our turn times are market leading, and we know that because of other efficiencies and other supply chain avenues that we pursue, we're able to offer competitive pricing as well. So that's a huge part of the model, that's how we look at it all the time. Thank you very much.
Great. Thank you for the time.
Thanks.
Speaker Change: The next question comes from Ellen Page with Jeffrey, please go ahead.
Hi guys, thank you for the questions.
Thank you. Thank you.
Speaker Change: Maybe just to start, you called out 12% organic growth for the overall aviation business, but can you help us understand the trends in emerovers' distribution and if there is any impact from timing at the U.S. emphasis within Kelstrom?
Speaker Change: Yeah, I mean, I think we've let me answer the USM question first. We've been pretty clear that, you know, USM is part of everyone's model and there's a place for it inside of our business, but it's a much more strategic place. So, you know, from a growth perspective, expect that to be always on the lower end of growth for us.
and that's pretty much where we are today. Today, we're uh...
Speaker Change: We're finding the right place for that business as we integrate it and there will be a place for it. It's just definitely on the lower row side.
Speaker Change: As we look at the two growth areas, I don't know, yeah, it was a little bit skewed towards distribution this quarter, but it's normal, that's in close in the quarter. So nothing to really take a little bit ahead. Yeah, because I mean this, I mean, I can share a little color this quarter. I think I'm our hose a little ahead. But yeah, it's not, it's not materially different one way or another.
John the Organic Group
Josh Sullivan: That's helpful. And within your integration process for year one and two, how do you think about cost versus revenue synergies for the three deals that you've done in the last 12 months?
Speaker Change: Yeah, the answer is just yes. I mean, that synergies, you know, encompassed a little bit of everything. But I'd say it also is already each acquisition brings something different with how we look at synergies. So let's talk about TCI first. That business is not a cost takeout business.
Speaker Change: That business is all about how can we help a business that's an A plus asset with an A plus team? And how do we help them expand capacity and take advantage of a growing market? So that business we've grown 30% throughout the year. As you can imagine, there's an amount of SGNA that stays flat during that period. And then there's some additional labor that comes in. So SGNA is a percentage of sales does decline, which is going to drive some additional margin in that business. And then we'll look at prices.
Speaker Change: and Product Cost Margins to assist that business as well. So there's no kind of cost out in a business like that. In other businesses, like in the calcium business, you know, there were some leaders who have left the business and know and we because we have a large organization, there's no need to replace those leaders and we had an ability to have some cost out in the first and into the second quarter to drive some synergies up front. So each deal will kind of look different. I'd say Turban Weld will look more like TCI. It's a very similar business, just supporting business in general aviation. OEM.
Speaker Change: and very similarly, it's a capacity constraint market where all we need to do is help them again give them, you know, an aperture for growth. So each asset kind of looks different on our synergy plans.
Great, thanks, I'll leave it there.
Great. Thank you.
Thank you.
This concludes our question and answer session.
Speaker Change: I would like to turn the conference back over to John Cuomo for any closing remarks.
Yes, I just want to say thank you everybody for this going to [inaudible]
Speaker Change: You know, a tremendous journey getting through our first kind of critical chapter at VSE, which is really transforming the business to a pure play aviation aftermarket business. And we're excited for the next chapter ahead and for all of you to be part of it. Have a great day. Thank you.
John Cuomo,
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.