Q2 2025 VSE Corp Earnings Call

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It is now my pleasure to introduce.

Vice President of Investor Relations and Treasury Michael permit.

Thank you welcome to Vse Corporation's second quarter 2025 results conference call.

We'll begin with remarks from John Cuomo, President and CEO, followed by financial update from Adam Cohen.

<unk> financial officer.

Resin tastes and we are sharing today is on our website.

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.

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.

At the conclusion of our prepared remarks, we will open the line for questions.

I would now like to turn the call over to John.

Good morning, Thank you for joining us today at the second quarter 2025 conference call.

We're pleased to report another outstanding and record quarter.

In the second quarter of 2025, we achieved record revenue record profitability.

Record margin and significantly improved free cash flow generation.

Today's results highlight the strength of our business.

<unk> of our markets are strong contributions from recent acquisitions and the impact that our integration efforts are having on accelerating growth and margin opportunities.

Let's begin with slide three and a review of our second quarter highlights.

First on April one we completed the sale of our fleet segment.

This marked the final step in our multiyear transformation into a pure play aviation aftermarket company.

This divestiture behind US we are now fully focused higher growth higher margin distribution and MRO services within the aviation aftermarket.

Second we acquired turbine world industry specialized MRO provider.

X engine components supporting the business in general aviation aftermarket.

This acquisition expands our engine service capabilities.

At several proprietary repair offerings to our MRO portfolio.

Deepens, our OEM relationships and opens the door for future growth through targeted investments.

Third we signed a new five year authorized service center agreement with Eaton for hydraulic pump MRO support.

This has eaten first authorized aftermarket repair partnership and endorsement of Vse is a trusted and capable OEM partner.

Four we secured a new $700 million credit facility, comprising a $300 million term loan a and a $400 million revolver.

This refinancing polices, our prior facilities and gives us more flexibility along with a lower total cost of capital and support.

Michael Perlman: To our presentation and posted on our website. 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 would now like to turn the call over to John.

And posted on our website.

And finally.

Made solid progress executing on our operating plan.

all percentages, in today's discussion refer to year-over-year progress, except where noted

<unk> recent acquisition <unk>.

Launching new programs and expanding margins through synergy capture and operational improvement.

John Cuomo: Good morning. Thank you for joining us today for the VSE second quarter 2025 conference call. We are pleased to report another outstanding and record quarter. In the second quarter of 2025, we achieved record revenue, record profitability, record margins, and significantly improved free cash flow generation. Today's results highlight the strength of our business, the resilience of our market, the strong contributions from recent acquisitions, and the impact that our integration efforts are having on accelerating growth and margin opportunities. Let's begin with slide three and a review of our second quarter highlights. First, on April 1st, we completed the sale of our fleet segment. This marked the final step in our multi-year transformation into a pure-play aviation aftermarket company. With this divestiture behind us, we are now fully focused on higher growth, higher margins, distribution, and MRO services within the aviation aftermarket.

At the conclusion of our prepared remarks, we will open the line for questions is that I would now like to turn the call over to John.

Let's now move to slide four where I will provide updates on our acquisition and integration effort.

Good morning, thank you for joining us today. The vse second quarter 2025 conference call.

Let's begin with PCI.

We are pleased to report another outstanding and record quarter.

We acquired PCI in April 2024, and it's quickly become one of our fastest growing business unit.

And in this second quarter of 2025, we achieved record revenue.

Growth has been driven by a strong backlog for OEM engine partners and new business win.

Record profitability, record margins, and significantly improved free cash flow generation.

To support this momentum.

Today's results highlight the strengths of our business, the resilience of our markets.

<unk> and new repair capabilities, expanding our capacity and executing cross selling synergies, including in sourcing work from our house for business.

Strong contributions from recent acquisitions.

That our integration efforts were having on accelerating growth and margin opportunities.

In December 2024, we acquired Telstra.

We're very pleased with <unk> performance and integration progress over our first six months of ownership.

Let's speaking with slide 3 and to review of our second quarter highlights.

First on April 1st, we completed the sale of our Fleet segment.

Team is executing well.

Our focus on driving profitable growth and improving margins.

We're doing that in three ways.

This marked the final step in our multi-year transformation into a pure play. Aviation aftermarket company.

Yes.

The sizing higher value higher margin engine and engine related components.

Typically those supporting next generation platform like the leap engine.

John Cuomo: Second, we acquired Turbine Weld Industries, a specialized MRO provider, complex engine components, supporting the business in general aviation aftermarket. This acquisition expands our engine service capabilities, adds several proprietary repair offerings to our MRO portfolio, deepens our OEM relationship, and opens the door to future growth through targeted investment. Third, we signed a new five-year authorized service center agreement with Eaton for hydraulic pump MRO support. This is Eaton's first authorized aftermarket repair partnership and endorsement of VSE as a trusted and capable OEM partner. Fourth, we secured a new $700 million credit facility comprising a $300 million Term Loan A and a $400 million revolver. This refinancing replaces our prior facilities and gives us more flexibility, along with a lower total cost of capital to support growth.

With this the message or behind us we are now fully focused higher growth, higher margin distribution and mro services within the aviation aftermarket.

Second.

Second.

We've refined our ufm used serviceable material strategy to focus on higher margin product line that align with our in house repair capabilities and new part distribution product lines.

Required turbine weld industries specialize in MLO, providing complex engine components that support the business and general aviation aftermarket.

This is more disciplined and strategic approach as reduced topline USF revenue that is driving significantly stronger margins.

This acquisition expands our engine service capabilities at several proprietary repair offerings to our mro portfolio.

In the first half of 2025, we have reduced <unk> revenue by approximately 20% on a run rate basis versus the prior year and we expect a similar year over year trend in the second half.

Deepens, our OEM relationships and opens the door to Future growth through targeted Investments.

Third, we signed a new 5-year authorized service center agreement with eaten for hydraulic pump mro support.

Importantly, we repositioned Usn as a strategic enabler, a new parts distribution and repair services and no longer a standalone speculated parts trading business.

This is eaten first authorized, aftermarket repair partnership and endorsement of VC as a trusted and capable OEM partner.

Forth. We secured a new $700 million credit facility.

comprising, a hundred million dollar Term Loan a

Hundred million dollar revolver.

Third we've already begun capturing a significant portion of the $4 million in cost synergies, we identified at the time of acquisition.

John Cuomo: Finally, we made solid progress executing on our operating plans, integrating recent acquisitions, launching new programs, and expanding margins through synergy capture and operational improvement. Let's now move to slide four, where I will provide updates on our acquisition and integration efforts. Let's begin with TCI. We acquired TCI in April 2024, and it has quickly become one of our fastest growing business units. Growth has been driven by a strong backlog of OEM engine partners and new business wins. To support this momentum, investing in new repair capabilities, expanding our capacity, and executing cross-selling synergies, including insourcing work from our Telstra business. In December 2024, we acquired Telstra. We're very pleased with Telstra's performance and integration progress over our first six months of ownership. The team is executing well with a clear focus on driving profitable growth and improving margins. We're doing that in three ways.

This refinancing of the prior facilities gives us more flexibility, along with a lower total cost of capital to support.

In addition to Dci and Kallstrom, we're very excited about our recent acquisition of turbine world.

And finally, you made Solid progress executing on our operating plans.

Outstanding business with an outstanding team.

At Turbo World, we're expanding operational capacity to meet strong customer demand and investing in new equipment and technical talent to support this accelerated growth.

Integrating recent acquisitions, launching new programs, and expanding margins through synergy capture and operational improvement.

Let's number to 54 Where I will provide updates on our acquisition and integration efforts.

In addition, implementing standardized processes and upgrading systems to ensure the business scales efficiently and sustainably.

I was thinking with TCI.

Now moving onto program implementations.

We acquired TCI in April 2024 and it's quickly become 1 of our fastest growing business units.

The OEM licensed fuel control program made strong progress in the second quarter.

Driven by a strong backlog from OEM engine partners and new business wins.

To support this momentum.

The successful production of our first approved units.

Resting in new repair capabilities.

We remain on track for full production by early 2026.

Margin contribution is now fully.

Expanding our capacity and executing cross-selling synergies, including insourcing work from our house from business.

Collected in our financials.

in December 2024, we required tro

As mentioned, we launched Eaton's first authorized repair station in the Americas.

Early results are strong and we're helping you can expand into new markets.

We're very pleased with California's performance and integration progress over our first 6 months of ownership.

Kris repair capacity and improve the customer experience.

The team is executing well with a clear focus on driving profitable. Growth and improving margins.

John Cuomo: First, emphasizing higher value, higher margin engine and engine-related components, specifically those supporting next-generation platforms like a Leap Engine. Second, we've refined our USM, used serviceable materials strategy, to focus on higher margin product lines that align with our in-house repair capabilities and new part distribution product lines. This more disciplined and strategic approach has reduced top-line USM revenue, but is driving significantly stronger margins. In the first half of 2025, we have reduced Telstra's USM revenue by approximately 20% on a run-rate basis versus the prior year, and we expect a similar year-over-year trend in the second half. Importantly, we've repositioned USM as a strategic enabler of new part distribution and repair services and no longer a standalone speculative parts trading business. Third, we've already begun capturing a significant portion of the $4 million in cost synergies we identified at the time of acquisition.

We're doing that in 3 ways.

This sets the stage for future partnership opportunities.

Finally, following the fleet divestiture, we completed a full cost review.

First referencing higher value, higher margin engine, and engine related components.

Aligned with our single segment aviation model.

Specifically, those supporting Next Generation platform, like a leap engine.

We're now operating from a leaner base and are in the final stages of transition work, which will be completed before year end.

I will now provide an update on the current market environment for our business.

Second, we've refined our USM use serviceable material strategy to focus on higher margin product lines that align with our in-house repair capabilities and new park distribution product lines.

The second quarter began with some softness in the aftermarket driven by uncertainty around tariffs.

This more disciplined and strategic approach has reduced Topline USM Revenue. That is driving significantly stronger margins.

However activity rebounded quickly in May and June as Oems and customers regain confidence and swiftly adjusted to the new environment.

Looking ahead to the second half of 2025 and 2026, we anticipate continued strength in the aviation aftermarket specifically in the engine segment.

In the first half of 2025, we have reduced calcium's, USM Revenue by approximately 20% on a run rate basis versus the prior year.

And we expect a similar year-over-year Trend in the second half.

To capitalize on this growth we've made targeted investments both organically and through acquisition engine part distribution and repair services.

Importantly, we repositioned usn as a strategic enabler of new park distribution and repair services and no longer a standalone speculative Parks trading business.

The engine aftermarket remains one of the fastest growing and most supply constrained part of the market.

As of the second quarter engine related MRO and distribution revenue represents greater than 50% of total vse aviation revenue.

We've already begun capturing a significant portion of the 00 million in cost synergies. We identified at the time of acquisition,

John Cuomo: In addition to TCI and Telstra, we're very excited about our recent acquisition of Turbine Weld, an outstanding business with an outstanding team. At Turbine Weld, we're expanding operational capacity to meet strong customer demand and investing in new equipment and technical talent to support this accelerated growth. In addition, we're implementing standardized processes and upgrading systems to ensure the business scales efficiently and sustainably. Now, moving on to program implementation. The OEM licensed fuel control program made strong progress in the second quarter with a successful production of our first approved unit. We'll remain on track for full production by early 2026. Margin contribution is now fully reflected in our financials. As mentioned, we launched Eaton's first authorized repair station in the Americas. Our early results are strong, and we're helping Eaton expand into new markets, increase repair capacity, and improve the customer experience.

Let's now move to slide five to discuss our financial performance.

In addition to TCI and kellstrom, we are very excited about our recent acquisition of turbine Wells, an outstanding business, with an outstanding team.

DXP delivered another outstanding quarter.

<unk> record revenue record profitability and positive free cash flow supported by solid execution continued robust end market activity.

At turbine weld, we're expanding operational capacity, to meet strong, customer demand, and investing in new equipment and Technical Talent.

Support this accelerated growth.

In the second quarter of 2025 consolidated revenues increased 41% to $272 million.

In addition implementing standardized processes and upgrading systems to ensure the business scales efficiently and sustainably.

Now, moving on to program implementations.

Driven by strong financial performance from our core aviation distribution and MRO businesses.

The OEM license fuel control program made strong progress in the second quarter.

With a successful production of our first approved units.

And contributions from recent acquisitions.

We remain on track for full production by early 2026.

Aviation adjusted EBITDA increased by 48% in the quarter.

Margin contribution is now fully refresh reflected in our financials.

We will record $47 million.

<unk>, 1% of revenue.

As mentioned, he wants, Eaton's first authorized repair station in the Americas.

And consolidated adjusted EBITDA increased 52% to $43 million.

16% of revenue.

John Cuomo: This sets the stage for future partnership opportunities. Finally, following the fleet divestiture, we completed a full cost review to align with our single-segment aviation model. We are now operating from a leaner base and are in the final stages of transition work, which will be completed before year-end. I will now provide an update on the current market environment for our business. The second quarter began with some softness in the aftermarket, driven by uncertainty around tariffs. However, activity rebounded quickly in May and June as OEMs and customers regained confidence and swiftly adjusted to the new environment. Looking ahead to the second half of 2025 and 2026, we anticipate continued strength in the aviation aftermarket, specifically in the engine segment. To capitalize on this growth, we have made targeted investments both organically and through acquisitions in engine part distribution and repair services.

Early results are strong and we're helping eat and expand into new markets. Increase repair capacity, and improve the customer experience.

These record results driven by a balanced mix strong pricing solid execution on distribution program awards focused on higher margin product lines.

This sets the stage for future partnership opportunities.

<unk> success, and our OEM licensed manufacturing program and <unk>.

Finally following the fleet of venture we completed a full cost review to align with our single segment Aviation model.

We're now operating from a leaner base.

Contributions from recent acquisitions.

Leading earlier than planned synergy capture.

And are in the final stages of transition work, which will be completed before year end.

Adjusted net income of $20 million.

I will now provide an update.

And adjusted net income per diluted share of <unk> 97.

Increased 149% and 106% respectively.

The second quarter began with some softness in the aftermarket driven by uncertainty around tariffs.

And finally.

We completed the second quarter with a strong balance sheet.

Achieving an adjusted net leverage ratio of two two times following the sale of the fleet business and the acquisition of turbine World for <unk>.

However, activity rebounded quickly in May, and June as oems and customers, we gained confidence and swiftly adjusted to the new environment.

Looking ahead to the second half of 2025 and 2026,

<unk> us with significant financial flexibility.

We anticipate continued strength in the aviation aftermarket.

Specifically in the engine segment.

Port our strategic growth initiatives.

I will now turn the call over to Adam to discuss the details of our financial performance.

Thank you John let's turn to slide six of the conference call materials I will provide an overview of our second quarter consolidated financial performance.

To capitalize. On this growth, we've made targeted Investments, both organically and through Acquisitions the engine part distribution and repair services.

John Cuomo: The engine aftermarket remains one of the fastest growing and most supply-constrained parts of the market. As of the second quarter, engine-related MRO and distribution revenue represents greater than 50% of total VSE Corporation aviation revenue. Let us now move to slide five to discuss our financial performance. VSE Corporation delivered another outstanding quarter, generating record revenue, record profitability, and positive free cash flow, supported by solid execution and continued robust end-market activity. In the second quarter of 2025, consolidated revenues increased 41% to $272 million, driven by strong financial performance from our core aviation distribution and MRO businesses and contributions from recent acquisitions. Aviation adjusted EBITDA increased by 48% in the quarter to a record $47 million, 17.1% of revenue, and consolidated adjusted EBITDA increased 52% to $43 million, 16% of revenue.

The engine aftermarket remains 1 of the fastest growing and most Supply constrained parts of the market.

<unk> generated $272 million of revenue in the quarter.

Kris a 41% over the same period in the prior year.

Adjusted EBITDA increased 52% to $43 million compared to the second quarter of 2024.

As of the second quarter, engine-related MRO and distribution revenue represents greater than 50% of total VSE Aviation revenue.

Let's now move to slide 5 to discuss our financial performance.

Adjusted EBITDA margin was 16% in the quarter.

Approximate 110 basis point improvement over the prior year period.

Adjusted adjusted net income was $20 million and adjusted diluted earnings per share was <unk> 97.

BSE delivered, another outstanding quarter generating record, Revenue record, profitability and positive free cash flow supported by solid execution. Continued robust and Market activity.

The increase of 149% and 106% respectively over the prior year period.

Now turning to slide seven I will review, our aviation segment's record second quarter performance.

Vse aviation generated $272 million of revenue in the quarter, an increase of 41% over the prior year period.

In the second quarter of 2025 a Consolidated, revenues, increased 41% to 272 million driven by strong financial performance, from our Corps, Aviation distribution, and mro businesses and contributions to increase in acquisitions.

More specifically distribution revenue increased 50% in the period driven by strong operational execution of new and existing programs product line expansion.

Aviation adjusted ibida increased by 48% in the quarter to a record. 47 million

.1% of Revenue.

And Consolidated adjusted IBA increased 52%.

<unk> part supporting our OEM license manufacturing program.

To 43 million.

16% of Revenue.

John Cuomo: These record results, driven by a balanced mix, strong pricing, solid execution on distribution program awards, a focus on higher margin product lines, continued success in our OEM licensed Avionic MRO program, and contributions from recent acquisitions, including earlier-than-planned synergy capture. Adjusted net income, $20 million, and adjusted net income per diluted share of $0.97 increased 149% and 106%, respectively. And finally, we completed the second quarter with a strong balance sheet, achieving an adjusted net leverage ratio of 2.2 times following the sale of the fleet business and the acquisition of Turbine Weld, providing us with significant financial flexibility to support our strategic growth initiatives. I will now turn the call over to Adam to discuss the details of our financial performance.

Market share gains and contributions from the <unk> acquisition.

MRO revenue increased 27% in the quarter driven by increased repair activity on higher value ethical repair capabilities from our avionics youll dramatics in hydraulics MRO centers of excellence.

Please record results driven by a balanced. Mix strong pricing solid execution on distribution program Awards, a focused on higher margin product lines.

continued success in our OEM license manufacturing program in contribution from each inactive positions, including

The addition of new repair capabilities.

Earlier than planned Synergy capture.

Adjusted net.

Strong end market demand and contributions from the turbine World acquisition.

Excluding the impact of recent acquisitions and including PCI results in the quarter.

<unk> Aviation segment revenue increased by approximately 13% in the second quarter as compared to the prior year.

20 million and adjusted net income per diluted. Share of 97 cents increased 149% and 106% respectively.

Aviation adjusted EBITDA increased by 48% in the quarter to a record $47 million or 17, 1% of revenue.

And finally, we completed the second quarter, with a strong balance sheet, achieving an adjusted net, leverage ratio of 2.2 times following the sale of the fleet business and the acquisition of turbine weld.

Adjusted EBITDA margin improved 80 basis points year over year, driven by favorable pricing and product mix higher margin aftermarket sales from our OEM license manufacturing program lower contributions from our less profitable USL business and an increased in sourcing of repair work. We're also beginning to realize cost synergies.

Providing us with significant financial flexibility to support our strategic growth initiatives.

Michael Perlman: Thank you, John. Let's turn to slide six of the conference call materials, where I will provide an overview of our second quarter consolidated financial performance. VSE Corporation generated $272 million of revenue in the quarter, an increase of 41% over the same period in the prior year. Adjusted EBITDA increased 52% to $43 million compared to the second quarter of 2024. Adjusted EBITDA margin was 16% in the quarter, an approximate 110 basis point improvement over the prior year period. Adjusted net income was $20 million, and adjusted diluted earnings per share was $0.97, an increase of 149% and 106%, respectively, over the prior year period. Turning to slide seven, I will review our aviation segment's record second quarter performance. VSE Corporation aviation generated $272 million of revenue in the quarter, an increase of 41% over the prior year period.

I will now turn the call over to Adam to discuss the details of our financial performance.

Yeah, let's turn to slide 6 of the conference call materials. I will provide an overview of our second quarter Consolidated, financial performance.

<unk> from recent acquisitions.

Now, let's turn to slide eight of our presentation materials to review our aviation segment guidance for the full year 2025. It is important to note that our guidance does not assume further tariff escalation or global recession.

VSE generated $272 million in revenue for the quarter, an increase of 41% over the same period in the prior year.

Adjusted IBA increased 52% to $43 million.

Compared to the second quarter of 2024.

We are reaffirming our full year 2025 aviation segment revenue growth guidance range of 35% to 40%.

This growth is supported by full year contributions from recent acquisitions, partially offset by our strategic decision to narrow our USA focus to higher margin product lines aligned with our in house repair capabilities and new part distribution portfolio.

Adjusted IBA margin was 6% in the quarter, in approximate 110 basis, point improvement over the prior year period.

Adjust adjusted. Net income was 20 million and adjusted diluted earnings per. Share was 97 cents, increase of 149% and 106% respectively over the prior year period.

We are raising our 2025 full year aviation adjusted EBITDA margin guidance to the high end of the previously provided range 16, 5% to 17%. This.

Now, turning to slide 7, I will review our Aviation segments record, second quarter performance.

This increase reflects a higher margin product mix and lower contributions from our less profitable <unk> business.

Michael Perlman: More specifically, distribution revenue increased 50% in the period, driven by strong operational execution of new and existing programs, product line expansion, specifically parts supporting our OEM licensed Avionic MRO program, market share gains, and contributions from the Kellstrom Aerospace acquisition. MRO revenue increased 27% in the quarter, driven by increased repair activity on higher value technical repair capabilities from our avionics, fuel, pneumatics, and hydraulics MRO centers of excellence, the addition of new repair capabilities, strong end-market demand, and contributions from the Turbine Weld Industries acquisition. Excluding the impact of recent acquisitions and including TCI results in the quarter, Atlantic aviation segment revenue increased by approximately 13% in the second quarter as compared to the prior year. Aviation adjusted EBITDA increased by 48% in the quarter to a record $47 million, or 17.1% of revenue.

Vse, Aviation generate 272 million of Revenue in the quarter and increase of 41% over the prior year period.

In addition to our formal guidance commentary I will now provide some additional modeling items.

more specifically distribution Revenue, increased 50% in the period driven by

Adjusted unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture participated to be between 14% and $15 million, excluding stock based compensation for the full year.

Operational execution of new and existing programs.

Product line expansion. Specifically part, supporting our OEM license manufacturing program.

Market share, gains and contributions from the kellstrom acquisition.

Based compensation, which should beginning in Q1 is excluded from adjusted EBITDA is expected to be $3 million per quarter for the remainder of the year split relatively evenly between aviation and corporate.

Depreciation and amortization in total are projected to be approximately $38 million to $40 million for the full year of 2025.

Mro Revenue increased 27% in the quarter driven by increased repair activity on higher value, technical repair capabilities from our avionics Fuel, thematics and hydraulics. Mro centers of excellence

It addition of new repair capabilities.

Strong and market demand.

Interest expense is expected to be approximately $26 million to $28 million for the full year and finally, our effective tax rate is expected to be approximately 25% for the remaining two quarters or full year blended rate of 22%.

And contributions from the turbine weld acquisition.

Turning to slide 10 to review our balance sheet at the end of the second quarter. Our total net debt outstanding was $362 million cash and available availability under our $400 million credit facility was $333 million.

Excluding the impact of recent acquisitions and including TCI results in the quarter, the Panic, Aviation segment Revenue increased by approximately 13% in the second quarter as compared to the prior year.

Michael Perlman: Adjusted EBITDA margin improved 80 basis points year over year, driven by favorable pricing and product mix, higher margin aftermarket sales from our OEM licensed Avionic MRO program, lower contributions from our less profitable USM business, and increased insourcing of repair work. We are also beginning to realize cost synergies from recent acquisitions. Now, let's turn to slide eight of our presentation materials to review our aviation segment guidance for the full year 2025. It is important to note that our guidance does not assume further tariff escalation or global recession. We are reaffirming our full year 2025 aviation segment revenue growth guidance range of 35% to 40%. This growth is supported by full-year contributions from recent acquisitions, partially offset by our strategic decision to narrow our USM focus to higher margin product lines, aligned with our in-house repair capabilities and new part distribution portfolio.

Aviation adjusted Evita increased by 48% in the quarter to a record, 47 million or 17.1% of Revenue.

During the second quarter, we generated approximately $6 million.

A free cash flow driven by disciplined working capital management and record operating results. This was an improvement of approximately $28 million versus.

Just as EVii down, margin improved 80 basis points year-over-year, driven by favorable pricing and product mix, and higher margin aftermarket sales from our OEM licensed manufacturing program.

Lower contributions from our less profitable USM business.

Versus Q2 of 2024.

An increase in sourcing of repair work.

We are expecting to generate improved free cash flow in the second half of the year.

we're also beginning to realize cost synergies from

and acquisition.

Our adjusted net leverage ratio was two two times in the second quarter, which includes the impact of the fleet business sale and the acquisition of turbine World.

That I will turn it back over to John.

Let's turn to slide 8 of our presentation materials to review our Aviation segment, guidance for the full year. 2025 it is important to note that our guidance does not assume further tariff escalation or Global recession.

Thanks, Adam I'd like to conclude our prepared remarks by revisiting our 2025 priorities on slide 11.

We are reaffirming our full year 2025 Aviation segment. Revenue growth guidance range of 35 to 40%

Following the sale of our fleet business, we completed a full review of our corporate structure and cost base.

Now aligned with our aviation focused strategy and well positioned to scale.

Our transition work is underway and on track to be completed by year end.

Michael Perlman: We are raising our 2025 full-year aviation adjusted EBITDA margin guidance to the high end of the previously provided range, to 16.5% to 17%. This increase reflects a higher margin product mix and lower contributions from our less profitable USM business. In addition to our formal guidance commentary, I will now provide some additional modeling items. Adjusted unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture, anticipated to be between $14 and $15 million, excluding stock-based compensation for the full year. Stock-based compensation, which should begin in Q1, is excluded from adjusted EBITDA. It's expected to be $3 million per quarter for the remainder of the year, split relatively evenly between aviation and corporate. Depreciation and amortization in total are projected to be approximately $38 to $40 million for the full year 2025.

This growth is supported by full year contributions from recent acquisitions, partially offset by our, strategic decision to narrow our USM, Focus to higher margin product lines, aligned with our in-house repair capabilities and new part distribution portfolio.

Second, we're expanding repair capabilities and increasing capacity across both legacy operations and recent acquisitions and strong demand and drive growth at our MRO centers of excellence.

We are raising our 2025 full year Aviation adjusted. Eva down margin guidance to the high-end of the previously provided range to 16 and 1/2 to 17%.

Third we're prioritizing the integrations that PCI and <unk>.

this increase reflects a higher margin product, mix and lower contributions from our less profitable USM business,

Market efficiencies and enhanced customer value.

Also launched integration planning for turbine world and are investing to meet growing demand.

In addition to our formal guidance commentary, I will now provide some additional modeling items.

Fourth we began capturing synergies from recent acquisitions to support margin expansion.

Adjusted unallocated corporate costs which include incremental stranded costs associated with the fleet deer participated to be between 14 and 15 million dollars.

He is one of the caliber of integration is already delivering a significant portion of the $4 million and identified cost savings as evidenced by our strong second quarter margin per quarter.

Excluding stock-based compensation for the full year.

Next we continue to make steady progress on implementing our OEM license Youll control manufacturing capabilities in.

Stock-based compensation, which is beginning in. Q1 is excluded from adjusted. Eva is expected to be million dollars per quarter for the remainder of the year, but relatively evenly between Aviation and corporate.

And finally, we remain focused on building organic growth pipeline deepening OEM partnership.

Michael Perlman: Interest expense is expected to be approximately $26 to $28 million for the full year. Finally, our effective tax rate is expected to be approximately 25% for the remaining two quarters, or a full-year blended rate of 22%. Turning to slide 10 to review our balance sheet. At the end of the second quarter, our total net debt outstanding was $362 million. Cash and availability under our $400 million credit facility was $333 million. During the second quarter, we generated approximately $6 million of free cash flow, driven by disciplined working capital management and record operating results. This was an improvement of approximately $28 million versus Q2 of 2024. We are expecting to generate improved free cash flow in the second half of the year.

Appreciation and amortization and total are projected to be approximately 38 to 40 million dollars for the full year 2025.

Spanning our market presence.

Part 2026 and beyond.

I'll close by thanking our shareholders customers and supplier partners for their continued trust and support at.

expense is expected to be 26 to 28 million for the full year and finally, our effective tax rate is expected to be 25% for the remaining 2 quarters for a full year, Blended rate of 22%

But most importantly, thanks to the Bse team for their outstanding record second quarter performance.

Operator, we're now ready to open the line for questions.

Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Turning to slide 10 to review our balance sheet. At the end of the second quarter, our total net debt outstanding was $362 million, while cash and availability under our $400 million credit facility was $333 million.

Million dollars.

A free cash flow driven by discipline working Capital Management and record operating results.

Our first question comes from the line of Ken Herbert with RBC capital markets.

This was an improvement of approximately 28 million versus Q2 of 2024.

Yes, hi, good morning, John and Adam and Michael.

We are expecting to generate improved free cash flow in the second half of the year.

Michael Perlman: Our adjusted net leverage ratio was 2.2 times in the second quarter, which includes the impact of the fleet business sale and the acquisition of Turbine Weld. With that, I will turn it back over to John.

Good morning, Ken.

Hey, John maybe just to follow up on your comments on the organic growth it looks like the guidance implies call. It low to mid teens organic growth in the back half of the year and you seem to have done a really nice job here of offsetting some of the U S. M growth headwinds can you just talk about what youre seeing on the commercial transport versus business.

Our adjusted net. Leverage ratio was 2.2 times in the second quarter, which includes the impact of the fleet business sale and the acquisition of turbine weld.

John Cuomo: Adam Cohn. I would like to conclude our prepared remarks by revisiting our 2025 priorities on slide 11. First, following the sale of our fleet business, we completed a full review of our corporate structure and cost base. We are now aligned with our aviation-focused strategy and well-positioned to scale. Sign-up transition work is underway and on track to be completed by year-end. Second, we are expanding repair capabilities and increasing capacity across both legacy operations and recent acquisitions. We have strong demand and drive growth at our MRO centers of excellence. Third, we are prioritizing the integrations of TCI and Telstra to unlock efficiencies and enhance customer value. We have also launched integration planning for Turbine Weld Industries and are investing to meet growing demand. Fourth, we have begun capturing synergies from recent acquisitions to support margin expansion.

The debt. I will turn it back over to John.

Thanks, Adam. I'd like to conclude our prepared remarks, by revisiting our 2025 priorities on side of

Specifically, how we think about second half and what Youre seeing with some of your end markets.

first following the sale of our Fleet business and completed a full review of our corporate structure and cost base.

Sure I appreciate the question Yeah, I mean, I think I wanted to be a little clear because I didn't want anyone to get a concern that organic growth was slowing but we're really in a position as we have done in the first half of the year to continue to reposition that used serviceable material business to something different which is a bit of a decline in top line.

We're now aligned with our Aviation Focus strategy and well positioned to scale.

Final transition work is underway and on track to be completed by year end.

But we look at the markets I'd say, let me break it down first engine and non engine, both the NGA and commercial the engine markets continue to be the most robust parts of the market for us specifically and they continue to outperform kind of the components side of our business. That's both in distribution and MRO then when you look at it by end markets.

Second we're expanding repair capabilities and increasing capacity across those Legacy operations and recent acquisitions meet strong demand and drive growth at our mro centers of excellence.

Third, for prioritizing the integrations of PCI and Kallstrom to unlock efficiencies and enhance customer value. We've also launched integration planning for Turbine Wells and are investing to meet growing demand.

The commercial end markets are stronger than the business in general aviation market that market has settled in nicely. The bmj marketed nicely in that kind of 4% to 6% range.

John Cuomo: Phase one of the Telstra integration is already delivering a significant portion of the $4 million in identified cost savings, as evidenced by our strong second quarter margin performance. Next, we continue to make steady progress on implementing our OEM licensed Avionic MRO program manufacturing capabilities. Finally, we remain focused on building the organic growth pipeline, deepening OEM partnerships, and expanding our market presence to support 2026 and beyond. I will close by thanking our shareholders, customers, and supplier partners for their continued trust and support. Most importantly, thanks to the VSE Corporation team for their outstanding record second quarter performance. Operator, we are now ready to open the line for questions.

4. We begun capturing synergies from recent acquisitions to support margin expansion.

We're seeing the commercial end markets, probably naturally without organic growth in that high single digit to low double digits, and then a little bit of organic growth pushing us into double digits on the commercial side. So you kind of balance that out.

A is 1 of the Council of integration is already delivering, a significant portion of the 400 in identified cost savings as evidenced by our strong second quarter margin performance.

Next, we continue to make steady progress on implementing our OEM license, fuel control, and manufacturing capabilities.

You get to a place where our natural organic growth for our business being 50% commercial 50% <unk> about just over 50% engine type products versus component products, putting it in a position where it's about kind of mid to high single digits before any share gains.

And finally, we remain focused on building the organic growth pipeline, deepening OEM Partnerships and expanding our Market presence to support 2026 and Beyond.

I'll close by thanking our shareholders customers and supplier Partners their continued trust and support.

Very helpful and can you provide any more detail on the sort of the <unk> and I guess, specifically what the impacts could be maybe this year, but more importantly, 'twenty six 'twenty seven as we think about your adjusted EBITDA margins is there is there a significant cost opportunity here how are you thinking about the potential.

The most importantly, thanks to the vse team for their outstanding record. Second quarter performance.

Operator. We're now ready to open the line for questions.

Operator: Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Ken Herbert with RBC Capital Markets.

There.

Certainly, as a reminder to ask a question. Please press star, 1 1 1 on your telephone and wait for your name, to be announced to withdraw your question. Please press star 1 1 1 again.

Yeah, I mean, I would say that we're as you can see by the margins that we posted in a quarter the progress on the acquisitions and the integrations.

our first question comes from the line of Ken Herbert with RBC Capital markets,

Ken Herbert: Yeah, hi. Good morning, John and Adam and Michael.

We are ahead of ahead of schedule. So we built into our plans.

John Cuomo: Morning, Ken.

Yeah, good morning. Uh, John and Adam and Michael.

Ken Herbert: Hey, John, maybe just to follow up on your comments on the organic growth. Looks like the guidance implies, you know, low to mid-teens organic growth in the back half of the year, and you seem to have done a really nice job here of offsetting some of the USM growth headwinds. Can you just talk about what you're seeing on a commercial transport versus business jet side, or specifically how we think about the second half and what you're seeing by some of your end markets?

Morning. Ken.

Margin opportunity and definitely felt that there was opportunity to continue to scale margins.

I would say that we continue to be ahead of our plans. So I wouldn't get too far ahead in terms of margin opportunity, but theres definitely we do see continued opportunity out in the market.

Movement as we integrate but we've already captured a number of synergies both on our fuel control program. Our initial $4 million that we announced with <unk> from a significant portion of that has been realized in the first half of the year as well.

John Cuomo: Sure. Appreciate the question. Yeah, I mean, I think I wanted to be a little clear because I didn't want anyone to get a concern that organic growth was slowing. But we're really in a position, as we have done in the first half of the year, to continue to reposition that new serviceable material business to something different, which is a bit of a decline in top line. But when we look at the markets, I'd say let me break it down first: engine and non-engine. Both DNGA and commercial, the engine markets continue to be the most robust parts of the market for us specifically, and they continue to outperform kind of the component side of our business. That's both in distribution and MRO. Then when you look at it by end markets, the commercial end markets are stronger than the business in general aviation market.

Hey John, maybe just to follow up on your comments on the organic growth. Um, looks like the guidance implies, you know, cover low to mid-teens organic growth in the back half of the year, and you seem to have done a really nice job here of offsetting some of the USM growth headwinds. Can you just talk about what you're seeing on a commercial transport versus business jet side, or specifically how we think about second half, and what you're seeing with some of your end markets?

Thanks, John Nice cash generation in the quarter as well I'll pass it back there.

Thanks, Kevin appreciate it.

Thank you.

And our next question comes from the line of Sheila <unk> with Jefferies.

Okay. Good morning, John and Adam and thank you for the time, maybe just on that last point, Ken just made on cash great cash generation and I think you called out improved free cash flow in the second half so given $57 million of generation.

You know just given the generation in the first half how do we think about the sustainability of free cash flow and any puts and takes on working capital we should consider.

John Cuomo: That market has settled nicely. The BNGA market is nicely in that kind of, you know, 4 to 6% range where we're seeing, you know, the commercial end markets probably naturally without organic growth in that high single digits to low double digits, and then a little bit of organic growth pushing us into double digits on the commercial side. So you kind of balance it out and, you know, you get to a place where our natural organic growth for our business being 50% commercial, 50% BNGA, about just over 50% engine-type products versus component products, putting it in a position where it's about kind of, you know, mid to high single digits before any share gain.

Sure. Uh appreciate the question and yeah I I mean I think I wanted to be a little clearer because I didn't want anyone to get a concern that organic growth was slowing, but we're really in a position as we have done in the first half of the year to continue to reposition that youth service of all material business to something different which is a bit of a decline in Topline. Um but we look at the markets that say let me break it down first engine and non-engineering, both C and G and Commercial. The engine markets continue to be the most most robust parts of the market for us specifically and they continue to outperform kind of the components side of our business. That's both a distribution and mro. Then when you look at it by end markets, uh, the commercial, um, and markets are stronger, uh, than the, the business of general aviation Market that market has settled nicely to be in GA Market.

Yes.

Yes, sure. So yes. So it was a good solid cash quarter as you mentioned, Chile generated about $6 million in the quarter, we have seen significant improvement year over year. So if you look over the first six months versus last year I think we've improved by about $65 million so pretty significant.

As you know there is some working capital seasonality in the business. So we generally see a larger use in the first half of the year.

Sort of neutralized in the back half of the year as we lap our inventory purchases.

Nicely in that kind of, you know, 4 to 6% range, um, where we're seeing, you know, the commercial and markets probably naturally without organic growth and that high single digits to low double digits and then a little bit of organic growth pushing us into double digits, on the commercial side, so you kind of balance it out. Um, and, you know, you get to a place where our natural organic growth for our business being 50%. Commercial 50% B&A about just over 50% engine type products versus uh component products.

So we are expecting to see strong improvement through the back half of the year I would say that we are seeing improvement in our working capital profile, especially just given the last few acquisitions, including Telstra. They are less working capital intensive businesses. So we're just seeing some natural improvement, but there is definitely a focus on.

Putting it in a position where it's about kind of, you know, mid to high high single digits before any share game.

Ken Herbert: Very helpful. And can you provide any more detail on the sort of the one VSE and I guess specifically what the impact could be maybe this year, but more importantly '26, '27 as we think about the adjusted EBITDA margins? Is there a significant cost opportunity here? Or how are you thinking about the potential there?

Continuing to generate strong free cash flow.

John Cuomo: Yeah, I mean, I'd say that we're, you know, as you can see by the margins that we posted in the quarter, the progress on the acquisitions and the integrations is, you know, ahead of schedule. So we built into our planned, you know, margin opportunity and definitely felt that there was opportunity to continue to scale margins. I would say that, you know, we continue to be ahead of our plan. So I wouldn't get too far ahead in terms of margin opportunity, but there's definitely, we do see continued opportunity out in the market, you know, as we integrate. But we've already captured a number of synergies both on our fuel control program, our, you know, initial $4 million that we announced with Telstra. A significant portion of that has been realized in the first half of the year as well.

Maybe this year, but more importantly 2627 as we think about the adjusted ebit to margins. Is there, is there a significant cost opportunity here or how are you thinking about about the potential there?

Great and maybe just talk about Huston for a little bit it's been a part of the etsy for now.

Over six months what are the biggest positive.

John You mentioned, you know potentially shifting around the U S. M business achieve always called out for something different when does that something different.

Yeah I appreciate the question.

First it makes me feel great about the diligence everything is relatively as we had thought the business would be.

The distribution business is.

As strong or stronger than we had anticipated. The team that manages that is is quite strong as well and we're really pleased to see.

What they have done in the first half of the year and the opportunities as we move forward as well.

The vortex business, which is their MRO business services business.

Continues to perform outstanding.

Yeah. I I mean I I'd say that we're you know as you could see by the margins that we posted in the quarter the the progress on the Acquisitions and the Integrations is is you know ahead of ahead of schedule. So we built into our plans. Um you know, margin opportunity and definitely felt that there was opportunity to continue to scale margins. Um, I would say that, you know, we continue to be ahead of our plans. So I wouldn't get too far ahead in terms of, uh, margin opportunity. But there's definitely, we do see continued opportunity out in the market. Um, you know, I mean, as we integrate but we've already captured a number of synergies, both on our fuel control program. Our you know, initial 4 million dollars that we announced with kellstrom. Uh, significant portion of that has been realized in the first half of the year as well.

Ken Herbert: Thanks, John. Nice cash generation in the quarter as well. I'll pass it back there.

Well and we plan to get that integrated onto our systems.

Hopefully before year end, and then I'd say the USA business, we wanted to let it run for about six months and just watch how the business played it was a little bit too opportunistic in terms of parts trading for me, So where we're moving the business and shifting the business is we look at our business is bringing together our capabilities and in sourcing.

John Cuomo: Thanks, Ken. Appreciate it.

Thanks, John, nice cash generation of the quarter as well. I'll, I'll pass it back there.

Thanks Ken appreciate it.

Operator: Thank you. And our next question comes from the line of Sheila Kahaglu with Jefferies.

Thank you.

In our next question, comes from the line of Sheila kahalu with Jeffries.

Sheila Kahaglu: Good morning, John and Adam, and thank you for the time. Maybe to come at last point Ken just made on cash, great cash generation, and I think you called out improved free cash flow in the second half. So given $57 million of generation, you know, just given the generation in the first half, how do we think about the sustainability of free cash flow and any puts and takes on working capital we should consider?

As much work as we possibly can so so think of it more of a new used and repair model, where we're supporting our new part distribution with or with a used.

Sam option or were reporting are supporting our repair capabilities.

He used option or we're working directly with large airlines on some type of asset management program. So thats, what our USA and kind of strategy, which we've just launched a brand new leader in place and that's what that will look like and we'll share more details as we get into the back end of the year, but expect to see a little bit of pruning on the revenue side, there because we want to get away from the transaction.

Um, good morning John and Adam, and thank you for the time. Maybe just on that last point Ken just made on cash, uh, great cash generation. I think you called out improved free cash flow in the second half. So given $57 million of generation, um, you know, just given the generation in the first half, how do we think about the sustainability of free cash flow and any puts and takes on working capital we should consider?

John Cuomo: Yeah, I'm going to take that one. Yeah, sure. So, yeah, it was a good, solid cash quarter, as you mentioned, Sheila. We generated about $6 million in the quarter. We have seen significant improvement year over year. So if you look over the first six months versus last year, I think we've improved by about $65 million. So pretty significant. And as you know, there's some working capital seasonality in the business. So we generally see a larger use in the first half of the year, and that sort of neutralizes in the back half of the year as we lap our inventory purchases. So we are expecting to see, you know, strong improvement through the back half of the year. I would say that we are seeing improvement in our working capital profile, especially just given the last few acquisitions, including Telstra. They're less working capital-intensive businesses.

Final parts trading and we also want to focus on the right margin profile for our business.

Great. Thank you so much for that color.

Thank you.

Thank you Andrew.

Our next question comes from the line of Noah <unk> with William Blair.

Awesome, John Adam Michael Good morning, Thanks for taking my good morning Noah.

I want to start off on margins you touched a little bit on it.

Earlier, but we were under the impression that Q1 margins would typically be greatest in Q2 and Q3.

John Cuomo: So we're just seeing some natural improvement. But there's definitely a focus on, you know, continuing to generate strong free cash flow.

Were a bit lower before improving back end in the fourth quarter. Obviously this quarter's aviation EBIT margins were exceptional at 17 point 17, 1%.

Sheila Kahaglu: Great. And maybe if we could talk about Telstra for a little bit. It's been a part of VSE for now over six months. What are the biggest positives? And John, you mentioned, you know, potentially shifting around the USM business, which you've always called out to something different. What does that something different mean?

Yeah, sure. So yeah, it was a good solid cash, uh, quarter, as you mentioned. She only generated about 6 million, uh, in the quarter. We have seen significant Improvement, uh, year-over-year. So if you look the first 6 months versus last year, I think we've improved by about 65 million. Uh, so pretty significant. Um and as you know there's some working capital seasonality in the business. So we've generally see a larger use in the first half of the year, uh and that that sort of neutralizes in the back half of the year as we left our inventory purchases. Um, so we are expecting to see you know a strong Improvement through the back half of the year. I would say that we are seeing improvement in our working capital profile especially just given the last few Acquisitions including kellstrom, they're less working capital intensive businesses. So we're just seeing some natural Improvement. Um, but there's definitely a focus on, you know, continuing to generate strong free, cash flow.

Great. And maybe if we could talk about calcium for a little bit, it's been a part of the essay for now.

So given the.

Youll control program.

<unk>.

The full margin contribution <unk> cost synergies moving faster than expected.

Uh, over 6 months, what are the biggest positives and John you mentioned, you know potentially shifting around the USM business which you've always called out to something different. What is that? Something different mean

John Cuomo: Yeah, I appreciate the question. I mean, first, it makes me feel great about the diligence. Everything is relatively as we had thought the business would be. The distribution business is as strong or stronger than we had anticipated. The team that manages that is quite strong as well. And we're really pleased to see what they have done in the first half of the year and the opportunities as we move forward as well. The Vortex business, which is their MRO business services business, continues to perform outstandingly well. And we plan to get that integrated onto our systems, you know, hopefully before year-end. And then I'd say for the USM business, we wanted to let it run for about six months and just watch, you know, how the business played. It was a little bit too opportunistic in terms of parts trading for me.

And then also driving down some of that lower margin U S. M work whats kind of whats preventing you from the back half of the year, maintaining if not beating that 17 one figure.

Adam you want to kick off for you want me to start go ahead I'll take it. It's a good question. So I would say that as I said the.

Second quarter margins were very strong.

The Kallstrom synergy capture had a large part of the sort of capturing those maybe earlier than we initially anticipated so that really drove some of the strong margins in the second quarter. If you look back historically there is definitely seasonality.

Our margins and it really goes back to the seasonality in the distribution business, we tend to see higher margins in the first half of the year.

John Cuomo: So where we're moving the business and shifting the business is, you know, we look at our business as bringing together our capabilities and insourcing as much work as we possibly can. So think of it more of a new used and repair model where we're supporting our new part distribution with a used USM option, or we're supporting our repair capabilities with a used option, or we're working directly with large airlines on some type of asset management program. So that's what our USM kind of strategy, which we've just launched and put a new leader in place, and that's what that'll look like. And we'll share more details as we get into the back end of the year. But expect to see a little bit of pruning on the revenue side there because we want to get away from the transactional parts trading.

From basically lower cost of inventory and so.

So that's really what's driving sort of that first half to.

Second half than maybe initially we expected to capture more of the synergies in the second half of the year from Telstra them or that sort of accelerated up a quarter. So thats driving some of the differences from what we initially anticipated.

Yeah, I appreciate the question. Um, I mean, first, it makes me feel great about the diligence. Everything is relatively as we had thought the business would be. Um, the distribution business is, uh, is as strong or stronger than we had anticipated. The team that manages that is is quite strong as well, and we're really pleased to see. Uh, what they have done in the first half of the year and the opportunities as we move forward as well. Um, the uh, the vortex business, which is their mro business, services business. Um, is continues to perform outstanding uh really well and we tend to get that integrated onto our systems. Um, you know, hopefully before year end and then I'd say the for the USM business, we wanted to let it run for about 6 months and just watch, you know, how the business played. It was a little bit too opportunistic in terms of Parts trading for me, so where we're moving the business and Shifting the business is, you know, we look at our businesses bringing together our capabilities and insourcing as much work as we possibly can. So, so

Great and then with leverage down to two two times can you talk a little bit about the M&A pipeline going forward and then in particular.

Honeywell fuel control deal for a while now and it.

Seems like those dialogue programs are very very strong on the margin side. So are there other versions of that in the pipeline as well.

John Cuomo: And we also want to focus on the right margin profile for our business.

Yeah I appreciate the question I'd say that the M&A pipeline is very very healthy.

Sheila Kahaglu: Great. Thank you so much for that color.

To think of it, more of a new used and repair model where we're supporting our new park distribution with a, with a used, uh, USM option or we're reporting uh, supporting our repair capabilities, um, with with a used option, or We're working directly with large Airlines on some type of asset management program. So that's what our USM kind of strategy, which we've just launched and put a new leader in place, and that's what that'll look like. And we'll share more details as we get into the back end of the year. But expect to see a little bit of pruning on the revenue side there because we we want to get away from the the transactional parts trading. And we also want to focus on the on the right margin profile for all business.

Great, thank you so much for that color.

John Cuomo: Thank you.

We look at the back half of the 25% into 'twenty six.

Operator: Thank you. And our next question comes from the line of Noah Levitz with William Blair.

Thank you.

A number of.

You know what kind of active or soon to be active.

Thank you. And our next question comes from the line of Noah Levites with William Blair.

Noah Levitz: Hello from John, Adam, Michael. Good morning. Thanks for taking my call.

Things in the market.

John Cuomo: Hi, Noah.

It's always difficult to forecast something like that because as you dive in its Peter Youre, all in or you're all out.

Noah Levitz: To start off on margins, you touched a little bit on it earlier, but we were under the impression that Q1 margins were typically the greatest, and then Q2 and Q3 were a bit lower before improving back in the fourth quarter. Obviously, this quarter's aviation EBITDA margins were, you know, exceptional at 17.1%. So given, you know, fuel control program receiving the full margin contribution, Telstra cost synergies moving faster than expected, and then also driving down some of that lower margin USM work, what's kind of what's preventing you from the back half of the year maintaining, if not beating, that 17-1 figure?

Awesome John Adam Michael. Good morning. Uh thanks for taking my call.

So we'll see how that plays out, but we do have a pretty robust and healthy pipeline and obviously, it's a place we plan to use our balance sheet to support that inorganic growth with regard to kind of our licensed manufacturing program.

We really need until the first quarter of next year to be perfect on our fuel control execution. So we are although we're excited about the program and the growth opportunities. It offers because it's our first program and it's something very unique that we havent done before we're more kind of looking at it with more of a longer game our focus so I'd say don't.

Anything there at.

At least in the next 12 months. So maybe back end of next year as we move into 2027, we'll look at growth opportunities and what the market looks like there for us.

Uh, earlier, but we were under the impression that q1 margins were typically the greatest and then Q2, and Q3 were a bit lower, uh, before improving back in, in the fourth quarter, obviously this quarter's Aviation even the margins were, you know, exceptional at 17 point 17.1%. Um, so given you know, fuel control program, receiving, the full margin contribution, kellstrom costs energy is moving faster than expected. Um, and then also driving down some of that lower margin, USM work? What's kind of what's preventing you from the back half of the Year, maintaining, if not beating that 17 months a year,

John Cuomo: Adam, you want to kick off or you want me to start? Go ahead.

Great Thanks, and congrats on the quarter.

Ken Herbert: I will take it. It is a good question. I would say that the Q2 margins were very strong. I think the Kellstrom Aerospace synergy capture had a large part, sort of capturing those maybe earlier than we initially anticipated. That really drove some of the strong margins in the Q2. If you look back historically, there is definitely seasonality in our margins, and it really goes back to the seasonality in the distribution business. We tend to see higher margins in the first half of the year from basically lower cost of inventory. That is really what is driving sort of that first half to the second half. Maybe initially we expected to capture more of the synergies in the second half of the year from Kellstrom Aerospace, but that sort of accelerated up a quarter. That is driving some of the differences from what we initially anticipated.

Thank you I appreciate it.

Thank you. Our next question comes from the line of Jeff Van <unk> with B Riley Securities.

Thank you everyone and let me add my congratulations.

Wanted to follow up just on the <unk> synergies it sounds like you're realizing those a little bit ahead of expectations.

I'm wondering where are you seeing the remaining opportunities for efficiencies synergies leveraging scale as you fully integrate recent acquisitions just wondering what the focus is there for second half.

Adam. You want to kick off for you. Want me to start? Go ahead. Yeah, I'll take it. It's a good question. So I would say that. Yeah the the second quarter margins were very strong. I think the you know the kellstrom Synergy capture had a large part, the sort of capturing those maybe earlier than we initially anticipated. So that really drove some of the strong margins in the second quarter. If you look back historically, there is definitely a seasonality uh, in our margins and it really goes back to the

Yes.

I appreciate the question synergy capture is as easy and complicated and at the same time. This for real levers right. There's growing revenue while keeping your SG&A relatively flat. There is an element of price. There is an element of product cost and then there's an element of operating expenses. So each deal that we do when we're when we're going through our <unk> modeling.

The seasonality in the distribution business, we tend to see higher margins in the first half of the year um from basically lower cost of inventory. And so that that's really what's driving sort of that first half uh to the second half and you know maybe initially we expected to capture more of the synergies in the second half of the Year from kellstrom but that sort of accelerated up a quarter. Uh so that's driving some of the differences from what we initially anticipated.

Noah Levitz: Great. And then with leverage down to 2.2 times, can you talk a little bit about the M&A pipeline going forward? And then in particular, you've had a Honeywell fuel control deal for a while now, and it seems like those style of programs are very, very strong on the margin side. So are there other versions of that in the pipeline as well?

We know in our diligence kind of we tried to capture where we think the synergy opportunities are and what the very specific actions are that are going to be tied to each.

I would say that a lot of the cost synergies have been captured already on this deal. So we're really where we look at it as more in sourcing more on the product margin side or opportunities to grow top line, while kind of leveraging that base that operating expense base. So the SG&A as a percentage of sales will start to decline and generate strong.

John Cuomo: Yeah, I appreciate the question. I'd say that the M&A pipeline is very, very healthy. As we look at the back half of '25 and into '26, you know, we have a number of, you know, kind of active or soon-to-be active, you know, things in the market. It's always difficult to forecast something like that because as you dive in, it's, you know, it's either you're all in or you're all out. So we'll see how that plays out. But we do have a pretty robust and healthy pipeline, and obviously, it's a place we plan to use our balance sheet to support that inorganic growth. Oh, with regard to kind of our licensed manufacturing program, you know, we really need until the first quarter of next year to be perfect on our fuel control execution.

Great. And then with leverage down to 2.2 times, can you talk a little bit about the m&a pipeline going forward? Um and then in particular uh you've had the Honeywell fuel control deal for a while now and seems like those dial of programs are in a very very strong on the margin side. So are there other versions of that in the pipeline as well? Thanks,

Longer returns for the business. So I'd say, it's more on the top side of the income statement than the bottom side as we continue to integrate.

Okay fair enough.

And then just kind of a follow up I'm wondering what your latest thinking is on opportunities for the Honeywell business.

Yeah.

Like I, just said to Noah.

Of anything we're doing.

Uh, yeah, I appreciate the question. I'd say that the M pipeline is very, very healthy. Um, as we look at the back half of, uh, 25 and into 26. Um, you know, we have a number of, uh, you know, kind of active or soon to be active, um, you know, things in the market. It's, it's always difficult to forecast, something like that. Because, as you dive in, it's, you know, it's either, you're all in or you're all out. Um, so we'll see how that plays out, but we do have a pretty robust and healthy Pipeline. And obviously, it's a place we plan to use our balance sheet to support that inorganic growth with regard to, um, kind of our licensed manufacturing program.

That is probably the most precise program. It's our first manufacturing program. It's a fuel control that's on the <unk> six engine for Pratt, Canada, and the Rolls Royce $2 54.

John Cuomo: So we are, although we're excited about the program and the growth opportunities it offers, because it's our first program and it's something very unique that we haven't done before, we're more we're kind of looking at it with more of a longer game of focus. So I'd say don't expect anything there, at least, you know, in the next 12 months. So maybe back end of next year as we move into 2027, we'll look at growth opportunities and what the market looks like there for us.

Wanted to be absolutely perfect.

We have work to do through the first quarter to continue to get kind of final approvals and it to be our control without any interference from the original OEM. So.

So we do not plan to work on new programs until that's completed so I would tell you.

You know, we really need until the first quarter of next year to be perfect on our fuel control execution. So uh we are although we're excited about the program and the growth opportunities it offers because it's our first program and it's something very unique that we haven't done before we're more or have a kind of looking at it with more of a longer game a focus. So I'd say don't expect anything there um at least you know in the next 12 months. So maybe back end of next year as we move into 2027. We'll look at growth opportunities and and with the market looks like there for us,

Noah Levitz: Great. Thanks and congrats on the quarter.

Probably the first quarter I can give you a better strategy update once we get the full inflammation implementation done on this program.

John Cuomo: Thank you, Noah. Appreciate it.

Great, thanks. And congrats on the quarter.

Operator: Thank you. Our next question comes from the line of Jeff Van Senderen with B Riley Securities.

Thank you and I appreciate it.

Thank you.

But it's but it's yes, it's really it's performing very very well, we've got to clean up some supply chain issues that existed when we acquired the program and that's in process full financials are embedded in all end.

Our next question comes from the line of Jeff Van Cinder with B Riley securities.

Jeff Van Sinderen: Good morning, everyone. Let me add my congratulations. I wanted to follow up just on the Telstra synergies. It sounds like you're realizing those a little bit ahead of expectations. And wondering, where are you seeing the remaining opportunities for efficiencies, synergies, leveraging scale as you fully integrate recent acquisitions? Just wondering what the focus is there for the second half.

And everything that we're doing today, so very very pleased with the performance of the program, we just need a little bit of time.

Okay fair enough. Thanks for taking my questions.

Thank you.

Thank you and our next question comes from the line of Josh Sullivan with the benchmark company.

Hey, good morning.

We never want to let me add my congratulations um wanted to follow up just on the kellstrom synergies it sounds like you're realizing those a little bit ahead of of expectations. Um and wondering where are you seeing the remaining opportunities for efficiencies synergies leveraging skill as you fully integrate recent acquisitions just wondering what the focus is there, uh, for second half.

John Cuomo: Yeah, I mean, you know, I appreciate the question. You know, synergy capture is easy and complicated at the same time. There's four real levers, right? There's growing revenue while keeping your SG&A relatively flat. There's an element of price, there's an element of product cost, and then there's an element of operating expenses. So at each deal that we do, you know, when we're when we're going through our deer modeling, you know, in our diligence, kind of we try to capture where we think the synergy opportunities are and what the very specific actions are that are going to be tied to each. You know, I would say that a lot of the cost synergies have been captured already on this deal.

Hey, John.

John can you just expand on the hydraulics opportunity, maybe how large that market why are you maybe the right partner to leverage capabilities there.

Yes, I think I mean, it's a good question to say how large it is because it is a.

I laugh because it's the data that I'm trying to get my arms around myself because you look at.

Do you have kind of an unapproved market you don't have data so.

I would guess, it's somewhere between 50 and $100 million, but I'm, giving you a very very wide range, because it's really difficult to capture kind of what are the unauthorized shops are doing.

John Cuomo: So really what we look at is more insourcing, more on the product margin side, or opportunities to grow top line while kind of leveraging that operating expense base. So the SG&A as a percentage of sales will start to decline and generate stronger returns for the business. So I'd say it's more on the top side of the income statement than the bottom side as we continue to integrate.

For Us I think there's a few things number one is we're really able to drive kind of faster turnaround times and.

Our level of quality in supporting OEM authorized work is very very core to our strategy. So the second thing is we partner in unique ways. Its not a one size fits all for an OEM. So we can kind of customize and really listened to where the OEM needs us and where they don't so starting to understand how this product.

As we continue to integrate.

Jeff Van Sinderen: Okay, fair enough. And then just kind of a follow-up, wondering what your latest thinking is on opportunities for the Honeywell business.

It's performing where there's new parts, where theres used parts and again, where the MRO piece plays in and how can we bring all of that together to support. This OEM. So relationship is strong we've been able to capture business back that was the non authorized shop prior and listened to the OEM of some core customers that they wanted us to put.

Okay. Fair enough. Um, and then just kind of a follow up. I'm wondering what your latest thinking is on opportunities for the the Honeywell business.

John Cuomo: Yeah, I mean, like I just said to Noah, you know, it's of anything we're doing, that is probably the most precise program. You know, it's our first manufacturing program. It's a fuel control that's on the PT6 engine for Pratt Canada and the Rolls-Royce 250. And we want it to be absolutely perfect. You know, we have work to do through the first quarter to continue to get kind of final approvals and it to be our control without any interference from the original OEM. So we do not plan to work on new programs until that's complete. So I would tell you, you know, probably the first quarter, I can give you a better strategy update once we get the full implementation done on this program. But it's really, it's performing very, very well.

On to bring that work and to drive some near term success. So we're really pleased with the work so far.

Got it.

And then maybe this ties into your U S strategy, but you noted engine side continues to be strong in the component side.

You heard that in other areas of the industry as well, but just curious on your thoughts on the cycle for when that might slip wear component demand would outpace the engine side and I know your recent M&A has really been focused on the engine side, but just trying to get some perspective on the long term industry cycle.

Yeah, I I mean, like I just said to Noah, you know, it's uh, of anything we're doing. That's that, that is probably the most precise program, you know, it's our first manufacturing program, it's a fuel control. That's on, you know, the pt6 engine for Pratt Canada and the Rolls-Royce 250 for, um, and we wanted to be absolutely perfect. Um, you know, we have work to do through the first quarter to continue to get kind of final approvals and it to be our control without any interference from the original OEM. Um, so we do not plan to work on new programs until that's complete. So, uh, I would tell you, you know, it probably the first quarter I can give you a better strategy update once we get the full implementation implementation done on this program.

John Cuomo: We've got to clean up some supply chain, you know, issues that existed when we acquired the program, and that's in process. Full financials are embedded in all, you know, in everything that we're doing today. So very, very pleased with the performance of the program. We just need a little bit of time.

Yeah, It's a great question and so my answer is more opinion that I would say that that database.

But where.

We don't see.

Kind of an inflection point, where that shifts we see at least for the near term and the midterm.

But but it's but it's, it's, it's, it's really, it's performing. Very, very well. We've got to clean up some supply chain. You know, issues that existed when we acquired the program and that's in process full financials are embedded in all in um, you know, uh, and everything that we're doing today. So uh very, very pleased with the performance of the program. We just need a little bit of time.

Jeff Van Sinderen: Okay, fair enough. Thanks for taking my questions.

The engine aftermarket again, both for business in general aviation and commercial continuing to outpace the kind of the components side. The majority of that is really comes down to the supply chain and MRO capacity.

John Cuomo: Oh, thank you.

Okay, fair enough. Thanks for taking my questions.

Oh, thank you.

Operator: Thank you. And our next question comes from the line of Josh Sullivan with The Benchmark Company.

Thank you. And our next question comes from the line of Josh Sullivan with the Benchmark company.

Ken Herbert: Hey, good morning.

John Cuomo: Hey, Josh.

Hey, good morning.

So if I if you.

Ken Herbert: John, can you just expand on the hydraulics opportunity? You know, maybe how large is that market? Why are you maybe the right partner to leverage capabilities there?

Hey, Josh.

Go visit my engine related MRO shops.

If I can add capacity I can fill that with the work very very quickly we're still seeing more supply.

John, can you just expand on the Hydraulics opportunity? You know, maybe how large is that market? Why are you maybe the right partner to leverage capabilities? There

John Cuomo: Yeah, I think, I mean, you know, it's a good question to say how large it is because I laugh because it's the data that I'm trying to get my arms around myself. Because you look at when you have kind of an unapproved market, you know, you don't have data. So, you know, I would guess somewhere between 50 and 100 million, but I'm giving you a very, very wide range because it's really difficult to capture kind of what the unauthorized shops are doing. For us, I think there's a few things. Number one is we're really able to drive kind of faster turnaround times and, you know, our level of quality in supporting OEM-authorized work, you know, is very, very core to our strategy. So the second thing is, you know, we partner in unique ways. It's not a one-size-fits-all for an OEM.

More demand out there than there is supply in terms of shop floor space to do to do work. So I don't see that slowing down in kind of the next three years or so and that's probably as far as we look out.

Got it thank you for the time.

Thanks Ross.

Thank you and our next question comes from the line of Michael <unk> with <unk> Securities.

Hey, good morning, guys nice results. Thanks for taking the question.

Hey, John just maybe back to Sheila's question on the <unk>.

U S M moving away from that maybe transactional speculative should should we think about some of this new focus being accretive to your repair margins, especially as we think about sort of overall engine repairs are you going to be out there looking for certain U S and partners to drive it down.

John Cuomo: So we can kind of customize and really listen to where the OEM needs us and where they don't. So starting to understand how this product is performing, where there's new parts, where there's used parts, and again, where the MRO piece plays in, and how can we bring all that together to support this OEM. So the relationship is strong. We've been able to capture business back that was in an unauthorized shop prior and listen to the OEM of some core customers that they wanted us to focus on and bring that work in to drive some near-term success. So we're really pleased with the work so far.

<unk>.

Um, yeah, I think, I mean, you know, it’s a good question to say how large it is because I laugh because it's the data that I'm trying to get my arms around myself. Because you look at, uh, when you have kind of an unapproved market, you know, you don't have data. So, um, I would guess it's somewhere between $50 million and $100 million, but I'm giving you a very, very wide range. Because it's really difficult to capture kind of what the unauthorized shops are doing. Um, for us, I think there's a few things. Number one is we're really able to drive kind of faster turnaround times, and, um, you know, our level of quality in supporting OEM authorized work, you know, is very, very core to our strategy. So, the second thing is, you know, we partner in unique ways. It's not a one size fits all for an OEM, so we can kind of customize, um, and really listen to where the OEM needs us and where they don't. So starting to understand how this product is performing, where there are new parts, where there are used parts. And again, where the ML...

Yeah, I mean, I'd love to answer the question next quarter or the quarter after that.

Beginning of launching their strategy, but it's but it's a great question and it's exactly how we're looking at it. So I don't want to say unequivocally, yes until I know that we can execute on the strategy, but I would say it's a couple of things number one is how do you think about when something is broken. The question is do you need a new part do you need to use part or the need to repair and bringing.

Tomorrow plate piece plays in and how can we bring all of that together to support this OEM? So relationship is strong. Um, we've been able to capture business back that uh, was in an unauthorized uh, shop Pryor and um listen to the OEM of some core customers, that they wanted us to focus on, and bring that work in to drive some near-term success. So, we're really pleased with the work so far.

Ken Herbert: Got it. And then maybe this ties into your USM strategy, but you noted engine side continues to be stronger than the component side. We've obviously heard that in other areas of the industry as well, but just curious on your thoughts on the cycle for when that might flip where component demand would outpace the engine side. And I know your recent M&A has really been focused on the engine side, but just trying to get some perspective on that long-term industry cycle.

Got it.

and then, and then maybe,

Those three together so that you can think you're looking at it through the customers' lens rather than shipping a part to us into one of our MRO shops, we come back with a quota on price and lead time.

Turnaround time, and they basically say, it's beyond economical repair and the numbers don't work and we don't have erodible pool or a used Usn pool.

John Cuomo: Yeah, it's a great question. And so, you know, my answer is more opinion than I would say, you know, backed and data-based. You know, but where we don't see, you know, kind of an inflection point where that shifts. We see, you know, at least for the near term and the midterm, you know, the engine aftermarket, again, both for business in general aviation and commercial, continuing to outpace kind of the component side. The majority of that really comes down to supply chain and MRO capacity. So, you know, if I, and if you go visit my engine-related MRO shops and I can add capacity, I can fill that with work very, very quickly. We're still seeing more supply, more demand out there than there is supply in terms of shop floor space to do work.

This ties into your USM strategy but you know to you know, engine side continues to be stronger than the component side we've, we've obviously heard that in other areas of the industry as well but just curious on your thoughts on the cycle for when that might flip, where component demand would outpace the engine side. And I I know your recent m&a has really been focused on the engine side, but just trying to get some perspective on that long term industry cycle.

Not in a position to offer them an alternative at that point in time, so tying those two together number one is extremely customer friendly and we think that for us.

Yeah, it's a great question and so you know my my answer is is more opinion than I would say, you know back to the database. Um you know but where

We don't see.

Very good strategy for us the second piece is exactly where your initial comments are is how do we continue to look at for lack of a better word in sourcing our own work. So that we can continue to focus on margin expansion.

We've already taken some of the vortex work, which is the <unk> services business and we're in sourcing that into our <unk> component shop up in Connecticut, So looking at those types of opportunities.

You know, kind of an inflection point where that's shifts. We see, you know, at least for the near term in the midterm, you know the engine aftermarket again both for business and generally Aviation and Commercial continuing to outpace kind of the component side. The majority of that is really comes down to supply chain and mro capacity.

Within the business continues to be a priority in terms of margin expansion.

Got it got it and then I got it.

If you could just parse out a little bit I think I heard 50% revenue exposure to engines, maybe how that breaks out between commercial PGA and should we think about you talked about more alignment.

John Cuomo: So I don't see that slowing down in kind of the next three years or so, and that's probably as far as we look out.

So, you know, if I and if you go visit my engine related mro shops, and I can add capacity, I can fill that with work. Very, very quickly. We're still seeing more Supply, uh, more demand out there than there is Supply in terms of, uh, shop for space to do, uh, to do work. So I don't see that slowing down and kind of the next 3 years or so. And that's probably as far as we look out.

With some of the newer engines like me should should we look at kind of at the shop visit forecast is that good.

Ken Herbert: Got it. Thank you for the time.

Got it. Thank you for the time.

John Cuomo: Thanks, Josh.

Operator: Thank you. And our next question comes from the line of Michael Charmoly with Trua Securities.

Thank you.

Proxy for for your engine growth in commercial going forward.

Thank you. And our next question comes from the line of Michael Charmoli with Trua Security.

Ken Herbert: Hey, morning guys. Nice results. Thanks for taking the question. Hey, John, just maybe back to Sheila's question on the USM, you know, moving away from that maybe transactional speculative. Should we think about some of this new focus being accretive to your repair margins, you know, especially as we think about, you know, sort of overall engine repairs? Are you going to be out there looking for certain USM partners to drive down repair costs?

Yeah, I mean, I think our first Michael did we break it did you breakout the data on the market segments into the engine work.

No we didn't give that level of granularity okay.

But Michael will try to get some of that data and I'll for another quarter to get to that the data around that question, but it's north of 50% in terms of engine work and that's both of them are on the MRO side and on the distribution side of the business compare and I would say, it's probably not very different in our two market segments, but we'll get some data around it. The second question was.

Should should we think about some of this new Focus being a creative to, to your repair margins? You know, especially as we think about, you know, sort of overall engine repairs. Are you going to be out there looking for certain USM parts to drive down the Air cost?

John Cuomo: Yeah, I mean, I'd love to answer the question next quarter or the quarter after because we're just in the beginning of launching the strategy. But it's a great question, and it's exactly how we're looking at it. So I don't want to say unequivocably yes until I know that we can execute on the strategy. But I would say it's a couple of things. Number one is how do you, you know, if you think about when something is broken, you know, the question is, do you need a new part? Do you need a used part, or do you need a repair?

Regarding to leap I would say it was a little early to use that data for trends for us.

Still are more on the legacy engines.

Our focused on kind of continuing to evolve that but if you look at our core private Whitney, Canada, and our product with the U S. G. Safran type engines were probably heavier on kind of legacy engines today and continuing to focus on evolution to <unk>.

John Cuomo: And bringing those three together so that you can think, looking at it through the customer's lens, rather than them shipping a part to us into one of our MRO shops, we come back with a quota on price and lead time, you know, turnaround time, and they basically say it's beyond economical repair and the numbers don't work. And if we don't have, you know, a rotable pool or a used USM pool, you know, we're not in a position to offer them an alternative at that point in time. So tying those two together, number one, is extremely customer-friendly, and we think that's a very good strategy for us.

Newer newer type assets.

Got it got it and then just last one Adam do you have a target leverage ratio for year end.

I mean, given where we are right now Mike at two two times with the EBITDA.

Growth in free cash flow generation, we should be south of two times by end of the year, we didn't give a specific target, but we shouldn't do that.

More than two times.

Got it thanks, guys I'll jump back in the queue.

That's a good number I don't know if I ever had that number before.

Thank you once again, ladies and gentlemen to ask a question. Please press star one one on your telephone.

John Cuomo: The second piece is exactly where, you know, your initial comments are, is how do we continue to look at, for lack of a better word, insourcing our own work so that we can continue to focus on margin expansion. You know, we've already taken some of the bull checks work, which is the Telstra services business, and we're insourcing that into our TCI, you know, component shop up in Connecticut. So, you know, looking at those types of opportunities within the business continues to be a priority in terms of margin expansion.

Yeah. I mean I I I'd love to answer the question next quarter or the quarter after because we just we're just in the beginning of launching the strategy but it's a but it's a great question and it's exactly how we're looking at it. So I don't want to say unequivocally yes until I know that we can execute on the strategy but I would say it's a couple of things. Number 1, it's how do you, you know, if you think about when something is broken, you know, the question is, do you need a new part? Do you need to use part, or do you need a repair and bringing those 3 together? So that you again, thinking, looking at it through the customer's lens rather than shipping a part to us into 1 of our mro shops. We come back with a quote on on price and lead time, uh, you know, turn around time and they basically say it's beyond economical repair and then the numbers don't work and they're and, and if we don't have, you know, a rotable pool or a used usn pool, you know, we're not in a position to offer them an alternative at that point in time. So tying, those 2 together, number 1 is extremely customer friendly and we think that's the a very good strategy for us the second.

And our next question comes from the line of Ken Herbert with RBC capital markets.

Hey, John I appreciate the follow up I just wanted to ask the engine engine question, maybe a slightly different way do you see better opportunity today as you look to build out that exposure on maybe the MRO side. It sounds like it maybe relative to distribution as you think about engine and specifically sort of the organic pipeline.

Ken Herbert: Got it. Got it. And then I think on maybe if you could just parse out a little bit, I think I heard 50% revenue exposure to engines, maybe how that breaks out between commercial BGA. And should we think about, you know, you talked about more alignment, you know, with some of the newer engines like LEAP. Should we look at kind of the LEAP shop visit forecast as a good proxy for your engine growth and commercial going forward?

Pieces, exactly. Where, you know, your initial comments are, is how do we continue to look at the lack of a better word? Insourcing, our own work so that we can continue to focus on margin expansion. You know, we've, we've already taken some of the vortex work, which is the calcium Services business and we're insourcing that into our TCI, you know, component shop up in Connecticut. So, you know, looking at those types of opportunities, um, within the business continues to be a priority in terms of margin expansion.

And then as part of that does your existing relationship on.

On the engine side in particular with Pratt does that preclude you at all from working with other engineer them or other engine Oems on the distribution side.

No I mean, so first more of our direct and OEM distribution businesses on business in general Aviation engines.

Got it. And then I got um maybe if you could just part part out a little bit, I think I heard 50% Revenue exposure to engines, maybe how that breaks out between commercial BGA and should we think about, you know, you talked about more alignment, um, you know, with some of the newer engines like leap should should we look at kind of the the leap shop visit forecast that's a good.

And then it is on the commercial side, our commercial distribution work that we do that supporting engines is less engine OEM work and it's more.

John Cuomo: Yeah, I mean, I think first, Michael, did we break it? Did we break out the data on the market segments when we did the engine work?

Proxy for for your engine growth and Commercial going forward.

Yeah, I mean I think a first Michael did we break it. Did we break out the data on on the market segments? When did the engine work?

Ken Herbert: We didn't give that level of granularity.

Other Oems that are supporting that.

John Cuomo: Okay. Yeah, but Mike, we'll try to get you some of that data, and I'll, for another quarter, to get you the data around that question. But you know, it's north of 50% in terms of engine work, and that's both on the MRO side and on the distribution side of the business. And it's, you know, I would say it's probably not very different in our two market segments, but we'll get some data around it. The second question with regard to LEAP, I would say it was a little early to use that data for trends for us. You know, we are still more on, you know, legacy engines. We are focused on kind of continuing to evolve that.

That engine.

So I think we have opportunity to support.

Far more commercial.

Distribution opportunities and then with regard to Oems.

We were very very OEM centric and then our MRO shops that we have.

Centers of excellence that support different Oems and we don't see working with one precluding us from an opportunity to work with the other.

No, we we didn't give that level of granularity. Okay, yeah. So but Mike, we'll, we'll try to get you at some of that data and I'll uh for for another quarter and to get to that the data around that question. But you know, it's north of 50%, in terms of engine work and that's both of them are on the mro side and on the distribution side of the business compared and and it's, you know, I would say it's probably not very different in our 2 market segments, but we'll get some data around it. The second question,

Great. Thank you.

Thank you and I'm showing no further questions. So with that I'll now turn the call back over to President and CEO, John Cuomo for any closing remarks.

John Cuomo: But if you look at, you know, our core Pratt & Whitney Canada, our Pratt & Whitney US, GE Safran type engines, we're, you know, probably heavier on kind of legacy engines today and continuing to focus on evolution to more, you know, newer type engines.

Thanks, everybody for joining our call today. We appreciate the continued support of the story of a great.

Thursday.

Ladies and gentlemen, thank you for participating this does conclude today's program and you may now disconnect.

Ken Herbert: Got it. Got it. And then just last one, Adam, do you have a target leverage ratio for year-end?

With regarding to LEAP, I would say it was a little early to use that data for trends for us, you know, we are uh still a more on, you know, Legacy engines. Um we are focused on kind of continuing to evolve that, but if you look at, you know, our corporate Whitney Canada and our Pratt Whitney us GE saffron type engines were, you know, probably heavier on kind of Legacy engines today and continuing to focus on Evolution, to, uh, to more to, you know, newer newer type engines.

Got it, got it. And then, just last 1. Adam, do you, do you have a Target leverage, uh, ratio for year end?

Jeff Van Sinderen: Given where we are right now, Mike, at 2.2 times with the EBITDA growth and free cash flow generation, we should be south of two times by the end of the year. We didn't give a specific target, but we should be lower than two times.

Ken Herbert: Got it. Thanks, guys. I'll jump back in here.

Uh, I mean given where we are right now. I'm like at 2.2 times with the ebita uh growth and free cash flow generation. We should be south of 2 times. The end of the year. We didn't give a specific Target but we should be okay lower than 2 times.

Noah Levitz: That's a good number. I don't know if I ever had that number before.

Got it. Thanks guys. I'll jump back in the queue.

That's a good number. I don't know if I ever have that number before.

Operator: Thank you. Once again, ladies and gentlemen, to ask a question, please press star 11 on your telephone. And our next question comes from the line of Ken Herbert with RBC Capital Markets.

Thank you.

Once again, ladies and gentlemen.

Our next question comes from the line of Ken Herbert with RBC Capital markets.

Ken Herbert: Hey, John. Appreciate the follow-up. I just wanted to ask the engine question maybe a slightly different way. Do you see better opportunity today as you look to build out that exposure on maybe the MRO side? It sounds like it may be relative to distribution as you think about engine and specifically sort of the organic pipeline. And then as part of that, does your existing relationship on the engine side in particular with Pratt, does that preclude you at all from working with other engine OEMs on the distribution side?

Hey, John appreciate the follow-up. Um, I just wanted to to ask the engine engine question, maybe a slightly different way. Do you see better opportunity today as you look to build out that exposure on maybe the mro side? It it sounds like it maybe relative to distribution as you think about engine and specifically sort of the organic Pipeline and then as as part of that does your existing relationship on on the engine side, in particular with Pratt, does that preclude you at all from working with other engine, Mr. Uh other engine oems on the distribution side,

John Cuomo: No, I mean, so first, more of our direct engine OEM distribution business is on business in general aviation engines than it is on the commercial side. Our commercial distribution work that we do that is supporting engines is less engine OEM work, and it is more other OEMs that are supporting that engine. So I think we have opportunity to support far more commercial distribution opportunities. Then with regard to OEMs, I mean, we are very OEM-centric. In our MRO shops, we have centers of excellence that support different OEMs, and we do not see working with one precluding us from an opportunity to work with another.

Engine. Uh, so I think we have opportunity to support um, you know, far more, uh, you know, commercial you know, distribution opportunities. Um, and then with regard to oems, you know, where, you know, we're very, very OEM Centric. And then our mro shops, we have, you know, centers of excellence that support different oems and we don't see working with 1, Pro us from an opportunity to work with another

Ken Herbert: Great. Thank you.

great. Thank you.

Operator: Thank you. I am showing no further questions. With that, I will now turn the call back over to President and CEO John Cuomo for any closing remarks.

Thank you. And I'm showing no further questions. So, with that, I'll now turn the call back over to president and CEO John Cuomo for any closing remarks.

John Cuomo: Thanks, everybody, for joining our call today. We appreciate the continued support of the story. Have a great Thursday.

Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.

Uh, thanks everybody for joining our call today. We appreciate, uh, the continued support of the story. Have a great, uh, Thursday.

Ladies and gentlemen, thank you for participating. This does conclude today's program and you may now disconnect