Greetings, and welcome to the VSE Corporation First Quarter 2024 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Perlman, Vice President, Investor Relations and Treasury. Thank you, Michael. You may begin.

Thank you, Devin. Welcome to VSE Corporation's First Quarter 2024 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO. Also on the call this morning are Steve Griffin, Chief Financial Officer; and Tarang Sharma, VP, Controller and Head of Corporate Development. 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. We are 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 would like to turn the call over to John.

Good morning. Thank you for being a part of today's first quarter conference call. Today, we share not only the exceptional performance of our first quarter, but also the remarkable strides our teams are making in executing our operational and strategic plans. As I mark my fifth year with VSE, it's truly exciting to witness our story and vision, translating into such strong results. Let's begin on Slide 3, where I will provide an update on our Q1 performance. In the first quarter, we delivered company-wide revenue growth of 28%. This included both record revenue and record profitability for our Aviation segment. The strong aviation revenue growth was driven by balanced results from both our distribution and MRO revenue channels. Distribution revenue growth was driven by expansion of existing OEM partnerships and strong execution of both new and existing programs. MRO revenue growth was driven by market share gains and expanded repair capabilities and product offerings both supported by strong end market activity. The Aviation segment's record profitability and 17% adjusted EBITDA margins was driven by contributions from new distribution programs, MRO market share gains and our new fuel control program. During the quarter, fleet segment revenue was up 5%, driven by increased sales volume from e-commerce customers and fulfillment partners, supported by disciplined volume expansion at our Memphis distribution center and expanded product offerings, supporting new and existing customers within our commercial sales channel. This growth was partially offset by a decline in revenue from the United States Postal Service, driven by their implementation of a new fleet management information system, which has resulted in a temporary slowdown in maintenance-related activities and, therefore, parts usage. Now let's move to Slide 3, where I will provide an update on our strategic initiatives and program implementation. First, in April, we announced…

Thank you, John. Working with you in the VSE leadership team and the support of the partners and shareholders of VSE has been an honor, and I'm extremely proud to have been a part of such a talented team that was able to accomplish this strategic pivot of a 60-year old business. It's a difficult personal decision for me to leave VSE. I'll be joining another public company in the health care industry based in the Boston area to be closer to my family, but I look forward to following the company's future successes, and I'm confident that Tarang, Michael and the entire finance team is ready to support the next phase of growth. John, it's been a real honor being your partner in this transition. Now let's turn to Slides 5 and 6 of the conference call materials, where I'll provide an overview of our first quarter financial performance. VSE generated $242 million of revenue in the quarter, an increase of 28%, led by an increase in aviation revenues of 43% and fleet revenues of 5%. Adjusted EBITDA of $32 million increased 37% or $9 million compared to the first quarter of 2023. Aviation drove this growth, up $9 million compared to the same period in the prior year. Adjusted net income increased 51% to $14 million and adjusted diluted earnings per share increased 23% to $0.87 per share. Now turning to Slide 7, we'll cover our Aviation segment's first quarter results in more detail. Revenue increased 43% compared to the first quarter of 2023 to a record $162 million. Both distribution and MRO businesses were strong contributors, up 38% and 58%, respectively. The 38% increase in distribution revenue was driven by strong execution of legacy OEM programs, the ramp-up of new OEM programs, including the Pratt EMEA and…

Thank you, Steve. I would like to conclude our prepared remarks by reviewing our 2024 priorities on Slide 10. As previously communicated, 2024 is a year of execution. Let's begin with our Aviation segment. First, our Pro Euro program implementation is accelerating, and our new Hamburg, Germany distribution center is open and shipping products. We are preparing for what's next for that facility with additional product lines to be added, beginning with tires from our Desser acquisition in the third quarter of 2024. Second, our primary focus is the launch and transition of our newly acquired fuel controls program, where we became the licensed manufacturer for over 340 unique fuel controls, spanning 120 platforms, serving both the business and general aviation and rotorcraft markets. This transition is outpacing early expectations and is expected to contribute an additional $7 million of EBITDA this year and $14 million in 2025. And third is the integration of Desser Aerospace. This integration is in process and includes a full system, process, go-to-market and organizational integration. We expect the integration to be completed over the next 12 months. We are also excited to begin planning integration activities for our recently announced TCI acquisition. Moving to our fleet segment. We remain focused on our organic growth and customer diversification strategy and plan to drive commercial growth as we continue to scale our new distribution and e-commerce fulfillment center. Regarding the USPS, we will continue to support both legacy and new vehicles, while we manage this temporary disruption in activity brought on by their new system conversion. We are and will continue to be ready for their recovery later this year. In summary, we are very proud to report company-wide revenue growth of 28% to start the year. This included both record revenue and record profitability for our Aviation segment. We remain focused on executing our growth and strategic initiatives to support delivering another year of above-market revenue growth and improved profitability within our Aviation segment. We are committed to scaling our commercial fleet business and managing through the near-term and temporary challenges within the USPS. In addition, a key focus for the remainder of the year is strong balance sheet management and generating solid second half of the year free cash flow. And finally, we remain committed to driving our strategic transformation forward. This includes finalizing the divestiture transitions for the Federal and Defense segment, repositioning our corporate headquarters and evaluating strategic options for the Fleet segment. Thank you again, Steve, and thank you to the amazing VSE team for what they do each day to support all of our stakeholders and for a great start to 2024. Operator, we are now ready for the question-and-answer portion of the call.

[Operator Instructions]. Our first question comes from the line of Ken Herbert with RBC Capital Markets.

Well, maybe really nice margins in the Aviation segment. Can you just talk about the cadence from here relative to the full year guide because it implies somewhat of a bit of a step down through the remainder of the year. And I'm just wondering if there's anything specific we should keep in mind regarding the segment and the margin progression or maybe just 1 quarter and how much conservatism could be built into the expectations for segment margins there?

Yes, I appreciate the question, Ken. I mean it does bounce around quarter-by-quarter. And if you look at last year, we do tend to start at the higher end for the first quarter. There are some pricing initiatives at the OEM level that we're able to take advantage of in terms of when inventory is purchased and when it actually hits the market. So I do think that this makes sense relative to how the business has performed seasonally as compared to prior years. But I want to reemphasize that the start to the year and the increase in the margin guidance for this business demonstrates it has a strong runway to go and certainly continues to exceed our expectations from multiple different contributing factors.

And it sounds like just based on the commentary on where leverage could get to by the end of the year below 4x that cash generation this year should accelerate in the second half of the year, but maybe how do we think about the full year free cash flow expectations?

Yes, I think you're right. We're going to continue to guide to strong second half free cash flow dynamics, again, similar to last year as to the margin question. The first half of the year obviously has the cash outflow for the larger program that we're launching in Europe and then we'll start to drive some very strong free cash flow in the second half of the year, and that will be what drives leverage down.

And just finally, John, you've obviously got a lot of plates up in the air and a lot of initiatives you're pursuing now. And then of course, you layer on top of it a CFO search. How do you think about those new investment opportunities? And I just wanted to preface this by there's still substantial disruption in the aviation marketplace. There still could be unique opportunities to present themselves. How do you plan to balance your time around, obviously, execution and maximizing the investments relative to potential new opportunities that could emerge?

Yes. That's a great question. I would say our core DNA of the business is solid execution. Ben Thomas, who is the President of our Aviation business is an extremely strong competent leader in terms of execution. So he is managing the day-to-day in the aviation business and running all of the execution projects. When I look at acquisitions, there are some that have a real strong need for integration upfront and some that can operate a little bit more like a stand-alone because the synergies are less, but the opportunity is to grow or greater. We felt that with TCI. So it's an outstanding business. It's an A+ asset that has great growth opportunities and doesn't need a lot of day 1 influence and integration work from us. So I'd say where we kind of will continue to look at opportunities is really looking at the capacity of the team and saying, where do we have capacity to support new opportunities? And if not, are there opportunities like TCI, where we can -- they essentially can operate as a stand-alone until we're ready and still be able to take advantage of what's around in the market. I see the same thing that you do. There's a lot of disruptions. We do think there will be a tremendous amount of deal activity in the back end of this year and early next year. So we remain very open to the opportunities. But as always, the level of discipline that we'll approach will be very prudent.

Our next question comes from the line of Jeff Van Sinderen with RBC Capital Securities.

It's with B. Riley. So let me just say that, Steve, disappointed to see you leave, but obviously, wish you the best in your future endeavors. Just wanted to -- if we could circle back a minute to the USPS situation. I guess maybe anything else you can help us to sort of characterize specifically what they're doing now with their new management system, I guess, it is. And how that's disrupting maintenance? And then maybe you can touch on also what you're seeing as they're migrating or, I guess, starting to migrate to their new platform? And then any shift in expectation there, if there is any?

Yes, I appreciate the question. Obviously, it's a disruption to the business in the near term. When you go through an ERP transition, there's always some bumps and you do always expect some level of disruption and we had initially guided the forecast down. Obviously, we are taking guidance down further based on further disruptions. You can look at it as almost like a kitchen crashing in a restaurant in terms of how the operational flow is really -- is complicated at this point in time. The positive is this is not a traditional PO purchase order model. We have inventory on consignment at more than 300 postal service locations, and we're very embedded in their systems and processes, which is why it's a more complicated process as they implement their new ERP system. Once all the kinks are worked out, we do expect maintenance activity to improve and therefore, part usage to improve. And what we have is essentially a requirements contract. So kind of once we have a part on contract, if they need it, they're purchasing it from us. So obviously, the requirements have decreased as are going through the implementation. They have made the decision to go full forward rather than fixing and making sure the sites work really well before they bring new sites live. They are still bringing sites live, which is why that we have the near-term impact. So our anticipation is they'll finish the integrations and then the work and the processes will start to improve towards the back end of the year. And with that, you'll start to see the recovery in the revenue recovery that goes along with that.

And then if we could just turn to the TCI acquisition. Congratulations on closing that. Maybe you could just speak to your -- I guess, your initial thoughts on the process of integrating and maybe the timeline there.

Yes. So aligned with the question that Ken just asked, it's an asset that's a real strong kind of A+ asset. I'd say there's a little bit of work we're doing, but not a tremendous amount of near-term integration. So the bigger opportunities we look at is sitting with some of their large OEM partners who have problems that they need to have solved and what we call back shop work that we can do for them and making sure we've got capacity to support that work, and we've got the capabilities to support that work. So we're spending much more time on how to grow that business because it's such a strong business. It's fun. We acquired the business 3 weeks ago. And in the first week, they received a supplier or key supplier work from Collins. So nice to see very strong relationships, and the goal is just to leverage those and grow. That's really where the near-term focus will be for TCI.

Our next question comes from the line of Louie DiPalma with William Blair.

Steve, you were instrumental in VSE's transformation as both a CFO and also with your Desser Aerospace industry knowledge and a pleasure to work with, and your new company is lucky to have you. And Tarang congrats on your new role. John, you mentioned how the $175 million new 10-year agreement was an expansion. Did the scope change upon renewal? And in general, for renewals right now, are you pushing to add distribution capabilities to the OEMs in Europe via the new Hamburg facility and also Asia and have like the Pratt & Whitney Canada anchor, like facilities in those regions have that led to more business development activity?

Yes. So a couple of questions in there. First, yes. So we don't have a lot of contracts up for recompete this year. So that's one of the very few. This is actually a very quiet year in terms of renewals, which is not a bad thing. So we were very pleased to see early renewal on that program, and that is an expanded scope of work. So if you think back, I've been here for about 5 years. We had COVID kind of in the middle of it. As we've signed these programs 3 or 5 years ago that are now coming up for renewal, we've really proven ourselves with these OEM partners and customers in the market. So not only do we feel very confident in our ability to get these renewals across the finish line, but we feel pretty confident in our ability to expand scope. It's a great opportunity for share gain. With regard to our expanded facility, Hamburg, that was an agreement that we signed in the fourth quarter of last year. I think in record time, we have a lease signed in -- outside of the U.S. facility stood up and park shipping within under 100 days. So we want to make sure that program is stable. It's a very, very fluid program in terms of the number of aircraft on ground products that we ship out the door. So we want to make sure that performance remains very high before we add products. But we are seeing definitely more opportunities in the European region, and you'll continue to see that. It's a big growth focus for us as we get into 2025. But with the Desser acquisition, which just has a U.K. distribution site. And because of Brexit, it's a little bit more constrained at this point. We will be putting some of that product with those OEMs in that facility towards the back end of the year and see a lot more both business in general aviation and commercial opportunities to come, just beginning in Europe.

And from an aftermarket industry perspective, Boeing's production has significantly increased -- do you continue to see aftermarket demand as being particularly hot right now? Has it subsided from last year, which was also very strong, and in general, continue to see a lot of visibility in terms of the long-term demand.

Yes. I tend to -- I mean, aftermarket demand is something that a customer calls you the day before they need to part or after they needed it for an order. So there's not a tremendous amount of backlog like you have with an OEM business. So there's a lot of data points out there, and I tend to be a little bit more conservative in how far out we look. What I would say is this is somewhat of a unique market where I think we can see a horizon into 2025, that is still as robust of a market as we are experiencing today. So the market, I'd say, with puts and takes is as robust as it was last year, say, puts and takes, you have cargo down a bit compared to commercial but commercial in that body remains very, very strong and probably a little stronger than last year. So all in all, we think 2023 was a strong year 2024, will continue to be a strong year, and we anticipate 2025 being a strong commercial year as well.

And do you -- does your exposure with Pratt & Whitney Canada, obviously a big customer. Does it remain skewed more towards business and general aviation. And over time, do you expect your commercial aviation exposure to grow?

Yes. I mean, Pratt & Whitney Canada is -- what they do only is business in general aviation of rotorcraft. There's a little bit of regional work in there. But if you look at their engine portfolio, it does not support commercial. You've got Pratt U.S. and Hartford that really does all the commercial work. TCI is a very large partner with Pratt on their type of work. So the Pratt Canada work is never going to have a commercial component to it.

But for -- I think TCI has a lot more commercial exposure, right? And should, I guess, more acquisitions in the future give you opportunity to expand that commercial work?

Yes. I mean what was attractive to us in TCI was, number one, we start with culture and strategy. They're OEM-centric and what they do and their culture of excellence in how they support their end user customer is at the highest levels. So that was the most attractive part to us. But then as I look at the balance of our business in terms of diversification between business and general aviation and commercial distribution and MRO, they are more MRO focused and they are more commercial focused, which is a shift that our business because of the large distribution programs, the business and general aviation we've signed, our business is skewed a little bit more that way. So this helps provide a really nice balance the other way, both in terms of customer base as well as revenue channel.

[Operator Instructions] Our next question comes from the line of Josh Sullivan with The Benchmark Company.

John, you executed on several large strategic pieces here in aviation, relatively short time, Desser TCI, et cetera. You did mention there that you think the aftermarket is still attractive and will be for next several years. But the organic underlying growth rate in Aviation this year, any changes by bucket in MRO, distribution, services or by Bizjet or commercial?

No. I mean, actually, I mean, what is really nice and that was kind of work into the script last night again is the balance of the business. We break our business down and we have our daily kind of flash reports into our business reviews, which really nice is how much green there is on these pages when we do business reviews with -- obviously, there's some puts and takes, like I mentioned a minute ago, some of the cargo stuff is a little down. But when I look inside of each of the business units inside of Aviation, there's just so much strong performance and nice balanced growth across the board. We're not really -- seeing a slowdown in the business in general aviation market either. There's -- is it as robust of a growth rate as we saw 18 months ago, no, but it's still a very, very healthy and growing market. So right now, we're seeing, with the exception of cargo, a fair amount of balance in terms of growth across both customer base and revenue channels and capabilities.

And then just as far as the transition with Honeywell and the fuel control side, where are you outpacing expectations? You mentioned there in the comments? And then has it taken any more resources maybe you thought it wouldn't?

Yes. I think, I mean, first of all, I'm just ecstatic about the team we've been able to bring forward because it's a new capability for us. And we had said that there'll be some cost before the revenue and earnings as we start to ramp up because we needed to bring on a new team. And just -- I can't say enough about the strength and the quality of the team that Ben Thomas has brought on to run this business. So the transition, it's slow and methodical the way it should be, but that is on or ahead of plan. The relationships with both the OEM that we're transitioning from and the OEM partners that we have is extremely solid, and then the financial performance is performing above our model at this point.

And then just to be clear on the U.S. -- the new U.S. Post Office system, once we're back to fourth quarter or I guess, maybe beyond that one back to normal rates, is there any change in the margin profile you expect?

No, it's a great question. I think we still continue to look at their new vehicle deployment and what that looks like. There's not a tremendous amount of new vehicles being deployed over the next 12 to 18 months. So we're really just -- we just need to get the recovery back and the systems back up and running. So we'll do everything that we can. Customers go through ERP transitions all the time and have a level of -- what's the right word? Complication as they do so. I think this one happens to be a little greater because of the number of actual locations. And the positive is the complexity of the process. And I'd say the positive of that, which means how embedded we are in their process. So we just need to ride this out with them and support them and wait for the recovery.

And I guess I'll just end on the commercial side, some nice growth there in fleet. Any new comments on the Memphis facility ramp up or any new endeavors there?

Yes, I'm actually feeling even more bullish about the opportunity set and the ramp-up. We have a new leader in place there who's just again, really -- I mean, it starts with talent in our business. who's really doing an outstanding job. We had launched that site with a few of our -- we call them fulfillment partners. So where we put our inventory on other websites, so not just on our own website. And what I'm excited about is not only the continued growth with our current partners. But hopefully, in the third quarter, I'd say we'll have revenue from a very large new partner, and we'll share more details of that coming forward. So we still see -- just honestly, I say unlimited in a real way, just a tremendous amount of positive upside as we continue to grow and scale that business.

Our next question comes from the line of Michael Ciarmoli with Truist Securities.

John or Steve, just to put a finer point on this. I can come up with a scenario where maybe the -- your old organic growth in aviation, 24% to 28% comes down a little bit. Are you -- did you make any changes to the organic growth assumptions? I know you called out $55 million to $60 million of TCI. It sounds like cargo is a little softer. We've seen some guys report Bizjet aftermarket a little bit softer, but I'm just trying to understand if anything changed with the underlying organic and aviation.

No, nothing has changed. So we can but I would say nothing has changed on our expectations. If you just look at the first quarter, up 20% organically. And when we compare that to what we put out at the Investor Day last year in November, that's stronger than what we anticipated.

And then just point of clarity on fleet. You talked about down 40%. Was that just postal assuming in not the whole segment, right, for 2Q and 3Q?

Correct. It's just post. And it's down 40% to 45% in the second and third quarter, respectively, associated with fiscal live.

And then, John, just back to aviation, you called it out share gains from MRO. I mean, obviously, there's tight capacity in the marketplace. Can you dig a little deeper there? I mean, are there certain repair capabilities that you're taking share from? Is some of this coming from just M&A and disruption in the marketplace? Is there more runway there for you guys to pick up share? And maybe even, I guess, not only the capabilities, but what specific market segments?

Yes, I think there's a couple of things. I think first of all, I think you talked to anybody the world, I tell my team, enjoy the times now. We're all doing well. The market is doing well. We're taking share. There's a couple of different paths. Number one, let's talk about some OEM work that's being offset. So we've got new capabilities with OEM authorized avionics that is predominantly on the 737 MAX, and that's a really strong capability for us. I don't know if I'd call that a share gain or Steve, how would you describe it more of an OEM authorizing their first U.S. partner to support this program because it's going to really continue to ramp. So we see that's just -- that's new and revenue is just beginning, and we see a tremendous amount of opportunity there. I'd say when you look inside of our shops, our fuel shop and our hydraulics and pneumatics and avionics, I'd say there's gains in different areas with different customer types. And then the last thing I'd add is our Southwest program where we have, we're supporting their 737 retirement is providing additional opportunity for us. So as we help them tear down those 737s and help them monetize the product, the parts that are on that -- those aircraft many of those need to come in for repair and is providing additional repair opportunities for our repair shops. So what I mean by all of this is you're seeing buckets all over the place. It's not just one platform or one program. It's really just, again, nice consistent growth across our business. And our business in general aviation business is performing very well. I was looking at some numbers yesterday of the markets. Obviously, it's not as robust as you saw 2 years ago in terms of growth. But I'd say it's plateauing at a very, very high rate and continues to stay pretty stable there, and you do see some months of growth. So not a lot of capacity in that market. So we do look out and feel that, that market still has a pretty good runway in terms of us being able to fill our capacity based on the demand profiles of our customers.

Last one I had. I mean, you put up some really good EBITDA margins in the Aviation segment in the quarter. And I think you called out that there were some higher costs there. Can you kind of quantify some of those costs, I guess, startup costs and others and maybe what was that drag? And does that continue? Or does that give you a kind of opportunity to even push these margins higher once you get past some of those initial costs?

Yes. Maybe I'll start, and then I'll hand it over to Tarang. I'd say the costs are not material enough to call out and specify in terms of numerical values, Mike. But what I'd say is, think with the reason why we do call it out is it does represent an opportunity for further margin expansion in the years ahead as we gain full scale in '25 and '26. We previously communicated that margin rates should continue to go higher and inflect higher. Tarang, is there anything else you want to add in terms of market mix on the year?

Yes. I certainly want to add the question associated with the variability of our margin and us starting out the quarter at a high margin rate. One of the things that's kind of built in here is the CPI margins are slightly lower than our margin run rate. So you'll see that impact as we continue on throughout the year.

And I'll give you the qualitative answer. It's all going to depend on mix. So within our business, we've obviously got some extremely high margin work and then some lower margin work. Now on the positive end, as I look at some of the opportunities that we have out there, some MRO growth that I see ahead, it's in the higher-margin area. The second thing that I would highlight is that our Honeywell fuel controls program is more of a margin driver than a revenue driver and as that continues to ramp, we'll continue to see opportunities there.

Is there an opportunity for TCI margins to become in line with the segment average or historical? Or will that be kind of permanently a bit lower?

I think maybe we'll give it some time to kind of understand the business a bit better, and maybe answer that in a future time.

There are no further questions at this time. I'd like to turn the floor back over to Mr. Cuomo for closing comments.

Thank you all for your continued support of VSE. We very much appreciate it and look forward to speaking with you in July during our second quarter earnings call. Have a great rest of your day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.