VSE Corporation

Good morning and welcome to the VSE Corporation third quarter 2023 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Michael Perlman, VP of Investor Relations and Communications. Please go ahead.

Thank you. Welcome to VSE Corporation's third quarter 2023 results conference call. Leading the call today are John Cuomo, President and CEO, and Steve Griffin, Chief Financial Officer. 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 the 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, which is posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. As a reminder, the Federal and Defense business segment has been excluded from our results. and has been moved to discontinued operations as we pursue the divestiture of the business. We also look forward to welcoming you all to our first Investor Day, scheduled for November 14, 2023, in New York City at NASDAQ Market Site and broadcast virtually. You can register for the event on our IR website at ir.vsdcorp.com. Please feel free to contact me directly with any questions. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John.

Thank you, Michael. Good morning, everyone, and welcome. Thanks for joining our call today. Let's begin with slide three, where I will provide an update on the performance of our business segments. Third quarter 2023 results were highlighted by record revenue and financial performance in our aviation segment, strong revenue growth in our fleet segment, and the closing of both the debtor acquisition and a transformational asset and intellectual property license agreement with Honeywell. Aviation segment revenue increased 48% in the quarter. This strong performance was driven by strong program execution, market share gains, the expansion of our products and repair capabilities, and positive end market activity. We continue to experience great success from our aviation segment organic and inorganic investments. Aviation distribution revenue growth of 46% was driven by strong program execution on new and existing distribution awards, the entrance into new markets, and an expansion of product offerings, along with improved pricing and product mix. Aviation MRO revenue growth of 54% was driven by strong end-market activity, market share gains, an expansion of repair capabilities, and contributions from new customers. The fleet segment experienced solid revenue growth across all channels with 22% total revenue growth in the quarter. Our fleet segment revenue and profit dollar contribution improved year over year. The fleet segment sales increase was led by revenue contributions from our new Memphis, Tennessee distribution facility as we continue to ramp our new e-commerce fulfillment business. The increase in USPS revenue in the quarter was supported by an expansion of the install base of their vehicles and continued maintenance investments in both legacy and new vehicles. Let's now move to slide four, where I will provide a strategic update. First, on July 3rd, we acquired Dessert Aerospace, a global aftermarket solutions provider of specialty distribution and MRO services. Desert Aerospace is a leading independent distributor of aircraft tires and tubes, a global distributor of brakes and batteries, and a component MRO services provider for wheel and brake repair. The acquisition supports our tip-to-tail aircraft distribution and MRO services strategy and provides VSC Aviation with increased access to the highly fragmented aviation aftermarket. Having DESER within the VSC aviation portfolio of assets has already begun to deliver sales synergy benefits. We have begun the integration of DESER starting with the U.S. operations, which is expected to be completed by the second quarter of 2024. As a reminder, integration means full system, process, and organizational integration into the VSC systems. with a goal of reducing cost, improving productivity, and providing our customers and suppliers with a one company seamless approach to the market. Second, we announced that we entered into a transformational purchase and perpetual license agreement with Honeywell that will allow us to exclusively manufacture, sell, distribute, and repair over 340 unique fuel control systems on four engine platforms. including three platforms that are still in production. This new agreement expands VSC Aviation's existing capabilities supporting these Honeywell fuel control systems and associated subcomponents. Since 2015, VSC Aviation has served as the exclusive distributor of these products. In addition, VSC Aviation has a long established and successful history as an MRO provider to support these fuel control systems. Through this new agreement, VSC expands the relationship to become the licensed manufacturer with perpetual rights to the intellectual property of these components. We are very excited about this announcement and what it represents for VSC Aviation. The announcement not only allows us to significantly strengthen our current and long-term relationship with Honeywell, the engine manufacturers, and the aftermarket users, but it's also a testament to the differentiated OEM centric value proposition, which continues to resonate with suppliers and provides us additional opportunities to add value through the supply chain. In addition, this adds a high margin revenue channel and partnership opportunity to our aviation portfolio. We'll share more details about this program during our November 14th investor day. Finally, Last month, we announced a mutual agreement to terminate the sale of the federal and defense segment to Bernhard Capital Partners. While we were disappointed with this outcome, we remained very focused on the near-term divestiture, and we are moving quickly towards the sale of these assets. We have relaunched the process and expect to provide a more detailed update early in the first quarter of 2024. In the interim, the FDS business will remain in discontinued operations as we pursue divestiture opportunities for this business. Let's now move to slide five. CSE delivered solid and well-rounded third quarter results highlighted by a 38% increase in revenue, a 57% increase in net income, and a 56% increase in adjusted EBITDA compared to the prior year. Our aviation segment posted its fourth record quarter in a row with revenues of $152 million, a 48% increase year over year, and our first quarter over $150 million. Driving the record revenue was balanced growth across both commercial and business and general aviation customers, increased activity through both our distribution and MRO sales channels, and the addition of Desert Aerospace. Adjusted EBITDA for the aviation segment of $25 million increased by 87% versus the prior year, yet another record for this business segment. Aviation segment adjusted EBITDA margin increased by approximately 340 basis points year over year to 16.6%. Aviation segment adjusted EBITDA represented 78% of total company third quarter adjusted EBITDA versus 65% last year. Our fleet segment also reported strong revenue growth in the third quarter on a year-over-year basis, increasing 22% to $79 million, driving growth across all active sales channels. Fleet segment adjusted EBITDA dollars increased by 5%, driven by strong commercial sales growth and solid contributions from the U.S. Postal Service Program. We are proud and thankful for our VSA teams and the strong commitment to our customer and supplier-focused values. I'm pleased to see that this work translated to a record financial performance in the quarter.