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spk09: 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.
spk05: 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.
spk04: 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.
spk08: Thanks, John. We'll now turn to slides four and five of the conference call materials for an overview of our third quarter performance. We reported $200.6 million in revenue in the third quarter, an increase of 27% from the prior year period, excluding the impact of a non-recurring pandemic-related PPE order in our fleet segment in the third quarter of 2020. On an adjusted basis, Revenue increased across all three reporting segments on a year-over-year basis in the third quarter. Our aviation segment grew for the fifth straight quarter. The 102% year-over-year growth was driven by a combination of new program wins, share gains, and contributions from our global parts acquisition completed in July 2021. Federal segment growth was driven by a combination of organic and inorganic wins, and the fleet segment growth was spurred by commercial fleet and e-commerce fulfillment revenue, as well as slightly higher USPS revenue. We generated adjusted EBITDA of $20.4 million in the third quarter, an increase of 19% on a year-over-year basis. Our adjusted EBITDA margin rate was just under 11%, as we saw the aviation segment continue to improve profitability both on a year-over-year basis and sequentially. Operating cash flow, less total capital expenditures, was $21 million in the third quarter. Turning to slide six, aviation segment revenue increased more than 100% year-over-year in the third quarter and was up 54% versus the second quarter of 2021. Both our distribution and repair businesses grew on a year-over-year basis, with distribution outperforming repair, primarily driven by improved end market demand and new contract wins. Distribution revenue, excluding the global parts acquisition, is back above pre-pandemic levels, while our repair business has been slower to recover. We anticipate a further repair recovery throughout next year, particularly as we expand our integrated solutions across a growing base of business and general aviation customers. Aviation adjusted EBITDA increased over 200% year-over-year and more than 80% sequentially, while adjusted EBITDA margins increased 340 basis points year-over-year to 10%. EBITDA margin growth continues to be a top priority for this segment as we implement new programs and drive scale. Turning to slide seven, fleet segment revenue increased 6% versus the prior year period. excluding the impact of a non-recurring PPE order in the third quarter of 2020. This growth was driven by a combination of higher commercial revenue and USPS work, offset by declines in DOD revenue. Commercial revenues were $20.7 million in the quarter, increased 66% versus the third quarter of 2020, and accounted for 34% segment revenue, in line with our continued revenue diversification efforts. Segment adjusted EBITDA of $7.7 million was down 14% versus the prior year period, but improved 10% versus the second quarter of 2021. Adjusted EBITDA margins declined 120 basis points year over year, however, expanded 70 basis points sequentially to 12.8% as the segment diversifies its sales mix and positions itself to gain scale on the recent organic investments in commercial markets. Turning to slide eight, federal and defense services segment revenue increased 2% on a year-over-year basis, driven by contributions from the HACO special services acquisition and new program wins, offset by the expiration of a contract with the U.S. Army in 2020. Federal adjusted EBITDA was $6.5 million in the quarter, and adjusted EBITDA margin rates were 9.7%. Federal segment-funded backlog increased 23 percent versus the third quarter of 2020 due to increased bidding and business development wins. Turning to slide nine, at third quarter end, we had $117 million in cash and unused commitment availability under our $350 million credit facility. The company's existing credit facility includes a $100 million accordion provision subject to customary lender commitment approvals. As of September 30th, BSE had total net debt outstanding of $294 million. Adjusted EBITDA for the trailing 12-month period was $73.1 million and excludes the EBITDA contribution from our two recent acquisitions prior to the date of acquisition. Reported net leverage was four times, and as John mentioned earlier, we expect to deliver incremental revenue and EBITDA from recent working capital investments in new program inventory which will result in net leverage at or below 2.5 times by year end of 2022. With that, operator, we are now ready for the question and answer portion of our call.
spk09: Thank you. And at this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. And our first question is from Ken Herbert with RBC Capital Markets. Please proceed with your question.
spk07: Hi, good morning, John and Steve and Noel. Nice quarter.
spk04: Thanks, Ken. Good morning. Good morning.
spk07: John, I first just wanted to ask, on the aviation segment, on the top line, can you provide any more color on maybe some of the mix of business jet versus, I know you talked a lot about the growth in the distribution versus MRO, but within the distribution side in particular, as we think about the business jet side relative to commercial transport or geographically, any more color Any more ways to parse out that very strong growth within the aviation segment would be helpful?
spk04: Yeah, sure. You know, we don't break out the revenue by market channel, but, you know, when I first came on board two years ago, I kind of shared that the business was about 50% business general aviation, 50% commercial. The business has definitely skewed more business in general aviation, specifically on the distribution side. over the last 12 months. So the global parts acquisition and the contributions from that business are all business and general aviation that they do not support commercial customers. And then our engine accessories program and the revenue and earnings supported from the ramp up of that program or contributions from the ramp up that program are all business and general aviation associated as well. So as we get to the back end of 2021, we're seeing the distribution business skew heavily towards BG&A versus commercial. On the repair side, it's still, you know, a similar mix that we consistently had in the past.
spk07: Okay. That's helpful. And it looks like incremental adjusted EBITDA margins were sort of low to mid-teens in the quarter. How do we think about the opportunity as some of the new contract wins ramp? And what should the progression of the EBITDA margins within the aviation segment look like through the rest of this year and perhaps into 2022?
spk08: Yeah, sure, Ken. So the adjusted EBITDA margin for the quarter in the business was 10%. up over three points versus the prior year and up a point and a half versus the prior quarter. So what we've communicated is you should expect sequential growth from the business as we continue to experience the recovery and the new program introductions. We've historically communicated that we expect to be mid-teens, which is where this business had been historically, and that all the new program wins would fit in with that, so in line with historic communications around the EBITDA margin rate. So I think what you should expect as we transition to 22 is continued improvement in the EBITDA margin rate in the aviation segment as the business recovers. You know, all at the end of the day, subject to the recovery in the repair business, which we've talked about as being an incredibly important indicator as to how we'll get back to that mid-teens rate.
spk07: Okay. That's helpful. And just one final question. I know you made the comment, John, that you weren't seeing any real significant disruptions yet from supply chain or cost inflation. But I'm curious, are there any areas of concern with your OEM partners when I think about the distribution business? And are you seeing any potential impact on their supply chains? And are there any steps you're having to take to maybe mitigate risk down the road on the distribution side?
spk04: Yeah, no, it's a great question. And just to kind of clarify my comments, we are seeing both inflation in labor as well as in some areas of our, in cost in some areas of our business. We have actions in place that we've been taking over the last 12 months to mitigate, you know, the risk that we see and how it could negatively impact the business. And what we've done specifically is you've seen us put a lot of working capital to use in terms of inventory and making sure that, you know, my assumption having been in distribution for the last 20 plus years is that we're going to see lead times continue to push out, specifically, you know, as we see recovery in the markets like commercial aerospace. And you're going to see more compression there. So we've been, you know, a little bit more aggressive on inventory purchases to be well prepared to manage that and actually hopefully a little bit opportunistic as well. The other thing I'd say is we have a very, in our aviation business, we have a very proprietary part heavy content With, uh, without a lot of, uh, long-term fixed price contracts, it's a little bit more transactional in nature. So it does allow us to, you know, to, to push that cost directly to the customer, similar to our fleet business. So the fleet business is where we've seen probably the most inflationary, um, you know, uh, and supply chain pressure on product, but we've been able to really manage that with, uh, pushing that cost, both logistics and, and price down to the customer. You know, it's unique times right now, and we're looking at it both in terms of how do we mitigate risk as well as how do we create opportunities for the business with the inventory that we have to capitalize on both new customer, you know, relationships because we're solving problems and to expand margins where we can.
spk07: Great. Well, thank you very much. I'll pass it back there.
spk09: Thanks, Ken. And our next question is from Michael Smith. Sarah Moley with Truist. Beautiful to see you with your question.
spk03: Hey, good morning, guys. Thanks for taking the question. Nice results. Steve, maybe just clarity. Can you give the organic growth rate in aviation? I mean, you had, I guess, global parts two months, should we assume maybe eight to 10 million of revenue contribution from those guys?
spk08: Yeah, so the global parts business contributed $13 million worth of revenue in the quarter. It was just a little over two months in terms of total contribution. The organic growth rate, so if you were to compare sort of sequential growth, 2Q to 3Q aviation, excluding the global business, it was up about 26% from a revenue standpoint. So growth excluded global and obviously good results from the global team as well.
spk03: And was all that, the parts, obviously all distribution? or did some of that flow into repair? Repair is immaterial within that number of $13 million. Got it. So was there anything different? I mean, if I look, I think you called out on the slides – distribution up 187% year over year. It looks like if you had a 13 million contribution, I mean, that's a pretty big step down from 2Q June. I think he did 28.5 in distribution. Was there anything in the core business? I mean, X global parts, it would seem like that distribution revenue is down significantly. No.
spk08: No, I don't think that I would say that. Distribution was $54 million in the quarter. So $13 million contribution from the – Okay, got it, got it.
spk03: $54 million in the quarter. Okay. Yeah. Got it. Yeah, it said distribution revenue up 187%. Okay, yeah, got it, got it. No, that makes sense. Okay, and then just on the – maybe back to Ken's question on supply chain and raw materials, looking at the inventory, pretty significant build this quarter and investment in inventory. How much was for, you know, some of the new contracts, ramping up these new programs? And I think, John, you just said you're starting to look at extending lead time, so presumably you're building some buffer there. I mean, how do we think about the inventory levels going forward?
spk08: Yeah, I mean, I'll give you sort of the financial answers as it relates to cash flow. So we feel good about the inventory positions that we're in today. As you know, we are continuing to stock for inventory associated with the new Pratt & Whitney Canada deal, which we announced previously would be $56 million of inventory purchases. So we are stocking as part of the build-out of that program. In the quarter, we generated $21 million worth of free cash flow. Obviously, we used quite a bit to start the year. So we feel good, I think, in terms of the investment level in the business. And by the end of the year, we've communicated – will be free cash flow negative, but sort of on a trajectory to have a year-over-year improvement, obviously. As it relates to the inventory levels, John, in terms of stocking and lead times, maybe I'll let you handle that.
spk04: Yeah, I'd say, Mike, that nothing that we're going to do will take us off of our plan to be free cash flow positive next year. So without knowing if some great new opportunity comes out in the market that may shift that. But based on our current organic plans, yes, we will invest further, but it won't change our 2022 free cash flow forecast.
spk03: Got it. Got it. And on the pricing environment, I mean, John, you've been through a couple cycles here. I mean, do you think pricing could add a couple points either to growth or margin? I mean, you've probably got a good amount of inventory that probably can be, you know, dialed up in terms of value right now. How do we think about, you know, maybe some incremental tailwind to top line and maybe margin contribution, you know, assuming, you know, customers out there, you know, need to get their aircraft off the ground and, you know, probably going to pay for, you know, whatever they can get their hands on. I mean, do you think that's a bit of a tailwind?
spk04: I think right now in the commercial space, there's still, the recovery is still, it's slow and steady. And I believe that there's still a large amount of inventory in the marketplace. Do I think there'll be pricing power and shift in prices sometime in 2022? Absolutely. But I would say on the commercial side, we're not seeing that yet. And on the business and general aviation side, we're really not seeing as many supply chain issues out there, I think. And that's why you know, I was pretty transparent in the earlier statements about no impact to our, you know, to our business for the remainder of the year. I'd say maybe where there's some opportunity would be in the fleet business, you know, to, you know, where we can potentially, you know, expand our margins there.
spk03: Got it. And we've been talking about, I think, supply chain relative to aviation. You just brought up fleet, thinking about, you know, kind of white trucks in the market you serve there and everything we're hearing, you know, on broader auto, I mean, supply chain, inventories, lead times, anything jumping out, you know, on that side of the business? Yeah.
spk04: I mean, so remember our commercial business in that market was very small and you can see our commercial growth and, you know, the whole 21 and 22 is all about that customer diversification strategy for that business and really, you know, building a business that's less reliant on one single customer. And I'm very, proud and pleased at how the team is performing in that diversification strategy. So it's not like we have a ton of long-term contracts on the commercial space where we're short inventory. So I'd say we've been very opportunistic with our relationships to overstock in products and actually build new customer relationships because we're solving some problems. But you are absolutely correct that we are seeing more supply chain issues and cost inflation logistics issues on that segment than the other two. Got it. Got it. All right. Perfect. Thanks, guys. I'll jump back in the queue here.
spk09: Thanks, Mike. And our next question is from Luis de Palma with William Blair. Please proceed with your question.
spk02: Good morning, John, Steve, and Noah. Morning, Louis. Good morning. For John, is the main reason that the repair business has been slower to recover than your distribution business because the mix of repair is more skewed towards commercial, whereas distribution is more skewed towards business aviation and business aviation has just recovered much faster? Is that the simple reason or is there something else?
spk04: We do have repair capabilities in our business and general aviation segment, and they are recovering quite well, and they're very close to, if not above, pre-pandemic levels. Our commercial MRO business is still below pre-pandemic levels, and the recovery is slow and steady, but it's slow and steady.
spk02: Great. And as it relates to your fleet business, you discussed a sequential EBITDA margin improvement. Are we at a point in which the fleet EBITDA stabilizes as your commercial sub-segment experiences rapid growth and your USPS business achieves some slight stabilization or maybe a modest decline? Have we reached a point of overall EBITDA stabilization for fleet?
spk04: I'd say we're close, but I don't want to say that we're exactly there yet where you can say this is the bottom and now you can expect steady improvements. We are committed and we feel very confident that we can get the business to return to mid-teens operating margins. We are continuing to invest to support our commercial fleet business. In the back half of 2021, we stood up a center of excellence to support our e-commerce initiatives around that business You know, we continue to invest to make sure that we are building centers of excellence. We have an ERP system conversion that will go in in early 2022. So I'd say that the reason, you know, I'd summarize that in one customer, which is the USPS. Our goal is to keep the USPS as flat to slightly down as possible. The contribution margin from that customer is strong. And if that number is slightly off, you may see a slight bounce in the operating income until we get to levels that are stabilized over the next 12 months. So I'd say we're close, but not exactly there yet. Steve, any color you want to add?
spk02: I think that adequately covers it. Great. And one final one. On Monday, one of your larger competitors, Amentum, announced that it is acquiring PAE. Would you view PAE as one of your closest comps for your federal division?
spk04: I mean, they're definitely a comp and definitely a competitor. They play a little bit more on the technical side than we do. You know, we've got a balance of MRO services work as well as technical and consulting work in our federal defense portfolio. So they skew more on the right side than the left side, but they are absolutely, you know, we look at them as a comp, you know, and a competitor. Great, sounds good. Thanks, everyone.
spk09: Thank you, Louie. And our next question is from Austin Wilder with Canaccord. Please proceed with your question.
spk00: Good morning, John. My first question here is just on the federal and defense segment, you know, the 23% increase in funded backlog. There's clearly been a strategy here to sort of move from the, you know, from cost plus a firm fixed price contract. Have you indicated what the margin differential is on that or at least ballparked it between the two types of contracts as you change the mix more from one to the other?
spk04: We haven't, but what I will say, what we have shared is the business has historically performed in the low single-digit margin rate as a total segment. And we've shared that the business will perform at high single digits, hopefully pushing to a double-digit margin rate. So with that, I think you can kind of finish the math on kind of the mix. So we are definitely moving into higher margin verticals, both in our consulting and services business, as well as more technical MRO and distribution work.
spk08: Yeah, and just for you to know, Austin, so like going back to 2018, 2019, the level of fixed price work done in the business was, you know, low 20% of total of the overall federal and defense segment. Last year, it was 54%. This year, you know, we're somewhere in the midst of like high 30s. This quarter was around 38%, and last quarter was 47%. So the shift towards the fixed price contract has been a significant driver of the overall margin improvement that you've seen in that segment over the last 24 months.
spk00: Okay, good. Yeah, that's very helpful. Now, just on the aviation segment, you've obviously seen the recent news that the U.S. has reopened international travel to Europe. Have you already started seeing an uptick in demand for MRO work on wide-body aircraft or other commercial aircraft because of that, or do you anticipate that soon?
spk04: We have not. We have not seen, you know, I was just over in Europe this last week at the MRO Europe show. There is definitely a different level of enthusiasm about that market, but that enthusiasm right now is in energy and not in necessarily backlog. So we've seen, you know, relatively consistent month-over-month improvements in inputs in our commercial MRO space. but we haven't seen, you know, a real kind of bump on the heavy, on the component of repair side with regard to wide body based on the recent announcement. We do expect it will, you know, again, materially impact positively 2022, but haven't seen it yet.
spk00: Okay, great. And on the aviation segment, on the business jet side, there's been a lot of news about business jet OEM build rates being materially higher and demand rising. And so, you know, if you look at business jet travel rates in terms of traffic, it's, you know, 15 to 20% higher than either 2020 levels or 2019 levels. So obviously you guys are very bullish on the business and general aviation market. So do you think this is sort of a, a temporary trend or do you think there's been a long-term structural change in the market?
spk04: I think it's been a long-term structural change. I think it's a great question because I've obviously been in this market for about 25 years and, you know, there was a little bit of, you know, you saw like a pop in the market and then it would kind of settle down and it was never a real market. We're seeing this as a, you know, you've got new players in the market like Wheels Up. You've got used aircraft, you know, and parked aircraft at the lowest levels historically. You've got people like NetJets and the like that are pretty much at capacity in terms of access to aircraft. So we expect this to be a continued trend, and we see our tip-to-tail approach in terms of both MRO capabilities and distribution products to be something that is a long-term sustaining revenue and margin opportunity for the business.
spk00: Awesome. Well, that definitely sounds very exciting, so I'll pass it back, and congrats on the quarter, guys.
spk04: Thanks, Austin. Appreciate it. Thanks.
spk09: And our next question is from Jeff Van Sinderen with B. Riley. Please proceed with your question.
spk01: Hi, everyone, and let me add my congratulations. A bunch of my granular questions were answered, so we'll take a crack at a multi-part, broader one, and maybe you can provide some thoughts I believe previously the expectation was for 40% of EBITDA to fall in first half and 60% in second half. I'm wondering if that's changed, and if so, kind of what weighting you're contemplating now. And then also, would you anticipate that revenues will grow sequentially overall from Q3 to Q4 this year? And then any thought or color on EBITDA margins that might be feasible for Q4?
spk08: Sure. So Jeff, good to hear from you. We're not going to give guidance on the fourth quarter, so I can't answer the, you know, I know originally at the start of the year back in, I think it was February or January, we communicated an expectation around a 40-60 split. I can't necessarily, you know, give you that answer without just giving you the fourth quarter, I think. But what I would say is, you know, we're pleased by the performance within the aviation segment. So you've seen the strong revenue and EBITDA recovery. We've, you know, internally modeled an expectation around that business sequentially recovering. So, you know, I'd say it's in line with our expectations. And we're pleased with sort of that trend. And that was going to be the biggest driver of what we expected to be a stronger back half of the year. You know, we've seen strong results from our FDS business. Back at the beginning of the year, we communicated that, you know, on a year-over-year basis, 2020 versus 2021, the EBITDA margin rate would be a bit of a headwind. Now, last year, we were north of 11% EBITDA margin rate. I think on a year-to-date basis, we're just above 10%. So we've seen some contracts move from fixed price to cost plus within that portfolio. And so as a result, you know, we're kind of sticking to our guidance around, you know, year over year, a bit of pressure. But overall, we're pleased with the business's performance. As it relates to sort of planning for the fourth quarter, we haven't given specific guidance, but other than to say, you know, we still, and I think John answered the fleet question already, I think the FDS business is continuing to go task order by task order to identify where those opportunities are to take on some of that risk for the fixed price work. So I'd say, you know, you should model out the full year and compare it to last year and you can get a sense for where we're at now and what you think the fourth quarter might be. Aviation, as I mentioned, you should expect us to continue to drive from a recovery standpoint, all predicated upon, you know, some level of recovery within the repair business.
spk01: Okay. And then as a follow-up to that, and I know, understand it's early, but kind of looking forward to 2022 since it's only a couple months out, Any thoughts on sort of organically being able to grow EBITDA faster than sales? Any thoughts around that?
spk08: Yeah, I mean, I think the places where you're going to see the most leverage opportunity is a place like aviation, where we've made significant investments into the business. And we've talked about this, that versus our competitors, we didn't necessarily take out as much cost as we wanted to be able to grow as the overall market recovered. So you should expect us to be able to drive leverage and hence, therefore, drive overall EBITDA margin improvement as we head into next year. Within the federal and defense segment and the fleet segment, we haven't necessarily given guidance, but as John mentioned, within fleet, we've got sort of two dynamics. One is the mixed shift towards commercial, which we've communicated as lower margin, but also there's an opportunity there from a scaling perspective as well, as we've made investments both in Salesforce as well as new facilities to support that growth. So You know, there's that two different dynamics, one hurting, one helping, as we continue to look into that next year.
spk01: Okay. Thanks for taking my questions, and best of luck.
spk08: Absolutely. Thank you.
spk09: And our next question is from Chris McGinnis with Sidoti & Company. Please proceed with your question.
spk06: Good morning. Nice quarter, and thanks for taking my question. I just had a question around the new five-year contract you just recently announced. Can you just talk about the difference, I guess, from the prior contract, what you added to it, and then maybe how much of a – maybe a margin profile difference there might be associated to that? Thanks.
spk04: Yeah. You know, Chris, I mean, so I think you – I hope you guys have seen the level of transparency since I've been on board and Steve's been on board that we try to have both in our disclosures as well as on these calls, obviously with the exception of areas that we think will competitively harm us. What we did with that contract specifically is, this is a legacy VSE contract, been here earlier than myself, our head of aviation and Steve, and we saw a tremendous opportunity to not only drive the long-term revenue and margin from that program, but also there's a little opportunity to take advantage of a situation in the market where we can get more favorable terms. So what I would say is that it's as good or better than it was before, and as each contract on the legacy side of the business is getting close to expiration, we have a really sophisticated and strong team in place that's able to drive higher value out of those programs than we have in the past. So I'd like to kind of keep it more qualitative than quantitative right now on that program.
spk06: No, I understand. Thanks for taking my question, and good luck in Q4.
spk09: Of course. Thank you. Thanks, Chris. And just as a quick reminder, if anyone has any questions, you may press star 1 on your telephone keypad. Our next question is from Michael Cermoli with Trois. Please proceed with your question.
spk03: Hey, guys. Thanks for taking the follow-up. John, just on the topic of labor. You know, I know you're not going to kind of gave the color you were going to give. But as we look at this federal contractor vaccination deadline of December 8th, I mean, how do you how do you think about your employee base there? I don't know if you can share anything in terms of which employees are vaccinated in terms of percentage. And then, you know, any any specific labor tightness you're seeing on, you know, within the aviation side of your business that we should be aware of? Sure.
spk04: You know, we are not immune from the macroeconomic conditions. We're not immune from impacts that, you know, face all businesses. We do operate in three very distinct segments from an operating perspective. So the mandate impacts our federal and defense team only, and we're working through that now. So we're not in a position where we're able to share the data or what the outcome will be until probably, you know, Q4. We are working to mitigate it. What I would say is more than anything, we're trying to really get our – just as we're trying to get all of you engaged on not just the quantitative measures and the proof points and the improvements we've made in the business, but the culture and the business that we're driving and the value that we're adding to the marketplace that people want to work here. So, yes, we are seeing some attrition, and, yes, it's an area of stress. But on the flip side, we are taking advantage of the attrition from other businesses to And we're able to really attract top talent that are excited to be part of a nimble, agile, entrepreneurial business that's going to scale and build something pretty powerful in the market for customers. So, you know, it's a balance of one day, you know, pulling your hair out and the next day feeling pretty enthusiastic about what we're building. But it's definitely interesting times on the labor front, something that's definitely, you know, we talk about supply chain. That I've been through multiple cycles. This is definitely unique. But right now we feel we've got it under control for the federal and defense team, and we'll continue to keep you guys updated if anything changes. Got it. Perfect. Thanks, guys.
spk09: And we have reached the end of the question and answer session. I'll now turn the call over to CEO John Cuomo for closing remarks.
spk04: Great. Thanks, everybody, for the time today. I appreciate your continued interest in VSE and look forward to speaking with you when we record our fourth quarter earnings. Have a great day.
spk09: And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
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