VSE Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the VSE Corporation Third Quarter 2023 Results Conference Call. All participants will be in listen only mode. 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.

Operator

Please go ahead.

Speaker 1

Thank you. Welcome to VSE Corporation's 3rd 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.

Speaker 1

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.

Speaker 1

As a reminder, The Federal 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 1st Investor Day scheduled for November 14, 2023 in New York City at NASDAQ MarketSite and broadcast virtually. You can register for the event on our IR website at ir.vscorp.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.

Speaker 1

With that, I'd like to turn the call over to John.

Speaker 2

Thank you, Michael. Good morning, everyone, and welcome. Thanks for joining our call today. Let's begin with Slide 3, where I will provide an update on the performance of our business segments. 3rd 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 Desir acquisition and a transformational asset and intellectual property license agreement with Honeywell.

Speaker 2

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 Aviation MRO revenue growth of 54% was driven by strong end market activity, market share gains and 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.

Speaker 2

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 and in the quarter was supported by an expansion of the installed base of their vehicles and continued maintenance investments in both legacy and new vehicles. Let's now move to Slide 4, where I will provide a strategic update. 1st, On July 3, we acquired Desir Aerospace, a global aftermarket solutions provider of specialty distribution and MRO services.

Speaker 2

Desir 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 aircraft distribution and MRO services strategy and provides VSE Aviation with increased access to the highly fragmented aviation aftermarket. Having Desser within the BSE Aviation portfolio of assets has already begun to for sales synergy benefits. We have begun the integration of Desser, starting with the U. S.

Speaker 2

Operations, which is expected to be completed by the Q2 of 2024. As a reminder, integration means full systems, process and organizational integration into the VSE systems with a goal of reducing cost, improving productivity and providing our customers and suppliers with a 1 company seamless approach to the market. 2nd, 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 4 engine platforms, including 3 platforms that are still in production. This new agreement spans VSE Aviation's existing capabilities supporting these Honeywell fuel control systems and associated sub components. Since 2015, VSE Aviation has served as the exclusive distributor of these products.

Speaker 2

In addition, PSE Aviation has a long established and successful history as an MRO provider to support these fuel control systems. Through this new agreement, DSC 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 VSE 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.

Speaker 2

We will share more details about program during our November 14 Investor Day. Finally, last month we announced a mutual agreement to terminate the sale of the Federal and Defense segment to Bernhardt Capital Partners. While we were disappointed with this outcome, we remain very focused on the near term divestiture and we are moving quickly towards We have relaunched the process and expect to provide a more detailed update early in the Q1 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 5.

Speaker 2

DSE delivered solid and well rounded 3rd 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 4th record quarter in a row with revenues of $152,000,000 a 48% increase year over year and our Q1 over $150,000,000 Driving the record revenue was balanced growth across and the addition of Dessair Aerospace. Adjusted EBITDA for the Aviation segment of $25,000,000 increased by 87% versus the prior year, yet another record for this business segment. Aviation segment adjusted EBITDA margin increased by approximately 3 40 basis points year over year to 16.6%. Aviation segment adjusted EBITDA represented 78% of Total company's 3rd quarter adjusted EBITDA versus 65% last year.

Speaker 2

Our fleet segment also reported strong revenue Growth in the Q3 on a year over year basis, increasing 22 percent to $79,000,000 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 BSA teams and a strong commitment to our customer and supplier focused values.

Speaker 2

I'm pleased to see that this work translated to a record financial performance in the quarter. I will now turn the call over to Steve for a detailed review of our Q3 financial performance.

Speaker 3

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 67 of the conference call materials to provide an overview of our Q3 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.

Speaker 3

We generated $231,000,000 in revenue in the 3rd quarter, an increase of 38% versus the prior year period. Aviation reported another record quarter, driven by strong 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 Desser Aerospace acquisition. Fleet segment growth was driven by solidecommerce fulfillment and commercial fleet sales, together with higher contributions from the USPS program. We generated $32,000,000 of adjusted EBITDA and $14,000,000 of adjusted net income, an increase of 56% and 75%, respectively.

Speaker 3

Adjusted EBITDA increased $11,500,000 driven by an $11,700,000 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 8, we'll cover our Aviation segment results. Revenue increased 48 versus the Q3 last year to a record $152,000,000 Both distribution and MRO businesses were strong contributors, up 46% and 54%, respectively. Aviation grew 24%, excluding the Desser 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 Desser.

Speaker 3

MRO continues to benefit from higher commercial flight activity, an expanded portfolio of repair services and capabilities, improved productivity and the addition of our Desser Aerospace acquisition. Aviation adjusted EBITDA increased by 87% in the quarter to $25,000,000 While adjusted EBITDA margins increased 3.40 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 Desser business as it exceeded our initial 3rd 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 Q3 results and the addition of DESER.

Speaker 3

We initially estimated ADESA would contribute approximately $35,000,000 of revenue to our second half results. While we are on track to exceed our initial expectations, we do expect slightly softer 4th quarter Desser revenue as compared to the 3rd 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 4th 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 4th quarter. However, we do anticipate higher sequential operating expenses, interest expense and amortization as we establish manufacturing capabilities to support the program.

Speaker 3

In 2024 and in 2025, we anticipate $7,000,000 $14,000,000 of EBITDA contributions from the program respectively, improving ratably throughout each year as we realize the lower cost of inventory purchases. We also expect to realize $10,000,000 and lower net working capital by the end of 2024. Now turning to slide 9. Fleet segment revenue increased 22 percent to $79,000,000 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 $37,000,000 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.

Speaker 3

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.

Speaker 3

While we service newly introduced vehicles. Segment adjusted EBITDA increased 5% to $9,000,000 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.

Speaker 3

Turning to Slide 10. At the end of the Q3, we had $89,000,000 in cash and unused commitment availability under our $350,000,000 credit facility. For the quarter, we generated $15,000,000 of operating cash flow and $11,000,000 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 $440,000,000 We currently have $250,000,000 of outstanding interest rate swaps following the execution of a $100,000,000 swap in July concurrent with the Desir acquisition. Pro form a net leverage, which includes the trailing 12 months results from our prior acquisitions, was 3.7 times at the end of the 3rd quarter.

Speaker 3

We expect our pro form a net leverage ratio to be below 3.5 times by the end of the 4th quarter, driven by growth in trailing 12 months of adjusted EBITDA and positive free cash flow in the 4th quarter. We expect 4th quarter free cash flow to improve sequentially as compared to the Q3 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.

Speaker 2

Thank you, Steve. 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 2 business segments. Please advance to Slide 11. 1st, continue to pursue the near term sale As I stated earlier, we remain confident in our ability to monetize these assets and will work towards an expedited sale of this business.

Speaker 2

We expect to provide an update in the coming months. 2nd, transition and implement our newly acquired Honeywell Fuel Controls product line and associated stuff components program. 3rd, complete the integration of our Precision Fuel MRO acquisition, which will happen this quarter and continue the integration of our Desser 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. 4th, continue to expand our full service unique product distribution and MRO repair capabilities within high growth, Underserved portions of the Aviation Aftermarket.

Speaker 2

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. 5th, 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 Q4 driven by disciplined cash management and strong operating results. I'm very proud Our Q3 operating performance and the tremendous progress we have made year to date to advance both our Aviation and Fleet business strategies.

Speaker 2

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 2 weeks. Operator, we are now ready for the question and answer portion of our call.

Operator

The first question comes from Luis De Palma with William Blair. Please go ahead.

Speaker 2

Good morning, Louie.

Speaker 4

John, Stephen and Michael, good morning.

Speaker 3

Good morning.

Speaker 4

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 4th quarter, How should we think about seasonality relative to the Q3?

Speaker 3

Yes. I think I mentioned In my prepared remarks, Louis, but obviously, we're extremely pleased with the results of the Aviation business in the Q3. When we look towards the Q4, there is an element of seasonality, a little bit lighter on revenue is what we would anticipate, and probably some of that mostly coming from the most recent Desser 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 For the Aviation business, we've increased our revenue guidance range for the full year 30% to 35%.

Speaker 3

And we look forward to talking more about 2024 and beyond when we get to the David, very, very pleased with the results thus far.

Speaker 4

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 energetics consulting business And you also have a $565,000,000 C5 aircraft IDIQ. Have you seen interest to buy these assets on a standalone basis as opposed to Potential acquirers for the whole business?

Speaker 2

Yes, Louis. So the way you're looking at it exactly correct. So we're Obviously, looking for as most expedited process as possible that can monetize the assets with the highest value. That could include selling These segments in totality or selling pieces or contracts independently, and we are pursuing both paths simultaneously.

Speaker 4

Great. And one final question. Earlier this year, you expanded your Pratt and Whitney Canada partnership 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?

Speaker 2

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 Desir, which gives us a strong solid team in Europe, But that team is very U. K. Centric. We have plans to expand outside of the U.

Speaker 2

K. And both leveraging the Desser 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.

Speaker 4

Awesome. Thanks, John, Stephen and Mike. Looking forward to the Analyst Day.

Speaker 3

Thanks, Louie. Look forward to seeing you.

Operator

Thank you. The next question comes from Michael Ciarmoli with Truist. Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for taking the questions. Just to close the loop on Fed and Trying to sell that, I mean, do you guys have to realistically lower your expectations in terms of what you think the asset could fetch Now I know it was kind of with that earn out $100,000,000 I mean are you just trying to do this as quick as possible and obviously you're still trying You know monetize it in the most efficient fashion and get the most value. But do you think you've got to lower your expectations for sale price?

Speaker 2

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 50,000,000 dollar based 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

Speaker 5

Got it. Okay, that's helpful. And then just on Aviation, obviously, very strong demand backdrop there. Just can you help me reconcile it? I think Steve you called out the organic growth maybe 24% ex Desser.

Speaker 5

I don't know if I have the math correct, but that Seemingly implies maybe a $25,000,000 contribution. Do I have that right? And I know you said $35,000,000 for the year, but I didn't know if there was anything else Sort of incorporated in that organic?

Speaker 3

You have the math correct. And so it does contribute $25,000,000 in the quarter and that's why I referenced that the business is Better than expectations for the second half

Speaker 5

of the year. Yes.

Speaker 3

But to be super candid with you, as we get to know the business better and work with the teams more, there I referenced the seasonality effect. Their Q3 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 Q4, hence the commentary. But yes, we're very pleased with the business' performance thus far and excited about working through the integration efforts.

Speaker 5

Got it. Can you help us out? I know you called out the distribution of 46 and MRO up 54. What can you Parcel, maybe the organic growth rates on those two lines?

Speaker 3

Yes, 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 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.

Speaker 5

Got it. And then I think you called out pricing as well. I mean, we've heard from some other suppliers out there. They've gotten Double digit last year, high single this year. Can you maybe talk to what you're seeing on pricing, maybe across both distribution and kind of MRO?

Speaker 2

Yes. I think, Mike, so I'd say that, obviously, 2023, we're not 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 My anticipation is that it's going to be a little bit more muted than we've seen in 2023 2022. So we're just getting initial kind of data in.

Speaker 2

Ask me that question in 2 weeks at the 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 2 years.

Speaker 5

Okay, got it. Last one and 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 obviously airlines maybe being forced To fly older equipment longer, not having enough lift. And I guess the same holds true for just where the MAX is. I mean, what are you guys seeing Potential tailwinds there?

Speaker 3

Yes, I'd say direct corollaries, not a ton. Obviously, we don't support that program today. But I'd say for the second part of your question, will that lead to a longer life on some of these legacy assets and therefore more repair opportunities? I believe 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.

Speaker 3

So we're kind of trying to support all lengths of the aircraft. And I think at this point, we continue to see robust demand. 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. Commercial at this point had seen such a strong 23, will start to moderate.

Speaker 3

We're seeing that in our business even in the Q3 on a year over year comp basis.

Speaker 5

Yes, of course. Got it. Sorry, I'll jump back in the queue. Thanks, guys.

Speaker 3

Thanks. Thanks, Mike.

Operator

Thank you. The next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Speaker 6

Hey, good morning.

Speaker 5

Good morning, Josh.

Speaker 3

Good morning.

Speaker 7

Just as far as the Honeywell IP acquisition, what does that Ramp looked like you talked about expanding the supply chain. Is there a qualification timeline or hiring need that we should think about?

Speaker 2

There is both actually. You're thinking about it the right way. So to say is, this is a great entry for us into this market. We 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.

Speaker 2

So we're working with the supply base and essentially assembling the fuel controls. That's our portion of the manufacturing. So if you think about it in our repair business Today, we disassemble it and we reassemble it. So we've got tremendous experience, but we do need the FAA approvals from a manufacturing perspective. That takes weeks months, not years.

Speaker 2

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 as 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 Sure 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

Speaker 7

And then curious if the deal is driven any incoming from Are there aerospace OEMs looking at the transaction as attractive or is this still in the outgoing effort, right, Tom?

Speaker 2

Yes. What I would say is that And I'll highlight this more on the Investor Day. When you look at the lifecycle of the product, you have at some point in time, many times an OEM says, Okay. This is still in production, but it's majority of the uses in the aftermarket. I want to use my R and D dollars and my shop floor space to focus on newer production products that they're looking for an alternative source for that production.

Speaker 2

And there are suppliers and companies in the industry that do this. I think we have pleasantly surprised the 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 forecast on deals, Don't expect us to announce another deal like this in the coming months.

Speaker 2

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 Right and really impress the market before we consider another transaction of this type. But there are definitely others out there for the future.

Speaker 7

Got it. And then maybe just switching over to fleet, the expansion of the installed USPS fleet, 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?

Speaker 2

Yes. I think the numbers the forecast that have been previously shared, 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 1, 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 NGTV, the next generation vehicle, whether electric or combustible engine.

Speaker 2

What they're doing is buying Commercial off the shelf vehicles, so whether they're Mercedes Metris, whether they're some other types of commercial off the shelf vehicles. 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 us in supporting EV medium duty fleet vehicles. So continue to see strong activity there for the near term. And we don't have the real forecast yet of when that NGTV will be delivered.

Speaker 2

As we get that, we'll share any impacts think that may add to the business.

Speaker 7

Okay. Thank you for the time.

Speaker 2

Thanks, Josh.

Operator

The next question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

Speaker 6

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.

Speaker 2

Yes. Thanks, Jeff, and good morning. The way that we've built this Kind of model, remember, we started literally from 0 in January. We launched in the middle of the Q1, 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.

Speaker 2

Then we're plateauing and stabilizing and then we're doing the Again, plateauing and stabilizing. So what you saw in the Q3 was really a more plateau period. And what you'll see in the 4th quarter is 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?

Speaker 2

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 improvement 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 in margin Improvement plan over the next 2 years.

Speaker 6

Okay, that's helpful. And then I know you mentioned some seasonality At Desser for Q4, just I guess anything else you're learning about Desser as you're integrating there?

Speaker 2

I mean, as you know, thrilled with the acquisition, thrilled with the diligence that my team did. It's exactly as expected To Steve's point, they outperformed in the Q1, great culture, great level of alignment. It's a great addition to the DST Aviation portfolio. So 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 or slightly ahead of pace And I'm very excited for what's ahead for 2024.

Speaker 6

Okay, terrific. Thanks for taking my questions and continued success.

Speaker 2

Thanks. Appreciate it. Thanks.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. John Cuvermo for any closing remarks. Over to you, sir.

Speaker 2

Thank you everybody for joining our conference call today. We look forward to seeing many of you on November 14 in New York at our 1st Investor Day And appreciate the continued support and interest in VSE. Have a great rest of your day.

Operator

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

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Earnings Conference Call
VSE Q3 2023
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