VSE Corporation

Good day, and welcome to the VSE Corporation's second quarter 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. 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 Michael Perlman. Vice President of Investor Relations and Treasury. Please go ahead. Thank you.

Welcome to VSC Corporation's second quarter 2024 results conference call. We will begin with remarks from John Cuomo, President and CEO. Also on the call this morning is Tarang Sharma, Chief Accounting Officer and Interim 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 future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation where available the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John.

Good morning. Thank you for joining VSE's second quarter conference call today. This morning, I would like to begin by discussing the current market environment for our aviation segment. I will then provide an update on our 2024 strategic priorities and review both our second quarter financial performance and outlook for the remainder of the year. Let's begin with a market update on the aviation commercial market. Global airline passenger traffic remains robust and has returned to, and in many cases exceeded, record pre-pandemic levels. 2024 revenue passenger miles are forecasted to be approximately 4% above 2019 levels and are expected to continue to increase annually over the next 10 years. Over the same period, the global in-service fleet is expected to expand by approximately 3% annually to accommodate increased passenger demand. While Boeing and Airbus are attempting to ramp up production to meet increased demand, quality and supply chain constraints have impeded their efforts. As an interim solution, airlines are delaying aircraft retirements, driving increased demand for aftermarket parts and maintenance-related services on aging aircraft. Within the business and general aviation market, we've seen a structural shift in the use of private aircraft following the pandemic and, as a result, more stability when compared to prior cycles. Business jet activity was the first to recover following the pandemic, and we have seen this activity stabilize near historically high levels and anticipate low single-digit growth rates in the near term. Moving now to slide three, where I will provide an update on our 2024 strategic priorities, beginning with the aviation statement. First, we continue to scale our new European Distribution Center of Excellence in Hamburg, Germany, launched earlier this year. The facility supports an expansion of our Pratt & Whitney Canada aftermarket program, which is performing in line with our expectations and is expected to be at the full year run rate by the end of the year. The facility will support additional distribution products, including tires, tubes, and batteries, from our DESR acquisition later in 2024. Second, the launch of our new OEM licensed fuel control manufacturing program is outpacing early expectations and contributing to segment profitability. Our Kansas facility expansion, which will support the manufacturing of this new product line, is expected to be operational by year end. The investment in this facility expansion accounts for most of the growth capex spent in the second quarter. Next, we are building a core competency in acquisition integration. The DESR acquisition integration, which includes integrating systems, processes, organizations, go-to-market strategy, and branding, remains on track and is expected to be completed over the next 12 months. Supporting this integration, we are developing a new e-commerce site that will support all VSC Aviation and legacy DESR customers. This new VSC Aviation site will be launched in the third quarter of this year. And finally, our recent acquisition of Turbine Controls, or TCI, has exceeded our initial expectations and assumptions. Our initial focus for this business is adding capacity and expanding our scope with existing engine OEM partners. Moving now to fleet. Earlier this year, we announced the initiation of a process to explore and evaluate strategic alternatives involving our fleet segment. The review is progressing and in process, and we expect to provide additional updates after both the USPS ERP transition is complete and the USPS revenue recovery is stabilized, both of which are anticipated by year end. In the interim, we have undergone several initiatives to better position the segment for future revenue growth, profitability, and a potential divestiture. We remain committed to managing the fleet segment through the near-term temporary disruptions caused by the USPS transition to a new ERP or fleet management system. We continue to focus on customer diversification and scaling our e-commerce fulfillment and commercial fleet businesses which are up approximately 30% organically year to date in the aggregate. At the corporate level, we completed a successful follow-on equity offering of 2.4 million shares at $71 per share in May. The net proceeds from the offering were used to repay outstanding borrowings under our revolving loan facility, including borrowings to fund our acquisition of TCI. Additionally, And as previously disclosed, the company expected to recognize restructuring charges related to the relocation of our corporate and federal defense headquarters and other corporate restructuring initiatives supporting the finalization of the federal and defense business segment divestiture. In connection with these activities, we recorded a $17 million charge in the second quarter. We have also made the decision to relocate our corporate headquarters to one of our existing aviation segments operating facilities later this year. We will provide a detailed update next quarter. Finally, our CFO search is progressing well, and we expect to announce a permanent CFO and onboarding plan soon, specifically before the end of the third quarter. Let's move on to slide four, where I will provide an update on our Q2 performance. In the second quarter, we delivered revenue growth of 30%. This included a second quarter in a row of both record revenue and record profitability for our aviation segment. The record aviation revenue and record profitability were driven by balanced performance, contributions from solid program execution on existing distribution awards, the scaling of new awards, expansion of MRO capabilities, The new OEM license manufacturing program and contributions from both the Dessert Aerospace and Turbine Controls acquisition supported these results. During the quarter, fleet segment revenue declined 9%, driven by a decline in revenue from the United States Postal Service as they implement a new fleet management information system, resulting in a temporary slowdown in maintenance-related activities and parts usage. To date, 235 facilities have migrated to the new system, versus 107 since our last update. The remaining 72 sites are expected to be transitioned by the end of the third quarter. The negative USPS performance was partially offset by increased sales volume from e-commerce customers and fulfillment partners, supported by continued discipline volume expansion at our Memphis Distribution Center and expanded product offerings supporting new and existing customers within our commercial fleet sales channel. With that, I will now turn the call over to Terang to discuss the details of our financial performance.