VSE Corporation

Good morning and welcome to the VSC Corporation fourth quarter and full year 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 presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like now to turn the conference over to Mr. Michael Perlman, Vice President of investor relations. Please go ahead.

Thank you. Welcome to VSC Corporation fourth quarter and full year 2024 results conference call. We will begin with remarks from John Cuomo, President and CEO followed by financial update from Adam Cohn, 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 gap financial measures in our presentation. Where available the appropriate gap financial reconciliation 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 us today for VSC's fourth quarter and full year 2024 conference call. 2024 was a transformative year for VSC driven by record revenue and profitability in our aviation segment, the acquisition of two commercial aviation aftermarket businesses and the divestiture of our federal and defense services segment. These strategic actions reinforce our commitment to becoming a pure play aviation aftermarket company streamlining our operations to drive sustained growth. Before diving into our results, I want to highlight last week's announcement regarding the sale of our fleet segment business Wheeler Fleet Solutions to one equity partners. This divestiture marks the final step in our strategic transformation into a leading pure play aviation aftermarket parts and services provider. The transaction is valued at up to two hundred and thirty million dollars, including a one hundred and forty million dollar cash payment and closing a twenty five million dollar seller note and up to sixty five million dollars in additional earn out consideration. The earn out allows us to participate in fleets expected revenue and margin recovery in twenty twenty five. The transaction is expected to close in the second quarter of twenty twenty five subject to customary closing conditions. This divestiture and the strategic actions we've taken over the past five years demonstrate our commitment to becoming a pure play aviation aftermarket company. With that, let's begin with an update on the current market environment for our aviation segment. The aviation segment supports both the commercial and business and general aviation aftermarket with each representing approximately fifty percent of twenty twenty five aviation segment forecasted revenue. The aviation aftermarket is set for another year of expansion in twenty twenty five with both the commercial and business aviation sectors experiencing continued growth. This momentum is driven by increased global passenger traffic, rising demand for maintenance repair and overhaul services and the uptick in business jet utilization. The commercial aircraft aftermarket parts and services market is expected to maintain its strong growth trajectory in twenty twenty five revenue passenger mile forecast combined with ongoing supply chain and capacity constraints indicate another robust year for the sector. As a result, the antecipates commercial aftermarket growth for our parts and services to range between eight percent and ten percent in twenty twenty five. The business aviation sector continues to see unprecedented demand with industry experts projecting that flight hours will remain steady or increase for more than ninety percent of operators in twenty twenty five as compared to twenty twenty four. This outlook coupled with new market entrance, leveraging fractional ownership, leasing and jet card program as well as a projected expansion of the total business aviation fleet supports VSC's forecast for our business and general aviation market. We anticipate growth of five to six percent in twenty twenty five for our products and services in this segment. Therefore, we forecast our combined markets at six and a half percent to eight percent in twenty twenty five with our plan to outperform these market assumptions. Let's now turn to slide three, where I will provide an overview of our twenty twenty four and year to date twenty twenty five highlights starting with our recent strategic acquisitions in aviation. First, in December, we acquired Kelström Aerospace, a leading aftermarket solutions provider specializing in value added distribution and technical services for the commercial engine market. Kelström aligns strongly with our OEM centric strategy, expanding our presence in the commercial aerospace aftermarket. This acquisition brings new engine focused customers, additional distribution products and enhanced MRO and technical service capabilities to VSC aviation. Integration of Kelström's distribution business is underway and is expected to be completed over the next twelve to eighteen months. In April, twenty twenty four, we acquired Turbine Controls or TCI, further increasing our exposure to the commercial aviation engine component MRO market. This acquisition expanded our repair capabilities and added new OEM relationships. This business performed exceptionally well in twenty twenty four, driving well above market revenue growth as they supported their key OEM partners. We remain focused on scaling capacity and deepening partnerships with OEMs in the year ahead. Third, we successfully completed the integration of DESSER's US distribution business in twenty twenty four, streamlining processes, systems and organizations and launching a new go to market strategy under the VSC brand. Looking ahead, we plan to integrate DESSER's remaining business units in twenty twenty five with the DESSER Australia integration already completed in early twenty twenty five. Moving on to new program implementations, we opened a new forty five thousand square foot distribution center of excellence in Hamburg, Germany. Initially, this site supported Pratt and Whitney Canada's Europe, Middle East and Africa distribution and support program and has since expanded to include tires, tubes and battery product lines with additional product lines expected to be expanded in the future. We launched a new OEM license, a D onic MRO program in twenty twenty four that combined with our distribution program supporting this product line allows us to manage the total life cycle of these products. We also launched our new OEM license manufacturing capability and facility expansion following our acquisition of the Honeywell fuel control program. The program exceeded our initial expectations and was a strong margin contributor in twenty twenty four. We plan to fully transition all manufacturing capabilities to our facility in twenty twenty five. Now, turning to our fleet segment, twenty twenty four with the year of transition as we continue supporting the United States Postal Service following their migration to a new fleet management information system. After reaching a low point in Q3, we began seeing improved maintenance related repair activity and parts usage in the fourth quarter. We expect this momentum to continue through twenty twenty five. With the fleet segments commercial sales channel, we scaled our Memphis e-commerce fulfillment facility, diversified our customer base and added new exclusive brands. As a result, our commercial revenue growth continues to outpace the market. At the corporate level, we successfully completed the sale of our federal defense segment in February twenty twenty four, marking a significant milestone in our transition to a pure play aviation business. Finally, we relocated our corporate headquarters to South Florida, co locating within our aviation segment headquarters and MRO Center of Excellence in Miramar, Florida. This move enhances collaboration with our business partners and employees while also reducing corporate overhead costs. Let's now move to slide four, where I will provide an update on our business segment full year twenty twenty four performance. For the full year twenty twenty four, we delivered both record revenue and record profitability for our aviation segment. Revenue growth was driven by balanced strong execution on new and existing distribution programs and expanded portfolio of MRO capabilities and contribution from recent acquisitions. The aviation segment also reported record profitability driven by distribution program growth, the optimization of existing distribution programs, increased throughput at our MRO facilities, support from our new OEM license manufacturing programs and contributions from recent acquisitions. For our fleet segment, the revenue decline was primarily driven by the USPS transition to a new fleet management information system platform. This resulted in the client maintenance related activities and reduced part requirements. Maintenance related repair activity levels began to rebound in the fourth quarter and are expected to continue to improve in twenty twenty five. This was partially offset by strong revenue contributions from our commercial customers driven by growth in both commercial fleet sales and e-commerce fulfillment sales. I will now turn the call over to Adam to discuss the details of our financial performance.

Thank you, John. Let's turn to slides five and six of the conference call materials. I will provide an overview of our fourth quarter financial performance. Let's begin with our consolidated fourth quarter results. VSE generated two hundred and ninety nine million dollars of revenue in the quarter. An increase of twenty seven percent led by a forty eight percent increase in aviation revenue, partially offset by a twelve percent decline in fleet revenue. Adjusted EBITDA increased twenty six percent to forty million dollars compared to the fourth quarter of twenty twenty three. Aviation drove this growth up thirteen million dollars compared to the same period in the prior year, partially offset by a three million dollar decline in adjusted EBITDA for fleet and a two million dollar increase in corporate admin expenses. Adjusted net income was eighteen million dollars and adjusted diluted earnings per share was ninety cents per share. For the full year twenty twenty four, we recorded approximately one point one billion dollars in consolidated revenue of twenty six percent versus twenty twenty three driven by record aviation growth. Adjusted EBITDA for the year was a hundred and thirty six million dollars, an increase of twenty percent or twenty two million dollars as compared to twenty twenty three. Aviation contributed to a forty one million dollar year over year increase, partially offset by a fifteen million dollar decline in fleet adjusted EBITDA and a three million dollar increase in corporate admin expenses. Adjusted net income increased twenty percent to fifty six million dollars. Adjusted net income per diluted share declined five percent to three dollars and thirteen cents per diluted share driven by an increase in share count. Now turning to slide seven, where we'll cover aviation segments record fourth quarter results in more detail. Aviation revenue increased forty eight percent to a record two hundred and twenty seven million dollars as compared to the fourth quarter of twenty twenty three. Both distribution and MRO businesses were strong contributors, up thirty two percent and eighty seven percent respectively. The thirty two percent increase in distribution revenue was driven by strong execution of new and existing OEM programs and twenty nine days of revenue and earnings contributions from the recent Kelstrom acquisition. The eighty seven percent increase in MRO revenue was driven by the expansion of new repair capabilities, margin share gains in the commercial and business and general aviation markets, support from our new OEM authorized avionics program and MRO contributions from the TCI acquisition. Excluding the impact of all recent acquisitions, organic aviation segment revenue increased by approximately seventeen percent in the fourth quarter as compared to the prior year. Aviation adjusted EBITDA increased by fifty six percent in the quarter to a record thirty seven million dollars or sixteen point four percent of revenue. The increase in adjusted EBITDA was driven by strong execution on distribution programs, increased throughput at MRO facilities, improved pricing and product mix, the launch of our new OEM licensed manufacturing program and contributions from recent acquisitions. For the full year twenty twenty four, the aviation segment generated record revenue of seven hundred and eighty six million dollars, an increase of forty five percent year over year. Adjusted EBITDA increased forty seven percent to a hundred and twenty nine million dollars and adjusted EBITDA margin increased twenty basis points to sixteen point three percent, all record results for the segment. Let's now turn to slide eight, a new slide in our earnings presentation to review our aviation segment guidance for the full year twenty twenty five. The purpose of slide eight is to walk you through the revenue and margin bridge of our aviation segment with the impacts of our TCI and KELSTRM acquisitions. Let's start with revenue. John mentioned earlier that we forecast our combined commercial and business and general aviation markets to grow between six and a half percent and eight percent in twenty twenty five. We expect full year twenty twenty five aviation segment revenue to increase between thirty five to forty percent. Supporting this growth are full year revenue contributions of approximately twenty six to twenty eight percent from both the TCI and KELSTRM acquisitions. In addition, we are forecasting to outperform market growth organically with high single digit to low double digit organic growth supported by market share gains, distribution program growth and repair capability expansion. Twenty twenty five full year adjusted EBITDA margins are expected to be between fifteen point five and sixteen point five percent. The near term margin dilution from TCI and KELSTRM is expected to have an approximate ninety basis point dilutive impact on aviation segment margins for the full year twenty twenty five. This is expected to be offset by a ten to a hundred and ten basis point improvement in core legacy aviation margins driven by operating leverage, program optimization and MRO utilization. In addition, we expect to begin realizing integration synergies in the second half of twenty twenty five. Synergy benefits will continue into twenty twenty six until all integration activity is complete. On a consolidated basis, interest expenses projected to be thirty one to thirty three million dollars. The effective tax rate is expected to be twenty five percent and depreciation and amortization in the aggregate is expected to be thirty six to thirty eight million dollars for the full year twenty twenty five. All figures are pre fleet divestiture. Now turn to slide nine for our fleet segment's fourth quarter results. In the fourth quarter fleet segment revenue declined twelve percent to seventy two million dollars. On a sequential quarterly basis, revenue was up two percent or two million dollars. Revenue from commercial customers was forty three million dollars in the fourth quarter. Commercial revenue represented fifty nine percent of total fleet segment sales as compared to fifty two percent in the prior year period. USPS revenue, which is included within our other government channel, declined approximately twenty five percent compared to the fourth quarter of last year. The revenue decline was primarily driven by the USPS transition to a new fleet management information system platform, which resulted in a decline in maintenance related activities and therefore reduced part requirements. Fleet segment adjusted EBITDA decreased thirty one percent to approximately seven million dollars driven by the impact of the decline in USPS sales volume. Fleet segment adjusted EBITDA margin was nine and a half percent for the fourth quarter. For the full year twenty twenty four, the fleet segment generated revenue of two hundred ninety four million dollars driven by eighteen percent growth in our commercial sales channel offset by a thirty percent decline in revenue from the USPS program. Total adjusted EBITDA twenty one million dollars declined forty two percent and for the full year adjusted EBITDA margin was seven point three percent. USPS revenue began to rebound in the fourth quarter of twenty twenty four and is expected to continue to improve heading into twenty twenty five. Turn to slide ten. In the fourth quarter, we generate fifty five million dollars of operating cash flow and fifty two million dollars of free cash flow driven by disciplined working capital management and strong operating results. At the end of the fourth quarter, our total net debt outstanding was four hundred and one million dollars and a revolver availability was a hundred and ninety four million dollars. Adjusted net leverage, which includes the trailing twelve month results from prior acquisitions, was two point five times. I will turn it back over to John.

Thank you, Adam. I would like to conclude our prepared remarks by looking forward and reviewing our twenty twenty five priorities on slide eleven. We have made significant progress in simplifying our business and sharpening our go to market strategy. With the announced sale of our fleet segment, we are entering the final phase of our strategic transformation into a pure play aviation aftermarket parts and services provider as one VSE. We expect to close the fleet transaction in the second quarter, and we are working closely with one equity partners to ensure a smooth and successful transition. Following the divestiture, we will conduct a comprehensive review of our cost structure to ensure our corporate organization is streamlined to support our go forward aviation strategy. Turning now to our aviation priorities. First, we are committed to driving organic growth, expanding our market presence and strengthening partnerships with both customers and suppliers. We look forward to sharing updates on new partnerships. Second, the integration of our OEM license manufacturing program remains on track. We expect to complete the transition of all manufacturing capabilities from Honeywell by year end. Third, we continue to invest in expanding repair capabilities and adding incremental capacity across our MRO businesses to meet growing customer and market demand. And finally, we are focused on accelerating the integrations of Dessert, TCI and Kallstrom to drive operational efficiencies and enhance customer value. And finally, from a financial perspective, we are focused on capturing synergies from our recent acquisitions to support margin expansion this year and into 2026. We also plan to continue to improve core aviation segment margins through operating leverage, program optimization and enhanced MRO utilization. We will continue to leverage our strong financial foundation to optimize inventory and drive free cash flow improvement in 2025. In closing, I want to thank our global BSE team for their dedication and hard work. Their efforts are driving our successes and positioning us for a stronger future. Operator, we are now ready for the question and answer portion of our call.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're 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 it, please press star then two. At this time, we will pause momentarily

to assemble our roster. Our first question comes from

Sheila

from

Jeffries. Please go ahead.

Good morning, guys, and congrats. Good morning, Sheila. Maybe my first question, John, for you with 35 to 40% aviation growth that implies high single digits to double digits or organic growth this year. How do we think about the pace of that growth and the cadence between distribution and MRO?

Yeah, it's a great question. We had a big debate on how to guide for the year. When you look at our business now with PCI and with Kelserum, we're about 50% business in general aviation aftermarket, 50% commercial aftermarket. And candidly, we wanted to give us a little bit of cushion. We've talked since we acquired Kelserum about the USM business. And although we love the business and there's a place for that business inside of ESE, we definitely see ourselves pruning some of that business to be what we want it to be in terms of consistency of revenue and at the right margin profile. So with that, the balance of the two markets and then the USM potentially slightly refocused efforts there. That's where we kind of got the guidance on revenue. I'd say it's pretty evenly split. We kind of laid out what our growth rates are by segment, and we're going to be slightly above those growth rates in both segments. And I'd say as far as Michael, when you think about the year, it's not heavily backended, right? No, I think it's pretty consistent across the whole year.

Okay, great. Thank you. And then maybe my second question is on acquisitions. You're proving to be a great integrator with PCI coming in, I think, at $85 million of contribution over the last eight and a half months versus $85 million was a full annual contribution. We initially expected. So what drove some of that PCI out performance? And how do we think about the revenue synergies opportunity with calcium outside of the assets? You'll you'll print off.

Yeah, I mean, it's a great question. So each deal we look at, both has a different strategic focus. And then as we integrated what we expect out of it, PCI was all about creating capacity and working with our partners to manage the opportunity to set that in front of us. And we've been able to grow that business fall north of twenty five percent since we've owned the business. We, we feel that those opportunities still exist to continue a heavy pace of growth. We're working with the team there. It's all about capacity expansion. When we look at calcium, it's a combined kind of focus that's slightly different there because we plan to have a heavier hand in integration. There's a synergy capture element to it, which, you know, which is really important for us. You know, we've got, I think we gave a little bit of that. I think Michael and Adam did a good job with that bridge on the margin guidance so we can walk you through it. But we obviously want to be in a position in twenty, twenty six to have the integration behind us and the margin back to kind of our core levels. So that's a bigger focus for us. I'd say then the revenue growth that said they're in the engine aftermarket. And you can continue to expect kind of double digit growth in twenty, twenty five for calcium.

Great. Thank you so much.

Our next question comes from Ken Herbert of RBC Capital Markets. Please go ahead.

Yeah. Hi. Good morning. Hey, John, appreciate appreciate the the revenue and even to bridge assumptions here as we think about twenty five. I wanted to ask maybe the growth question a different way. So the guidance implies about call it five hundred basis points of outperformance relative to some of your market growth assumptions for VCC. Can you comment maybe how you see that breaking out by by you called out share gains, you called out obviously greater distribution agreements expanding increased MRO capabilities. Is there one of those two or three areas that are disproportionately driving the outperformance for the business relative to the market?

I mean, to be honest, no, which is a good thing. Even when I looked at the, you know, we grew seventeen percent organically in the fourth quarter and my favorite part of diving in the details of the financials is there's not just kind of a one thing driving it. It's really a nice balance across geographic sectors, across markets, across programs. So what I love about actually where where we're positioned today is we're actually seeing, you know, growth in all of our areas. I'm not saying it's the same percentage growth, but it's not it's not one thing that's kind of outweighing the other. So I don't make it make it a little harder to model. But Michael and Adam, right? It's pretty.

Very evenly distributed. And we into John's point, we saw that in Q4 very balanced between MRO and distribution organic growth and that 17 to 18 percent range. OK,

perfect. Hey, as we think about, you know, give or take the 50 to 60 basis points of margin expansion on the core business in twenty five, is that a good way to think about the business sort of moving forward post twenty five or is there maybe some incremental opportunity on the core business? Just as you get further into obviously the TCI and calcium integration.

Yeah, that's a good question. I think 50 to 60 is a good way to think about it. I think you're going to see more realization of synergies, especially with Kelsner throughout twenty five. So you'll see that realized in twenty six as well. I think we're continuing to optimize our fuel control program as well as we transition to full manufacturing light manufacturing capabilities. So we there's some SGA carry forward that we're carrying throughout this year that will be optimized as we get through the end of the year as we fully transition the program. So those two elements will help the expansion as you go into twenty twenty six. Perfect.

Thanks, Adam. Thanks, John. Michael. Nice quarter.

Thanks, John. Appreciate it.

Our next question comes from Michael Chiamoli from Truist. Please go ahead.

Hey, good morning, guys. Nice results. Thanks for taking the question. Hey, John, Adam, lots of good color on revenue and margins, but no mention on cash flow. Can we maybe talk about some of the building blocks for cash in twenty five, you know, even twenty six? And I know you've talked about new partnerships. So presumably there might still be some required investment and just had to think about working capital and, you know, just help help level set us on what to expect with cash.

Yeah, sure. So, I think we'll provide more specific guidance after we close the fleet transaction. But when you think about some of the larger elements, twenty four to twenty five, you know, obviously in twenty, twenty four, we had the big inventory provisioning around the program. So, like, we spelled that out, call it in the thirty five million dollar range. We also had impact from the transaction as well in the fifteen million dollar range. So neither of those two will repeat in twenty, twenty five and we'll provide a nice tailwind in twenty, twenty five. There's some offsetting elements to that. So we do have two payments to close out the Walker lane real estate. So there's a six million dollar payment in twenty five and another six million dollar payment in twenty six. And then we also are ramping the honey well program in twenty, twenty five. So you'll see some build up in inventory as we transition to our manufacturing. So, those are the two, the couple large elements and obviously we're, you know, we're growing earnings and, you know, there's a working capital requirement in our business as well. And then, as you think to twenty, twenty six, I think we're continuing to focus on on optimizing our working capital efficiency, especially on the inventory side. And I think the other element is some of the recent acquisitions we've made, you know, TCI, Telstra, they're actually less working capital intensive is our core business. So you're going to see some natural improvement as we get through the year.

Got

it helpful.

And then maybe John, just pivoting back on on top line growth. When you laid out your, your kind of twenty six targets, I think that was twenty three. I think the framework called for high single digit organic. You know, obviously the market continues to be strong, but you've got low double digit potential. You know, what's kind of driving that subtle upward shift in the organic growth. And I know you've got the licensing deals and broaden the portfolio, but any noticeable changes, you know, that as you guys look at the portfolio that has driven that slight uptick.

I know it's interesting, similar to like the last question, what we're seeing in terms of our opportunities is quite balanced across the business. So you haven't seen us put out a ton of splashy headlines in terms of organic growth. Hopefully we'll have a few during the year to share, but I actually like when it's more the block blocking and tackle growth. You know, our model is again very centric and what's happening is as we're embedded and working with our partners where our normal cadence of natural market growth is happening. And then there's additional kind of share of wallet or other problems that they need to have solved of where we're finding opportunities. And again, it's quite balanced across both market segments, B and G and commercial and both of our capabilities distribution and MRO. So, so with it's given us a little bit more confidence in our ability to outpace. The other thing that I'd add Mike is the engine exposure from on the commercial side from TCI and Kelschraub. So, when you look at again, just the stuff that we do that is hard and you want to get credit, you want to follow the good markets, the commercial engine market natural pace is at the higher end of the market growth.

Yep. Got it. All right. Good stuff. Thanks guys. I'll jump back in with you. Thank you. Thanks.

Our next question comes from Louis DePalma of William Blair. Please go ahead.

John, Adam and Mike. Good morning. Good morning. Good morning, Louis. Congrats on the fleet deal and related to the fleet deal. When that closes, will there be some trapped corporate costs? And I was wondering, you know, when taking into account some potential trap corporate costs, what do you view as the pro forma margin for this year?

Yeah, I can take that. So, we are expecting some amount of trap corporate costs. We're still doing the work to, you know, we'll give more precise guidance. But I think if you look back when we announced the FDS transaction, we said around 3 to 4 million. And we're probably at the higher end of that range, but we will give you some additional guidance around that next quarter. I think when you look at pro forma margins, we're not going to give specifics, but. We are expecting some improvement, you know, 100 basis points plus just looking year on year, given the lower margin contributions from the from the Wheeler business. So, once we close that transaction and. You know, come up with a more precise number on stranded cost, we'll update you on pro forma margins.

Great. Thanks, Adam. And sticking to the topic of margins, John, I think you mentioned that you should finish the Honeywell OEM solutions integration this year. How much of like, a margin uplift should that like, contribute for the 2026 year in terms of the remaining synergies there? Very

little in 26, because we've been able to capture even though we're implementing it. We're capturing the margin improvement as we implement it. So we were ahead of plan last year in terms of implementation and margin capture. So the remainder of it will be in 2025 and then you'll see 2026. I mean, I'm going to give directional guide and kind of way to look at it and then we can give clarity towards the back end of the year. But as you look at, let's say the 3rd and the 4th quarter, that should start to mirror what 26 margins look like. So, it's a good note, Michael, to take as we kind of get to that point, we can give maybe a little clarity to the market on

it. Great. And one final one on the subject of M and A. Many investors, VSE investors hope that Boeing will put AVL on the market as it would seem to be an excellent fit with VSE. It's unclear if that is going to happen. But for John, do you view it to be a win win situation either way? I think the question is that if Boeing keeps AVL, you will continue to take their market share. But if they eventually put it on the market, and if something makes sense that it would be a good strategic fit.

Yeah, I mean, I think if I don't personally see the asset necessarily coming to market, I think when we look at Boeing in general, I think the whole market looks to them and is all supporting them in their recovery efforts on the side. With regard to the aftermarket, we continue to drive differentiation and to drive our market niche. If assets come to market of all sizes, we definitely are active in determining if they're the right fit for us. And with the fleet business kind of exiting in the second quarter and our team being able to kind of, for lack of a better word, play above their weight class, I think we can look at assets larger than we typically have as they come to market. But I would not say there's any necessity for us to look at a deal like that. And we feel very comfortable with our existing M and A pipeline that's kind of more known and kind of our market positions.

Great. Thanks, John. Thanks, Evan. Mike.

Thank you.

Our next question comes from Jeff van Cinderen of B Riley. Please go ahead.

Good morning everyone and let me add my congratulations. Just want to follow up on the last question. Just want to follow up on the last question there around Boeing. Just wondering, maybe you don't necessarily go after acquiring the assets, but are there opportunities you potentially could go after around them kind of exiting some of their businesses?

You know, I mean, there's one business that's that's kind of publicly sort of ish in the market. I say publicly ish because everything's confidential when you're doing a deal. But, you know, I read the same things you read. That's the only business I'm aware of that's in the market. And it's not an asset that we are looking at. It's not the type of asset that fits our portfolio. And it's, you know, I say we can do a larger deal. It's well above the deal that we would consider ourselves right now. So, from what we understand that the only asset in the market at this time. So, we've got a pretty robust pipeline of kind of small and medium sized deals of our own. And obviously we look at them as a partner and in some instances as a competitor and we continue to approach it that way. Okay, fair enough.

And then just wanted to clarify on the margin, the overall aviation margin progression this year. Wasn't clear if you were saying that it would kind of ramp throughout the year. I think that's what you were saying, but just wanted to clarify that.

Yeah, we do expect some ramp throughout the year. Which is what you've seen. Obviously, fourth quarter was very strong for us on a margin standpoint. I think you'll expect to see that in 2025 as well.

Okay, and then just one final one. Any thoughts on kind of the remaining hurdles you need to get through to close the fleet step?

We've got normal HSR that should expire in the month of March. I'm trying to remember what month we're in here. And then the closing conditions are quite light other than that. So, we are expecting a second quarter closure at this point.

Okay, great to hear. Thanks for taking my

questions. No, thank you.

As a reminder, if you have a question, please press star then one. Our next question comes from Josh Sullivan of the Benchmark Company. Please go ahead.

Hey, good morning. Morning, Josh. Just a broader question, I guess, on the aftermarket. How should we think of VSEC as OEM rates stabilize and ramp? I guess two parts. What are your general thoughts on the cycle? And then separately, how is VSEC now exposed with so many transformative actions in 24 TCI, Kallstrom, etc.?

Yeah, it's a good question. I think that Michael, what do you think? How do you want to answer this one?

Yeah, so, so, in terms of OEM rates of production, I think we're pretty confident in 2025 into 2026 in terms of our line of sight.

Yeah,

I would say that we are uniquely positioned with the OEMs based on our differentiated value proposition. So, as they pivot, we can pivot to potentially work that they're trying to offload. So, I think that positions us extremely well as their priorities change. In terms of TCI and Kallstrom opportunities that I guess we mentioned earlier that these two companies are in the largest, the fastest growing portion of the commercial aviation aftermarket with their exposure to engines. So, we continue to take advantage of existing opportunities with existing customers while working through the integration. So, we're confident in how the outlook for 2025. Yeah,

so, I think to Michael's point, 25 and 26, we feel very, very good about as you look at 27, I'd say we still feel this growth opportunities. It's how do you pivot to new platforms? And where do you find more offloading work from OEMs? So, the revenue may come, the organic growth may come from different channels than just a double digit kind of natural market decline. But I mean market growth, but we do not expect a market decline over the next three years at this point. And

then I guess just to that end, in TCI, you mentioned in the comments there that it's all about capacity expansion. How do we think of where capacity was when you first acquired the asset to maybe where it will be in 26 and once we're done integrating? Yeah,

it was, it was and is an amazing asset. You know, as a private business, I think that you continue to invest to a certain level and I think OEM partners will invest with you to a certain level. I think when you have a long term, stable public company approach like we do, it creates both different opportunities on both sides of the table. So, for us, we're looking at, you know, how do we double capacity in the total facility? And if we need expansion, we'll look at that as well. So, I'd say it's a multi-year plan to kind of double capacity.

And that's where a lot of our investment dollars are focused, especially in 2025 is expanding MRO capacity, TCI and really across the board.

Great. Thank you for your time.

This concludes our question and answer session. I would like to turn the conference back over to Mr. John Cuomo for any closing remarks.

Thanks. Thanks everybody for the time today. Look forward to speaking with you in May to report our 1st quarter of 2025. Thanks and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.