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spk00: 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.
spk03: 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.
spk09: 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.
spk08: I will now turn the call over to Steve for a detailed review of our third quarter financial performance.
spk04: Thanks, John. As a reminder, our results exclude the federal and defense segment, which remains in discontinued operations as it is held for sale. I'll now turn to slide six and seven of the conference call materials to provide an overview of our third quarter performance. As John mentioned, we reported record revenue in our aviation segment and strong year-over-year performance within our fleet segment. Our results across both segments were driven by strong program execution, expanded capabilities and offerings, market share gains, and robust demand across all end markets. We generated $231 million in revenue in the third quarter. an increase of 38% versus the prior year period. Aviation reported another record quarter, driven by strong program execution of new and existing distribution awards, an expansion of product offerings and repair capabilities, increased commercial and business in general aviation MRO activity, strengthened customer and supplier relationships, all of which have led to market share gains and new profitable revenue opportunities. And lastly, contributions from the recent DESR aerospace acquisition. Fleet segment growth was driven by solid e-commerce fulfillment and commercial fleet sales, together with higher contributions from the USPS program. We generated $32 million of adjusted EBITDA and $14 million of adjusted net income, an increase of 56% and 75%, respectively. Adjusted EBITDA increased $11.5 million, driven by an $11.7 million contribution from aviation and a $500,000 contribution from fleet, partially offset by the GAAP accounting impact on corporate expenses from discontinued operations. Now turning to slide eight, we'll cover our aviation segment results. Revenue increased 48% versus the third quarter last year to a record $152 million. Both distribution and MRO businesses were strong contributors, up 46% and 54% respectively. Aviation grew 24%, excluding the deaths or acquisition, driven by strong execution of recent investments and growth initiatives and strong end markets. Distribution revenue growth was driven by strong execution of existing OEM programs, expansion into new markets, improved pricing and customer mix, and contributions from DESER. MRO continues to benefit from higher commercial flight activity, an expanded portfolio of repair services and capabilities, improved productivity, and the addition of our DESER aerospace acquisition. Aviation adjusted EBITDA increased by 87% in the quarter to $25 million, while adjusted EBITDA margins increased 340 basis points to 16.6%. The improvement in profitability was driven by contributions from new programs, robust MRO revenue growth, operating leverage, and progress on margin improvement initiatives. Additionally, we were pleased with the results of the DESR business as it exceeded our initial third quarter expectations. Within our aviation segment, we recently increased our full year 2023 revenue growth guidance range to 30% to 35%, to account for our strong third quarter results and the addition of DESER. We initially estimated that DESER would contribute approximately $35 million of revenue to our second half results. While we are on track to exceed our initial expectations, we do expect slightly softer fourth quarter DESER revenue as compared to the third quarter due to seasonality within their business. We expect our full year adjusted EBITDA margins to be towards the higher end of our previously provided range of 14% to 16%, as strong year-to-date margins are modestly offset by fourth quarter investments, including standing up the supply chain for our newly acquired Honeywell fuel control systems business and the expansion of our operating footprint throughout Europe. Regarding the recent Honeywell fuel control announcement, we do not anticipate any material revenue impact in the fourth quarter, However, we do anticipate higher sequential operating expenses, interest expense, and amortization as we establish manufacturing capabilities to support the program. In 2024 and in 2025, we anticipate $7 million and $14 million of EBITDA contributions from the program, respectively, improving radically throughout each year as we realize the lower cost of inventory purchases. We also expect to realize $10 million in lower networking capital by the end of 2024. Now turning to slide nine. Fleet segment revenue increased 22% to $79 million, driven by strong growth in e-commerce fulfillment and commercial fleet sales, along with increased USPS demand to support their growing fleet. Total commercial revenue was $37 million in the quarter, an increase of 47% versus the prior year period and now represents 47% of total fleet segment revenue, an approximate 800 basis point increase over the same period in the prior year. Commercial revenue growth remains on track with our initial expectations as we launch our new Memphis distribution facility as we continue to scale our infrastructure and workforce to meet the robust end market demand. Commercial revenue, while we see strong growth year over year, commercial revenue declined modestly on a sequential quarterly basis, driven by what we believe to be a temporary market supply chain disruptions. We continue to launch the Memphis Distribution Facility as we navigate this new market. We remain confident in our ability to continue to grow the business. U.S. Postal Service revenue was up approximately 6% versus the third quarter of last year, which is included within our other government channels. Our best-in-class customer service and supply chain management program allows us to continue to maintain market share on all legacy USPS platforms while we service newly introduced vehicles. Segment adjusted EBITDA increased 5% to $9 million, driven by increased sales volume. Adjusted EBITDA margin was down 190 basis points to 11.6%, driven by the mix of commercial customers. For the full year 2023, we expect revenue growth of 20% to 25% year-over-year and adjusted EBITDA margin in the range of 11% to 13%. We continue to focus on driving year-over-year profit growth for the segment as we drive to scale our recently launched distribution facility to reach its full potential. Turning to slide 10, at the end of the third quarter, we had $89 million in cash and unused commitment availability under our $350 million credit facility. For the quarter, we generated $15 million of operating cash flow and $11 million of free cash flow driven by disciplined cash management and strong operating results. At the end of the quarter, we had total net debt outstanding of $440 million. We currently have $250 million of outstanding interest rate swaps following the execution of a $100 million swap in July concurrent with the DESER acquisition. Proforma net leverage, which includes the trailing 12-month results from our prior acquisitions, was 3.7 times at the end of the third quarter. We expect our Proforma net leverage ratio to be below 3.5 times by the end of the fourth quarter, driven by growth in trailing 12 months of adjusted EBITDA and positive free cash flow in the fourth quarter. We expect fourth quarter free cash flow to improve sequentially, as compared to the third quarter, as we continue to realize returns on working capital investments from earlier in 2023. With that, I will now turn the call back over to John for his final remarks. Thank you, Steve.
spk09: I'd like to conclude our prepared remarks by reviewing the opportunities ahead and priorities for our business. Our focus remains on driving sustainable, profitable growth while enhancing the operational performance of our two business segments. Please advance to slide 11. First, continue to pursue the near-term sale of the federal and defense business. As I stated earlier, we remain confident in our ability to monetize these assets and will work towards an expedited sale of this business. We expect to provide an update in the coming months. Second, transition and implement our newly acquired Honeywell Fuel Controls product line and associated subcomponents program. Third, complete the integration of our precision fuel MRO acquisition, which will happen this quarter, and continue the integration of our desert aerospace acquisition. We remain focused on our model to fully integrate all acquired assets into our systems, processes, and organizational structure in order to provide our customers with a single source for our products and services and drive synergies and greater combined value and investment returns for our shareholders. Fourth, continue to expand our full-service, unique product distribution and MRO repair capabilities within high-growth, underserved portions of the aviation aftermarket. We remain focused on offering a bespoke, solutions-oriented approach that addresses our customer needs. We look forward to sharing more about growth opportunities and 2024 pipeline in the coming weeks. Drive commercial growth while supporting legacy programs within our fleet business. This includes scaling and growing revenue and improving profitability at our Memphis Distribution and e-commerce fulfillment center to address robust and commercial fleet customer demand. And finally, deliver accelerated free cash flow, specifically in the fourth quarter, driven by disciplined cash management and strong operating results. I'm very proud of our third quarter operating performance and the tremendous progress we have made year to date to advance both our aviation and fleet business strategies. I'm very thankful to our teams and the results that they have been able to deliver. The culture and teams at VSE continues to be our greatest asset and our greatest differentiator. I look forward to sharing what's ahead for VSE at our November Investor Day in less than two weeks. Operator, we are now ready for the question and answer portion of our call.
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
spk05: At this time, we will pause momentarily to assemble our roster. The first question comes from Luis de Palma with William Blair.
spk00: Please go ahead.
spk08: Morning, Louis.
spk06: John, Stephen, and Michael, good morning. Morning. The aviation aftermarket remained very strong. It appears that there's really robust industry growth, and you've also gained share. But as we look to the fourth quarter, how should we think about seasonality relative to the third quarter?
spk04: Yeah, I think I mentioned it in my prepared remarks, Louis, but obviously we're extremely pleased with the results of the aviation business in the third quarter. When we look towards the fourth quarter, there is an element of seasonality, so a little bit lighter on revenue is what we would anticipate, and probably some of that mostly coming from the most recent desert acquisition. I referenced that it's above our expectations as we initially set out for, but it will have a seasonality effect. I think when we look for the full year, we're very pleased with the contributions for the aviation business. We've increased our revenue guidance range now for the full year, 30% to 35%. And we look forward to talking more about 24 and beyond when we get to the investor day. But very, very pleased with the results thus far.
spk06: Thanks, Steve. And sorry that I missed that. For the federal and defense segment, despite... some of its struggles, it still seems as though it has some attractive assets with the energetic consulting business. And you also have a $565 million C5 aircraft IDIQ. Have you seen interest to buy these assets on a standalone basis as opposed to potential acquirers for the whole business?
spk09: Yes, Louise. So the way you're looking at it, exactly correct. So we're obviously looking for as much expedited process as possible that can monetize the assets with the highest value. That could include selling the segment in totality or selling pieces or contracts independently. And we are pursuing both paths simultaneously.
spk06: Great. And one final question. Earlier this year, you expanded your Pret and Whitney Canada partnerships into Asia, and it appears that the execution for that geographic expansion has been going well. Are there opportunities for you with your other OEM partners in Asia and other geographies?
spk09: There are. We hope to be in a position to share a little bit more detail about that at our Investor Day coming up. We're really focused on Europe for 2024 with the acquisition of Dessert, which gives us a strong, solid team in Europe, but that team is very UK-centric. We have plans to expand outside of the UK and both leveraging the Dessert business and some of our OEM partnerships to do so. And we'll be in a position to share some more detail about that at the Investor Day.
spk06: Awesome. Thanks, John, Stephen, and Mike. Looking forward to the Analyst Day.
spk05: Thanks, Louis. Look forward to seeing you.
spk00: Thank you. The next question comes from Michael C. Armoli with Truist. Please go ahead.
spk02: Hey, good morning, guys. Thanks for taking the questions. Just to close the loop on Fed and trying to sell that, do you guys have to realistically lower You know, your expectations in terms of what you think the asset could fetch now? I know it was, you know, kind of with that earn out $100 million. I mean, are you just trying to, you know, do this as quick as possible? And, you know, obviously you're still trying to, you know, monetize it, you know, in the most efficient fashion and get the most value. But do you think you've got to lower your expectations for a sale price?
spk09: We are very focused on – we believe we can manage both value and time. I think it's important to highlight that the majority of the earn-out was associated with one contract, which we were not successful with. We are under protest at this time. So if you look at the $50 million base purchase price, we're very focused on the core assets at that value and doing our best to manage both getting to that value as well as doing it in the most expedited timeline possible. We had anticipated a first quarter closing, so we're very focused on what can we do within the same time period. Got it. Got it. Okay.
spk02: That's helpful. And just on aviation, obviously, very strong, strong demand backdrop there. Can you help me reconcile it? I think, Steve, you called out the organic growth, maybe 24% excess or less. I don't know if I have the math correct, but that seemingly implies maybe a $25 million contribution. Do I have that right? And I know you said $35 million for the year, but I didn't know if there was anything else, you know, sort of incorporated in that organic.
spk04: You have the math correct. And so it does contribute $25 million in the quarter, and that's why I referenced that the business is performing better than expectations for the second half year. Yep. But to be super candid with you, you know, as we get to know the business better and work with the teams more, I referenced the seasonality effect. Their third quarter does tend to be quite strong given the flight dynamics in the Europe region specifically, which is where they've got a large business. And we expect to see some level of decline there headed into the fourth quarter, hence the commentary. But, yeah, we're very pleased with the business's performance thus far and excited about working through the integration efforts.
spk02: Got it. Can you help us out? I know you called out the distribution of 46 and MRO of 54. Can you parse out maybe the organic growth rates on those two lines?
spk04: Yeah, I'm happy to. The distribution side of the business is up 23% on an organic basis, and the repair business is up 26% on an organic basis. Repair tends to still kind of lead at this point. It's still driven a little bit by the commercial recovery dynamics. But I'd say in both sides, distribution and repair, we still continue to see better than overall market results from an organic basis, so we're pleased.
spk02: Got it. And then I think you called out pricing as well. I mean, we've heard from, you know, some other suppliers out there, you know, they've gotten, you know, double digit last year, high single this year. Can you maybe talk to what you're seeing on pricing, you know, maybe across both distribution and kind of MROs?
spk09: Yeah, I think, Mike, so I'd say that obviously 2023, we're done. So what we have experienced is some results of some of the pricing efforts from the OEMs. We're starting to get the catalogs in now for 2024. My anticipation is that it's going to be a little bit more muted than we've seen in 23 and 22. So we're just getting initial kind of data in. Ask me that question in two weeks at the, you know, at Investor Day, and I'll probably have more detail of what, once we start going through the data, but I would anticipate 2024 price being less of an impact than we've seen in the last two years.
spk02: Okay, got it. Last one, then I'll get out of the way here. Any implications for you guys on the positive side, given what's going on with the GTF and You know, obviously airlines may be being forced to fly older equipment longer or not having enough lift. And I guess the same holds true for, you know, just where the max is. I mean, are you guys seeing potential tailwinds there?
spk04: Yeah, I'd say direct corollaries, not a ton. Obviously we don't support that program today. But I'd say to the second part of your question, will that lead to a longer life on some of these legacy assets and therefore more repair opportunities? We believe the answer is yes. And we continue to want to make sure that we're there to support our programs, whether they be on the newer side or on the end-of-life side. So we're kind of trying to support all legs of the aircraft. And I think at this point, we continue to see robust demand. You know, I think when we get to the Investor Day, we'll share more about our outlook headed into 2024 and 2025. give you a sense of where we think the markets are headed. They're certainly going to slow down from a year-over-year comp perspective. You know, commercial at this point has seen such a strong 23. It'll start to moderate. We're seeing that in our business, you know, even in the third quarter on a year-over-year comp basis.
spk02: Yep, of course. Got it. All right, I'll jump back in the queue. Thanks, guys.
spk05: Thanks. Thanks, Mike.
spk00: Thank you. The next question comes from Josh Sullivan with the Benchmark Company. Please go ahead.
spk05: Hey, good morning. Good morning, Josh.
spk01: Good morning. Just as far as the Honeywell IP acquisition, what does that ramp look like? You talked about expanding the supply chain. Is there a qualification timeline or hiring need that we should think about?
spk09: There is both, actually, thinking about it the right way. So what I'd say is this is a great entry for us into this market. I highlighted that we both have been distributing the product and repairing the product. This is much more of an assembly than a pure manufacturing. We're working with the supply base and essentially assembling the fuel controls. That's our portion of the manufacturing. If you think about it in our repair business today, we disassemble it and we assemble it. We've got tremendous experience, but we do need the FAA approvals from a manufacturing perspective. That takes weeks and months, not years. And then we have a very strong team who understands this product line, but obviously we're increasing staffing around that. The second thing I would add, because you see the revenue and earnings forecast that we had put out with the initial release and that Steve highlighted again today, is that we're sitting on legacy inventory. So we acquired inventory from Honeywell with obviously a Honeywell markup on it. We have to burn through that inventory, and then that margin capture that went to them now will come to us in the future. So as you look at the ramp, those are the steps to us getting to kind of the full ramp of both revenue and earnings potential on this program.
spk01: And I'm curious if the deal's driven any incoming from other aerospace OEMs looking at the transaction as attractive, or is this still in the outgoing effort right now?
spk09: Yeah, what I would say is that, and I'll highlight this more on the investor day, when you look at the life cycle of the product, you have at some point in time, many times, an OEM says, okay, this is still in production, but it's the majority of the uses in the aftermarket. I want to use my R&D dollars and my shop floor space to focus on newer production products that they're looking for an alternative source. for that production. And there are suppliers and companies in the industry that do this. I think we have pleasantly surprised the market with our ability to additionally support this. And this, coupled with our ability to distribute the product successfully and repair the product successfully, which is what our core business is, this really just adds an additional channel for us and we are having dialogue with OEMs at this point. What I would tell you, though, is don't expect, and I don't normally give forecasts on deals, don't expect us to announce another deal like this in the coming months. We really want to make sure we do this right. This is the first time we're doing this, and we're going to do this right and really impress the market before we consider another transaction of this type. But there are definitely others out there for the future.
spk01: Got it. And then maybe just switching over to fleet, you know, the expansion of the installed USPS fleet. You know, we've seen some large auto OEMs pull back on some EV development plans. How is the post office looking at its existing ICE fleet at this point?
spk09: Yeah, I think the numbers, the forecasts that have been previously shared, you know, there doesn't appear to be any tremendous shift in that forecast. So there will be a small portion of their fleet that will be EV. But the biggest thing that's happened is, number one, they've grown the fleet size, and that's a permanent growth to the fleet size. The second thing is how they've grown that is not through the NGDD, the next generation vehicle, whether electric or combustible engine. What they're doing is buying commercial off-the-shelf vehicles. So whether they're Mercedes Metris, whether they're some other type of commercial off-the-shelf vehicle. So they're building a more complex fleet type. that will continue to have a tremendous amount of non-EV-type vehicles. That said, our plan is to support all fleet types, and we look at the Postal Service as a really launch pilot customer to us in supporting EV medium-duty fleet vehicles. So continue to see strong activity there for the near term. We don't have the real forecast yet, of when that NGDV will be delivered. As we get that, we'll share any impacts we think that may have to the business.
spk05: Great. Thank you for the time. Thanks, Josh.
spk00: Thank you. Again, ladies and gentlemen, if you have a question, please press star then one. The next question comes from Jeff Van Sinderen with B Reilly. Please go ahead.
spk07: Good morning, everyone. Just wanted to follow up on the Memphis facility. Just wondering maybe if you can touch on incremental efficiencies to be realized there in the future.
spk09: Yeah, thanks, Jeff, and good morning. The way that we've built this kind of model, remember, we started literally from zero in January. We launched in the middle of the first quarter, completely new IT system, new facility, new infrastructure. So we're essentially, if you look at a chart, you're kind of increasing productivity and revenue out of the site. Then we're plateauing and stabilizing, and then we're doing the same thing again, plateauing and stabilizing. So what you saw in the third quarter was really a more plateau period, And what you'll see in the fourth quarter is, you know, the next phase of kind of revenue ramp and then, again, plateau again. So as we go through that ramp, we continue to look at where we're going to have productivity improvements. What is going to drive margin improvement over time? There's an element on supply chain on cost and pricing. But the other element is just, A, scale through that facility, and, B, then we look at continuous improvements both in terms of processes. And really in late 2024, we'll talk about automation and the impacts that will make. But we've got to get the facility stabilized before we add the automation in. But you can expect this to be a continuous improvement and margin improvement plan over the next two years.
spk07: Okay, that's helpful. And then I know you mentioned some seasonality at Dessert for Q4. Just, I guess, anything else you're learning about Dessert as you're integrating there?
spk09: I mean, you know, thrilled with the acquisition, thrilled with the diligence that my team did. It's exactly as expected to see this point where they outperformed in the first quarter. Great culture, great level of alignment. It's a great addition to the VSC aviation portfolio. So, yeah. Their business wasn't fully integrated, so they were running the business under different IT platforms. So we basically are breaking it up into a number of smaller acquisitions. But integrations are on track, are slightly ahead of pace, and I'm very excited for what's ahead for 2024.
spk07: Okay, terrific. Thanks for taking my questions and continued success.
spk05: Thanks. Appreciate it.
spk00: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. John Cuomo for any closing remarks. Over to you, sir.
spk09: Thank you, everybody, for joining our conference call today. We look forward to seeing many of you on November 14th in New York at our first Investor Day and appreciate the continued support and interest in VSE. Have a great rest of your day.
spk00: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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