VSE Corporation

Good day, and welcome to the VSC Corporation Third 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 a 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, Investor Relations, and Treasury. Please go ahead.

Thank you. Welcome to VSC Corporation's third quarter 2024 results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohen, our 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, Michael, and thank you for being a part of today's third quarter conference call. This morning, I would like to first officially welcome Adam, our new Chief Financial Officer, to his first VSE earnings call. Adam joined VSE in early September and has already made a significant impact, providing valuable support for the recently completed equity raise and the negotiation and signing of the Kallstrom acquisition. Adam, it's great to have you as my partner, and welcome to the team. I'd like to begin my prepared remarks by discussing the current market environment for our aviation segment. followed by an update on our progress to date on our 2024 strategic priorities. The aviation segment now supports more than 70% of total company revenues. Those revenues are derived from both the commercial and business and general aviation aftermarkets. In the third quarter of 2024, global demand in the commercial aerospace aftermarket remained at near record levels, driven by high passenger traffic. The market is navigating declining OEM production rates and ongoing supply chain disruptions, which continue to hinder the availability of new aircraft. The shortage of new aircraft is a significant obstacle for airlines looking to increase capacity and retire less efficient older aircraft. As a result, airlines are extending the operational life of existing fleets, which continue to fuel demand for aftermarket parts and maintenance services. The business and general aviation aftermarket is also operating near historic highs and has entered a period of stability compared to previous cycles. Private air travel sentiment remains robust. In summary, we expect strong demand in the commercial aftermarket with near double-digit revenue growth to continue into 2025, supported by high passenger volumes, OEM production challenges, and an aging global fleet. The outlook for business and general aviation also remains positive, with more stable low- to mid-single-digit growth into 2025. Let's now move to slide three, where I'll provide an update on our strategic priorities. Let's begin with our recently announced acquisition of Kallstrom Aerospace. Last month, we announced that we entered into a definitive agreement to acquire Kallstrom Aerospace. a leading full-service aftermarket solutions provider of value-added distribution and technical services for the commercial aftermarket. Kellstrom is a strong strategic fit and aligned with VSE's core strategic focus areas. First, Kellstrom increases VSE Aviation's customer base and market exposure to the commercial aerospace aftermarket with a focus on engines. Second, Kellstrom expands our distribution products and aftermarket service offerings Third, Kellstrom aligns with BSE's core OEM-centric strategy, with over 95% of Kellstrom distribution revenue being generated from exclusive, long-term relationships with marquee aerospace OEMs. Fourth, Kellstrom expands our international reach. Kellstrom operates across 75 countries, and approximately half of revenue is generated outside of North America. And finally, the acquisition presents significant synergies with a planned integration. Kellstrom generated approximately $175 million of revenue and approximately $20 million of adjusted EBITDA for the trailing 12-month period ended September 2024. We expect to generate run rate synergies of approximately $4 million within 18 months of close and are confident that we will be able to deliver greater than 15% EBITDA margins for the business as we integrate and optimize the businesses together. The total consideration for the acquisition is $200 million, comprised of $185 million in cash and approximately $15 million of common shares of the company, subject to working capital adjustments. The acquisition is expected to close in December. I would now like to provide an update on our 2024 strategic priorities for our two segments, beginning with aviation. Our European distribution expansion, initially supported by the Pratt & Whitney Canada Europe Middle East, and Africa aftermarket product support program is ahead of schedule and remains on pace to reach a full year run rate by the end of the fourth quarter. We have begun expanding our product line offerings in Europe with plans to support additional product lines in the near future. Next, the financial performance and implementation of our OEM licensed fuel control manufacturing program continues to outpace expectations. The implementation of the manufacturing capabilities supporting the launch of this new program are expected to continue into 2025. The integration of the Dessert Acquisition U.S. distribution business, which included integrating systems, processes, organization, and branding, was completed in the third quarter. Supporting this integration, we launched a new e-commerce platform, shop.vseaviation.com, where all legacy Dessert products, including tires, retreads, tubes, and batteries, are now available for purchase. Finally, following the acquisition of Turbine Controls in April 2024, we remain focused on adding incremental capacity and increasing our scope with existing OEM partners before integrating the business. The performance for this business remains well ahead of our expectations. Moving now to our fleet segments. During the third quarter, the United States Postal Service completed the implementation of its new fleet management information system, with all 307 vehicle maintenance facilities now live. Following this system implementation and beginning this quarter, we expect to see a gradual increase of repair activity and subsequently an increase in the usage of our parts, and we remain committed to supporting the USPS through this period of transition. Within our commercial sales channel, we are focused on scaling our e-commerce fulfillment facility, diversifying our customer and supplier base, and adding new products and brands to our portfolio. The complete segment strategic review remains in process, and we will provide an update in the near future as the USPS revenue continues to stabilize. At the corporate level, we completed a very successful following offering of approximately 2 million shares at $87 per share in October 2024. The net proceeds from the offering will be used to fund a portion of the cast consideration for the acquisition of Keltram Aerospace. The remaining balance will be funded through the revolver. Now let's move to slide four, where I will provide an update on our business segment Q3 performance. In the third quarter, we delivered both record revenue and record profitability for our aviation segment, driven by a 34% increase in aviation sales in the quarter. Our aviation segment balanced revenue growth was driven by strong execution on new and existing distribution programs and expanded portfolio of MRO capabilities and contributions from the TCI acquisition. The aviation segment also reported record profitability, driven by balanced contributions from new distribution programs, the optimization of existing distribution programs, MRO market share gains, and our new OEM licensed manufacturing programs, and contributions from the TCI acquisition. During the third quarter, fleet segment revenue declined 11%. USPS revenue declined as forecasted due to the final phase of implementation of a new fleet management information system. The conversion of their facilities to this new ERP platform resulted in a temporary slowdown in maintenance-related activities and parts usage, with recovery anticipated to begin this quarter. The USPS revenue decline was offset by 20% organic growth from the fleet's e-commerce fulfillment business, 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 Adam to discuss the details of our financial performance.