VSE Corporation

Greetings. Welcome to VSE Corporation Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Noel Ryan. You may begin.

Thank you, Operator. Welcome to VSE Corporation's Third Quarter 2021 Results Conference Call. Leading the call today are our President and CEO, John Cuomo, and Chief Financial Officer, Steve Griffin. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks 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. The appropriate GAAP financial reconciliations are incorporated into our presentation where available, which is 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. And with that, I would like to turn the call over to John Cuomo for his prepared remarks.

Thank you, Noel. Welcome, everyone, and thank you for taking the time to join our call today. Let's begin on slide three of our conference call material. BSE had a strong third quarter, representing the highest quarterly revenue run rate since the fourth quarter of 2016. Excluding non-recurring items, total revenue for the quarter increased by 27% year over year, supported by total year over year growth across all three reporting segments. Adjusted EBITDA for the quarter increased by 19% year over year, while adjusted net income increased by 42% versus the prior year period. We continued to execute on our aftermarket distribution and MRO strategies during the third quarter, while positioning the business to generate above-market revenue growth in higher margin verticals that leverage our unique value proposition through new contract wins, long-term program extensions, new program execution, the addition of new MRO capabilities, growth in our e-commerce platforms, and contributions from recently completed acquisitions. VSE has created a strong recurring base of business which will drive continued growth and margin expansion opportunities for our business into the future. Specifically, within our aviation segment, revenue increased more than 100% year over year to a record $73.1 million, driven by new program execution and contributions from the global parts acquisition. Aviation has now posted five consecutive quarters of sequential revenue improvement driven by both organic and inorganic growth, while both aviation adjusted EBITDA and adjusted EBITDA margins have trended materially higher versus prior quarter and prior year levels, consistent with our focus on higher value margin enhancing opportunities. Third quarter aviation distribution revenue was nearly 190% above the prior year, and more than 90% above the second quarter 2021, due mainly to organic share gains within the business and general aviation market, an area of significant long-term opportunity for the company, and the positive impacts of our global parts acquisition. While airline MRO revenue improved 8% versus the prior year period, MRO activity remains below pre-pandemic levels. As this market continues to recover, we expect to see further improvement in aviation margins as MRO revenues become a larger portion of the overall aviation revenue mix. As discussed on recent calls, BSE continues to build a business and general aviation platform that encompasses a full breadth of products and services, a tip-to-tail approach to support the requirements of our B and GA customers. One that builds upon our established MRO capabilities and parts distribution business. In June, VSC Aviation commenced service under a 15-year, $1 billion engine accessories distribution agreement. This agreement represents VSC's largest business and general aviation focus contract to date. The combination of both strong customer demand for the products and services we support, and execution and implementation by the VSE team will result in contract revenue of $12 million in 2021 and $45 million in 2022. Earlier this month, we announced that VSE Aviation had entered into a five-year extension with a global aircraft engine manufacturer valued at approximately $125 million. Under the terms of the extension of this agreement, we will remain the worldwide distributor of new fuel control systems and associated spare parts to the business and general aviation and rotorcraft market to support this leading global OEM. Similar to our engine accessories distribution program, this provides a multi-year pipeline of higher value contractual revenue and further positions us to become the leading integrated supplier of flight critical systems and MRO services to the B and GA market and builds upon a long-term relationship with another major OEM. In summary, our aviation segment continues to execute on plan while continuing to build a leading global distribution and MRO services brand. While aviation is now our largest segment by revenue, we still have work ahead of us, particularly as we continue to execute on the new program wins and focused actions to drive EBITDA margin expansion. I'm incredibly proud of what this team has accomplished, their relentless focus on the customer, and I see ample runway for the above-market growth in the years ahead. Turning now to a review of our fleet segment, excluding a non-recurrent COVID-related personal protective equipment order in the prior year period, fleet revenue increased 6% on a year-over-year basis in the third quarter. driven by continued growth in our commercial e-commerce fulfillment business. Commercial revenue increased by 66% on a year-over-year basis in Q3, representing 34% of total revenue in the period. Complete adjusted EBITDA margins improved 70 basis points sequentially in the third quarter. Our federal and defense business had a solid quarter, with revenue up 2% on a year-over-year basis, driven by a combination of organic growth contributions and the recently completed HACO special services acquisition. Federal segment backlog increased 23% year-over-year during the third quarter, as supported by new business development activities. Before I turn the call over to Steve, allow me to share some thoughts on the macro environment. Continued supply chain disruption and cost inflation are business risks we are actively mitigating. At this time, we are not reducing any internal revenue or margin forecast in our current outlook for the remainder of the year. In closing, each of our businesses executed at or above plan during the third quarter, while continuing to prioritize customer program execution and new business development within underserved higher margin distribution and MRO markets. We have a strong pipeline of new business development activity and announced new contract wins and program extensions that we expect will provide long-term recurring revenue streams at attractive margins. While 2021 was a year of significant upfront working capital investment in new program inventory, we expect to realize the benefits of these investments as we look ahead to 2022, resulting in improvement in free cash flow versus current year levels. We continue to evaluate a number of smaller, complementary acquisitions while remaining mindful of net leverage, which we expect will move towards 2.5 times by year-end 2022, given a combination of improved EBITDA generation and debt reduction. With that, I'll now turn the call over to Steve for a review of our financials.