VSE Q4 2024 Earnings Call Transcript

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February 27, 2025
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Operator

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.

Michael Perlman
Michael Perlman
Vice President of Investor Relations & Communications at VSE

Thank you. Welcome to VSE's Corporation's fourth quarter and full year twenty twenty four results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by financial updates 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.

Michael Perlman
Michael Perlman
Vice President of Investor Relations & Communications at VSE

Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward looking statements. We are using non GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year over year progress except where noted.

Michael Perlman
Michael Perlman
Vice President of Investor Relations & Communications at VSE

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.

John Cuomo
John Cuomo
President and CEO at VSE

Thank you for joining us today for VSE's fourth quarter and full year twenty twenty four conference call. Twenty twenty four was a transformative year for VSE, 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.

John Cuomo
John Cuomo
President and CEO at VSE

The transaction is valued at up to $230,000,000 including a $140,000,000 cash payment at closing, a $25,000,000 seller note and up to $65,000,000 in additional earn out consideration. The earn out allows us to participate in fleet's expected revenue and margin recovery in 2025. 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.

John Cuomo
John Cuomo
President and CEO at VSE

The Aviation segment supports both the commercial and business and general aviation aftermarket with each representing approximately 50% of 2025 aviation segment forecasted revenue. The aviation aftermarket is set for another year of expansion in 2025 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's parts and services market is expected to maintain a strong growth trajectory in 2025. Revenue passenger mile forecast combined with ongoing supply chain and capacity constraints indicate another robust year for the sector.

John Cuomo
John Cuomo
President and CEO at VSE

As a result, VSE anticipates commercial aftermarket growth for our parts and services to range between 810% in 2025. The business aviation sector continues to see unprecedented demand with industry experts projecting that flight hours will remain steady or increase for more than 90% of operators in 2025 as compared to 2024. This outlook coupled with new market entrants leveraging fractional ownership leasing and jet card programs as well as a projected expansion of the total business aviation fleet supports VSE's forecast for our business and general aviation market. We anticipate growth of 5% to 6% in 2025 for our products and services in this segment. Therefore, we forecast our combined markets at 6.5% to 8% in 2025 with our plan to outperform these market assumptions.

John Cuomo
John Cuomo
President and CEO at VSE

Let's now turn to Slide three, where I will provide an overview of our 2024 and year to date 2025 highlights, starting with our recent strategic acquisitions in aviation. First, in December, we acquired Kalswim Aerospace, a leading aftermarket solutions provider specializing in value added distribution and technical services for the commercial engine market. Telstra aligns strongly with our OEM centric strategy, expanding our presence in the commercial aerospace aftermarket. This acquisition brings new engine focused customers, additional distribution product and enhanced MRO and technical service capabilities to VSE Aviation. Integration of Telstra's distribution business is underway and is expected to be completed over the next twelve to eighteen months.

John Cuomo
John Cuomo
President and CEO at VSE

In April 2024, 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 2024, 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 U.

John Cuomo
John Cuomo
President and CEO at VSE

S. Distribution business in 2024, streamlining processes, systems and organizations and launching a new go to market strategy under the BSE brand. Looking ahead, we plan to integrate Desser's remaining business units in 2025 with the Desa Australia integration already completed in early twenty twenty five. Moving on to new program implementations. We opened a new 45,000 square foot distribution center of excellence in Hamburg, Germany.

John Cuomo
John Cuomo
President and CEO at VSE

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 licensed avionic MRO program in 2024 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 licensed 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 2024. We plan to fully transition all OEM manufacturing capabilities to our facility in 2025.

John Cuomo
John Cuomo
President and CEO at VSE

Now turning to our fleet segment. 2024 was a 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 2025. With the fleet segment's commercial sales channel, we scaled our Memphis e commerce fulfillment facility, diversified our customer base and added new exclusive brands.

John Cuomo
John Cuomo
President and CEO at VSE

As a result, our commercial revenue growth continues to outpace the market. At the corporate level, we successfully completed the sale of our Federal and Defense segment in February 2024, 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's full year 2024 performance.

John Cuomo
John Cuomo
President and CEO at VSE

For the full year 2024, 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, an 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 licensed 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 decline in maintenance related activities and reduced part requirements.

John Cuomo
John Cuomo
President and CEO at VSE

Maintenance related repair activity levels began to rebound in the fourth quarter and are expected to continue to improve in 2025. 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.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Thank you, Josh. 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 $299,000,000 of revenue in the quarter, an increase of 27% led by a 48% increase in aviation revenue, partially offset by a 12% decline in fleet revenue.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Adjusted EBITDA increased 26% to $40,000,000 compared to the fourth quarter of twenty twenty three. Aviation drove this growth, up $13,000,000 compared to the same period in the prior year, partially offset by a $3,000,000 decline in adjusted EBITDA per fleet and a $2,000,000 increase in corporate admin expenses. Adjusted net income was $18,000,000 and adjusted diluted earnings per share was $0.9 per share. For the full year 2024, we recorded approximately $1,100,000,000 in consolidated revenue, up 26% versus 2023, driven by record aviation growth. Adjusted EBITDA for the year was 136,000,000 an increase of 20% or $22,000,000 as compared to 2023.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Aviation contributed to a $41,000,000 year over year increase, partially offset by a $15,000,000 decline in fleet adjusted EBITDA and a $3,000,000 increase in corporate admin expenses. Adjusted net income increased 20% to $56,000,000 Adjusted net income per diluted share declined 5% to $3.13 per diluted share, driven by an increase in share count. Now turning to Slide seven, where we'll cover Aviation segment's record fourth quarter results in more detail. Aviation revenue increased 48% to a record $227,000,000 as compared to the fourth quarter of twenty twenty three. Both distribution and MRO businesses were strong contributors, up 3287% respectively.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

The 32% 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 Kallstrom acquisition. The 87% 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 17% in the fourth quarter as compared to the prior year. Aviation adjusted EBITDA increased by 56% in the quarter to a record $37,000,000 or 16.4% 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 license manufacturing program and contributions from recent acquisitions.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

For the full year 2024, the Aviation segment generated record revenue of $786,000,000 an increase of 45% year over year. Adjusted EBITDA increased 47% to 129,000,000 and adjusted EBITDA margin increased 20 basis points to 16.3%, 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 2025. 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 Kallstrom acquisitions. Let's start with revenue.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

John mentioned earlier that we forecast our combined commercial and business and general aviation markets to grow between six point five percent and eight percent in 2025. We expect full year 2025 aviation segment revenue to increase between 35% to 40%. Supporting this growth are full year revenue contributions of approximately 26% to 28% from both the TCI and Kallstrom 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. 2025 full year adjusted EBITDA margins are expected to be between fifteen point five percent and sixteen point five percent.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

The near term margin dilution from TCI and Kaelstrom is expected to have an approximate 90 basis point dilutive impact on Aviation segment margins for the full year 2025. This is expected to be offset by a 10 to 110 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 2026 until all integration activity is complete. On a consolidated basis, interest expense is projected to be $31,000,000 to $33,000,000 The effective tax rate is expected to be 25% and depreciation and amortization in the aggregate is expected to be $36,000,000 to $38,000,000 for the full year 2025.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

All figures are pre fleet divestiture. Now turning to Slide nine for our Fleet segment's fourth quarter results. In the fourth quarter, Fleet segment revenue declined 12% to $72,000,000 On a sequential quarterly basis, revenue was up 2% or $2,000,000 Revenue from commercial customers was $43,000,000 in the fourth quarter. Commercial revenue represented 59% of total fleet segment sales as compared to 52% in the prior year period. USPS revenue, which is included within our other government channel declined approximately 25% compared to the fourth quarter of last year.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

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 31 to approximately $7,000,000 driven by the impact of the decline in USPS sales volume. Fleet segment adjusted EBITDA margin was 9.5% for the fourth quarter. For the full year 2024, the fleet segment generated revenue of $294,000,000 driven by 18% growth in our commercial sales channel, offset by a 30% decline in revenue from the USPS program. Total adjusted EBITDA of $21,000,000 declined 42% and for the full year adjusted EBITDA margin was 7.3%.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

USPS revenue began to rebound in the fourth quarter of twenty twenty four and is expected to continue to improve heading into 2025. Turning to Slide 10. In the fourth quarter, we generated $55,000,000 of operating cash flow and $52,000,000 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 $4.00 $1,000,000 and our revolver availability was $194,000,000 Adjusted net leverage, which includes the trailing twelve month results from prior acquisitions was 2.5 times. I will turn it back over to John.

John Cuomo
John Cuomo
President and CEO at VSE

Thank you, Adam. I would like to conclude our prepared remarks by looking forward and reviewing our 2025 priorities on Slide 11. 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.

John Cuomo
John Cuomo
President and CEO at VSE

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.

John Cuomo
John Cuomo
President and CEO at VSE

We expect to complete the transition of all OEM 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 Deser, 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.

John Cuomo
John Cuomo
President and CEO at VSE

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 VSE 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.

Operator

We will now begin the question and answer session. Our first question comes from Sheila Kahyaoglu from Jefferies. Please go ahead.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group

Good morning guys and congrats.

John Cuomo
John Cuomo
President and CEO at VSE

Good morning, Jeff.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group

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

John Cuomo
John Cuomo
President and CEO at VSE

Yes, it's a great question. We had a big debate on kind of how to guide for the year. When you look at our business now with TCI and with Kaltrom, 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 Kaltura about the USM business.

John Cuomo
John Cuomo
President and CEO at VSE

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 we with that, the base between the balance of the two markets and then the USM potentially like slightly kind of 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.

John Cuomo
John Cuomo
President and CEO at VSE

And I'd say as far as Michael, when you think about the year, it's not heavily back ended, right?

Michael Perlman
Michael Perlman
Vice President of Investor Relations & Communications at VSE

No, no. I think it's pretty consistent across the whole year.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group

Okay, great. Thank you. And then maybe my second question is on acquisitions. You're proving to be a great integrator with TCI coming in, I think, at $85,000,000 of contribution over the last eight point five months versus $85,000,000 was the full annual contribution we initially expected. So what drove some of that TCI outperformance?

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group

And how do we think about the revenue synergies opportunity with Kaelstrom outside of the assets you'll prune off?

John Cuomo
John Cuomo
President and CEO at VSE

Yes. 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. TCI was all about creating capacity and working with our OEM partners to manage the opportunity that's in front of us.

John Cuomo
John Cuomo
President and CEO at VSE

And we've been able to grow that business well north of 25% since we've owned the business. 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 Kallstrom, it's a combined kind of focus that's slightly different.

John Cuomo
John Cuomo
President and CEO at VSE

There, because we plan to have a heavier hand in integration, there's a synergy capture element to it, which is really important for us. We've got you 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 2026 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 than the revenue growth. That said, they're in the engine aftermarket and you can continue to expect kind of double digit growth in 2025 for Kaltura.

Sheila Kahyaoglu
Sheila Kahyaoglu
Aerospace & Defense and Airlines Equity Research at Jefferies Financial Group

Great. Thank you so much.

John Cuomo
John Cuomo
President and CEO at VSE

Thanks, Joe.

Operator

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

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Yes. Hi, good morning. Hey, John, appreciate the revenue and EBITDA bridge assumptions here as we think about 25%. I wanted to ask maybe the growth question a different way. So the guidance implies about, call it, 500 basis points of outperformance relative to some of your market growth assumptions for VSCC.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Can you comment maybe how you see that breaking out 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

John Cuomo
John Cuomo
President and CEO at VSE

And my favorite part of diving in the details of the And my favorite part of diving in the details of the financials is there's not just kind of one thing driving it. It's really a nice balance across geographic sectors, across markets, across programs. So, what I love about actually where we're positioned today is, we're actually seeing growth in all of our areas. I'm not saying it's the same percentage growth, but it's not one thing that's kind of outweighing the other. So I know maybe it's a little harder to model, but Michael and Adam, right, it's pretty

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

No, it's very evenly distributed is what I would say. And to John's point, we saw that in Q4 very balanced between MRO and distribution organic growth in that 17% to 18% range.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

Okay, perfect. Hey, and as we think about give or take the 50 to 60 basis points of margin expansion on the core business in 2025, is that a good way to think about the business sort of moving forward post 2025 or is there maybe some incremental opportunity on the core business just as you get further into obviously the TCI and Kelsym integration?

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Yes, Ken, that's a good question. I think $50,000,000 to $60,000,000 is a good way to think about it. I think you're going to see more realization of synergies, especially with Kelsym throughout 2025. So, you'll see that realized in 2026 as well. I think we're continuing to optimize our fuel control program as well as we transition to full light manufacturing capabilities. So there's some SG and A 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.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

So those two elements will help the expansion as you go into 2026.

Ken Herbert
Ken Herbert
Managing Director at RBC Capital Markets

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

John Cuomo
John Cuomo
President and CEO at VSE

Thanks, John. Appreciate it.

Operator

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

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

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 2025, even 2026?

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

And I know you've talked about new partnerships, so presumably there might still be some required investment and just how to think about working capital and just help level set us on what to expect with cash?

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Yes, 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 $24,000,000 to $25,000,000 obviously in 2024, we had the big inventory provisioning around the Pratt program. So if we spelled that out, call it in the $35,000,000 range. We also had impact from the FDS transaction as well in the $15,000,000 range.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

So neither of those two will repeat in 2025 and will provide a nice tailwind in 2025. 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 $6,000,000 payment in 2025 and another $6,000,000 payment in 2026. And then we also are ramping the Honeywell program in 2025.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

So you'll see some buildup in inventory as we transition to our manufacturing. So those are the two the couple of large elements and obviously we're growing earnings and there's a working capital requirement in our business as well. And then as you think to 2026, I think we're continuing to focus 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, TCI, Telstra, they're actually less working capital intensive as our core business. So you're going to see some natural improvement as we get through the year.

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Got it. Helpful. And then maybe John, just pivoting back on top line growth. When you laid out your kind of 26 targets, I think that was 23. I think the framework called for high single digit organic.

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Obviously, the market continues to be strong, but you've got low double digit potential. 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 that as you guys look at the portfolio that has driven that slight uptick?

John Cuomo
John Cuomo
President and CEO at VSE

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 rates. And hopefully we'll have a few during the year to share, but I actually like when it's more the blocking and tackle growth. Our model is again very OEM centric and what's happening is as we're embedded in working with our OEM 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.

John Cuomo
John Cuomo
President and CEO at VSE

And again, it's quite balanced across both market segments, B and G and commercial and both of our capabilities distribution and MRO. So 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 Kallstrom. So when you look at again, just the stuff that we do that is hard and you want to get credit, you want it to follow the good markets, the commercial engine market natural pace is at the higher end of the market growth.

Michael Ciarmoli
Michael Ciarmoli
Managing Director - Aerospace & Defense Equity Research at Truist Securities

Yes, got it. All right, good stuff. Thanks guys. I'll jump back in the queue.

John Cuomo
John Cuomo
President and CEO at VSE

Thank you.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Thanks.

Operator

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

Louie Dipalma
Research Analyst at William Blair

John, Adam and Mike, good morning.

John Cuomo
John Cuomo
President and CEO at VSE

Good morning. Good morning, Louis.

Louie Dipalma
Research Analyst at William Blair

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 when taking into account some potential trapped corporate costs, what do you view as the pro form a margin for this year?

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

I can take that. So we are expecting some amount of trapped corporate costs. We're still doing the work to we'll give more precise guidance. But I think if you look back when we announced the FBS transaction, we said around $3,000,000 to $4,000,000 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 form a margins, we're not going to give specifics, but we are expecting some improvement, 100 basis points plus just looking year on year given the lower margin contributions from the Wheeler business.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

So once we close that transaction and come up with a more precise number around stranded costs, we'll update you on pro form a margins.

Louie Dipalma
Research Analyst at William Blair

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 for you?

John Cuomo
John Cuomo
President and CEO at VSE

Very little in 2026 because we've been able to capture even though we're implementing it, but we're capturing the margin improvement as we implement 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 guidance 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 third and the fourth quarter, that should start to mirror what '26 margins will 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.

Louie Dipalma
Research Analyst at William Blair

Great. And one final one. On the subject of M and A, many investors, VSE investors hope that Boeing will put Avial 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 such that if Boeing keeps Avial, 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 bit?

John Cuomo
John Cuomo
President and CEO at VSE

Yes. 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 OEM 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.

John Cuomo
John Cuomo
President and CEO at VSE

And with the fleet business kind of exiting in the second quarter and our team being able to kind of for lack of 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.

Louie Dipalma
Research Analyst at William Blair

Great. Thanks John. Thanks Adam and Mike.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Thank you.

Operator

Our next question comes from Jeff Van Sinderen of B. Riley. Please go ahead.

Jeff Van Sinderen
Senior Analyst at B. Riley & Co

Good morning, everyone. And let me add my congratulations. Just want to follow-up on the last 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?

John Cuomo
John Cuomo
President and CEO at VSE

I mean, there's one business that's kind of publicly sort of ish in the market. I'd say publicly ish because everything's confidential when you're doing a deal, but 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 I say we can do a larger deal. It's well above the deal that we would consider ourselves right now.

John Cuomo
John Cuomo
President and CEO at VSE

So from what we understand that's 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.

Jeff Van Sinderen
Senior Analyst at B. Riley & Co

Okay, fair enough. And then just wanted to clarify on the margin, the overall aviation margin progression this year. It 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.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

Yes. 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.

Jeff Van Sinderen
Senior Analyst at B. Riley & Co

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

John Cuomo
John Cuomo
President and CEO at VSE

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.

Jeff Van Sinderen
Senior Analyst at B. Riley & Co

Okay, great to hear. Thanks for taking my questions.

John Cuomo
John Cuomo
President and CEO at VSE

No, thank you.

Operator

Our next question comes from Josh Sullivan of The Benchmark Company. Please go ahead.

Josh Sullivan
Managing Director at The Benchmark Company LLC

Hey, good morning.

John Cuomo
John Cuomo
President and CEO at VSE

Good morning, Josh.

Josh Sullivan
Managing Director at The Benchmark Company LLC

Just a broader question, I guess, on the aftermarket. How should we think of VSCC as OEM rates stabilize and ramp? I guess two parts. What are your general thoughts on the cycle? And then separately, how is VSCC now exposed with so many transformative actions in 2024 TCI, Kaelstrom, etcetera?

John Cuomo
John Cuomo
President and CEO at VSE

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

Michael Perlman
Michael Perlman
Vice President of Investor Relations & Communications at VSE

Yes. So in terms of OEM rate production, I think we're pretty confident in 2025 and 2026 in terms of our line of sight. 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.

Michael Perlman
Michael Perlman
Vice President of Investor Relations & Communications at VSE

In terms of TCI and Kaltrym 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.

John Cuomo
John Cuomo
President and CEO at VSE

Yes. So I think to Michael's point, '25 and 2026, we feel very, very good about it. As you look at 2027, 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.

John Cuomo
John Cuomo
President and CEO at VSE

But we do not expect a market decline over the next three years at this point.

Josh Sullivan
Managing Director at The Benchmark Company LLC

Got it. And then I guess just to that end, on 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 2026, the ones we're done integrating?

John Cuomo
John Cuomo
President and CEO at VSE

Yes, it was and is an amazing asset. 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 how do we double capacity in the total facility. And if we need expansion, we'll look at that as well.

John Cuomo
John Cuomo
President and CEO at VSE

So I'd say it's a multi year plan to kind of double capacity.

Adam Cohn
Adam Cohn
Chief Financial Officer at VSE

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.

Josh Sullivan
Managing Director at The Benchmark Company LLC

Great. Thank you for your time.

Operator

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

John Cuomo
John Cuomo
President and CEO at VSE

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

Operator

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

Executives
    • Michael Perlman
      Michael Perlman
      Vice President of Investor Relations & Communications
    • John Cuomo
      John Cuomo
      President and CEO
    • Adam Cohn
      Adam Cohn
      Chief Financial Officer
Analysts
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Key Takeaways

  • VSE completed its strategic transformation into a pure play aviation aftermarket provider by divesting its Wheeler Fleet Solutions business for up to $230 million and selling the Federal & Defense Services segment in early 2024.
  • The Aviation segment delivered record revenue and profitability in 2024—up 48% in Q4 to $227 million and 45% for the full year at $786 million—and is guiding 35%–40% revenue growth and 15.5%–16.5% adjusted EBITDA margins in 2025.
  • Key acquisitions of Kalswim Aerospace (Dec ’24) and Turbine Controls (April ’24) expanded VSE’s engine-focused distribution and MRO capabilities, with integrations expected to complete over the next 12–18 months and synergies beginning in H2 2025.
  • VSE forecasts the commercial and business aviation aftermarket will grow 6.5%–8% in 2025 (8%–10% commercial, 5%–6% business aviation) and plans to outperform these markets via new OEM programs and capacity expansions.
  • Financially, VSE generated $299 million in Q4 revenue (+27%), $40 million of adjusted EBITDA (+26%), $52 million in free cash flow, and ended the quarter with net leverage of 2.5× and $194 million of revolver availability.
AI Generated. May Contain Errors.
Earnings Conference Call
VSE Q4 2024
00:00 / 00:00

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