Greetings and welcome to the VSE Corporation Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christine Kaineg, Head of Investor Relations. Thank you. You may begin.

Hello, and welcome to VSE Corporation's fourth quarter and full-year 2019 results conference call. Leading the call today are President and CEO, John Cuomo; and Tom Loftus, our Chief Financial Officer. 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 the risk prescribed 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. The appropriate GAAP financial reconciliations are incorporated into our presentation where available, which is posted on our Web site. All percentages in today's discussion refer to year-over-year progress, except as noted. At the conclusion of our prepared remarks, we will open up the call for questions. Please email your questions to questions@vsecorp.com. That's questions at V-S-E-C-O-R-P dotcom, and we will answer as many as possible during the allotted time. With that, I would like to turn the call over to John Cuomo for his prepared remark.

Thank you, Christine. Welcome everyone, and thank you for taking the time to join our fourth quarter earnings call. We will begin with an overview of our business in operating segments followed by a summary of our 2019 financial. Tom will provide more detail on our fourth quarter and fiscal year 2019 financial performance, and I will finish our call with additional detail on our operating segments and an overview of our strategy for 2020, before turning the call back to Christine to facilitate our question-and-answer session. As this is the first ever quarterly earnings call in the company's history, I would like to take a moment to introduce myself while providing a high-level overview of our company and operating segment. I joined VSE as CEO just over nine months ago, having previously led a division of a public aerospace and defense company. Under my leadership, VSE intends to take a more active role in engaging with our key stakeholders, including our institutional investors and the broader analyst community. Consistent with this mandate, you can expect to see increased transparency and consistency in our public communication going forward. With that, let's turn to slide three of the Investor Presentation. At its core, VSEC is a global aftermarket provider of distribution, repair, and consulting services for land, sea, and air transportation assets. We report and operate under three business segments: Our Aviation Group, our Supply Chain Management Group, and our Federal Services Group. Our Aviation Group provides component and engine accessory repair, part supply, and distribution, and supply chain solution for a global aftermarket commercial and business and general aviation customers. Aviation represented 30% of 2019 revenue. Our Supply Chain Management Group provides parts supply, inventory management, ecommerce fulfillment, logistics, data management, and other services to support the U.S. Postal Service,…

Thanks, John. Welcome, everyone on the call today. Turning to slide six, seven, and eight, our business generated stable revenue and operating income growth for the fourth quarter as compared to the fourth quarter of 2018. Revenue grew approximately 8% in the period, driven by both organic and inorganic growth in our Aviation Group. For the quarter, our total adjusted EBITDA was $23 million, up approximately 16% compared to the same period of 2018, driven by contract mix in our Federal Service Group. For the full-year, we had an increase of 8% primarily driven by the Aviation Group, which I just previously mentioned. Aviation Group was up 54% year-over-year, partially offset by a decline of 7% in our Federal Services Group. Our Supply Chain Management Group was essentially flat year-over-year. Our adjusted EBITDA margin improved 90 basis points year-over-year to 12.1% in 2019. Now, I will give a little more detail on each of our three operating segments, starting with Slide 10. Aviation Group revenue increased 42% year-over-year to $61 million in Q4 of '19, while full-year 2019 revenue increased 54% to $224.5 million. After adjusting for the increase in the earn out obligation of $1.9 million in the fourth quarter of '19 related to the success of our 1st Choice acquisition, operating income increased $1.2 million or 32%. And the full-year operating income increased 62% to $17.9 million. Aviation Group EBITDA declined 3% year-over-year in the fourth quarter to $5.8 million due to product and customer mix, while full-year 2019 EBITDA increased 53% to $30.3 million. The year-over-year increase in full-year 2019 operating income was attributable to a combination of contributions resulting from our 1st Choice acquisition closed in January 2019, together with organic growth in our global aviation distribution business. This week we closed the divestiture of our…

Thank you, Tom. Turning now to slide 15 and 16, 2020 will be a transformational year for VSE. We're focused on creating a lean corporate structure to support each business group. We are refocusing each business unit strategy to provide sustainable and differentiated value proposition in their respective markets. We're investing in each business group, including business development in order to support the execution of our strategies and to generate above market organic growth and return in 2021 and beyond. We're focused on increasing free cash flow to both pay down debt and support strategic investments and growth. In addition to our investments in organic growth, we will consider inorganic growth opportunities for each business. Our acquisition strategy will be different than what you've seen previously. We will no longer look to add portfolio companies to our business. You can expect to see us deploy a disciplined approach to M&A focusing on bolt-on accretive transaction that seeks to expand our customer base, our product offerings, our service capabilities, our geographic presence within the existing business group. As it relates to our go-forward strategy, I intend to provide greater detail during our first quarter earnings call. However, I will touch on a few high level points today. Our Federal Services Group's revenue and backlog declined just from an underdeveloped business channel. This year, you will see us be more intentional as we allocate resources toward growing this business. We seek to build backlog while focusing on a combination of traditional cost plus contract, balance with higher margin fixed price contracts. As Tom mentioned, we have a new Group President Rob Moore, on board for about 100 days. Rob has made significant organization changes, renew the teams focus on pipeline growth and business development, and we already seen progress and win. With regard to our Supply Chain Management Group, in 2019, we grew non-US Postal Service revenue by approximately 20% and we will continue to focus on diversifying our customer concentration in 2020 with incremental revenue growth in the commercial space. In our Aviation Group, we grew our business 54% in 2019 or 11% organically, and anticipate continuing to outgrow our markets organically in 2020 while staying highly focused on quality components and engine accessory repair, and aftermarket distribution services. I'm very pleased with the overall performance for 2019 and look forward to sharing more granularity on our strategy with you on our first quarter 2020 call. I'm excited about the future of VSE and a significant opportunity that we have for value creation for our customers, suppliers, employees and shareholders. Operator, we're now ready for the question-and-answer portion of our call.

Thank you. We will now begin our question-and-answer session. Ms. Kaineg, please go ahead.

Thank you. As a reminder, please email questions to VSE at questions@vsecorp.com and the management team will answer them in the order they are received. We've received our first question. Can you provide an update on the U.S. Postal Service fleet replacement impacting your Supply Chain Group? A new fleet requires far fewer parts than an older one, so how do you see the impact on market share as the old fleet is replaced? Is the primary growth in this segment coming from commercial vehicle parts support?

Thank you, Christine. A few points of clarification before I actually answer the question, first, there is no specific timing yet on the completion of the RFP process, or on the fleet replacement vehicle. Further once the process is complete, production needs to begin, and then the USPS is estimating about a timeline of seven years for the rollout of the vehicle. More importantly, I think it's important to highlight that when we talk about fleet replacement, we're only talking about the LLVs, which is the Long Life Vehicle, 40% of the USPS fleet has already been replaced over the last number of years. You can see from our public filings, the consistency of revenue and profit from our supply chain business over that time. So, once these new vehicles are out of their warranty period, the parts supply through VSE continues. Finally, I encourage you to refer to slide 12 of our Investor Deck with regard to our commercial business growth and our successful customer diversification strategy to replace both revenue and earnings from any decline in the USPS business, and you will hear much more about how we plan to accelerate this growth during our Q1 earnings and strategy rollout.

Okay. In previous quarters, you used free cash flow to repay debt and invest in inventory, what sort of return on equity do you think you can get in the current inventory investment? What are the risks associated with us holding inventory longer than planned?

Thanks, Christine. There's a few questions kind of rolled into one here. First, inventory turns are priority for the business. I mean, I want to be very clear on that. It's the largest asset in our organization, and although we're not giving free cash flow guidance on this call, you will see free cash flow improvement in 2020 driving -- which is driven by better inventory management. That said, we're stocking distributor with a disciplined approach to investing in new growth programs to support our growing aftermarket business and the fleet of aircraft. I ran a large successful public distribution business for almost 20 years, I'm confident on our approach to both improve free cash flow and drive the correct inventory stocking strategy to support our customers.

Okay. What impact do you anticipate the coronavirus having on your business?

So, at this point in time, we are obviously evaluating it just as most of the market is on a daily basis. We do not see an impact to our Q1 financials forecast or earnings. We have a very small portion of our business that is customers that are in the Asia-Pacific region. Most of our supply for both our Federal Services business and our Aviation business are domestic sources of supply. That said, as the issue continues to become more of a global issue, we will obviously continue to reevaluate any impacts we think it may have to the business.

Okay. We've seen several references to the success of your 1st Choice Aerospace acquisition. Can you add more detail? What did 1st Choice add to VSE from a strategic perspective and what drove the revenue growth at 1st Choice?

Sure. A little clarity on the business first, 1st Choice is an MRO business. Essentially, we repair high flow pneumatics by starters and valves, fuel, electronics, electromagnetic accessories, avionics, [indiscernible], and some cargo equipment as well. So, why 1st Choice? First, it fit our strategy, and we look at strategy for M&A -- well, in this instance, it's repair for aviation repair for accessories and components, the business is a market and is a market leader. It supports high margin growing aftermarket, predominantly the commercial aviation market. 2019 as you can see from our results was a great year, business exceeded both our deal forecast for both revenue and profit. It grew strong double-digit in well over market from 2018, and the business has been recognized for both service and repair excellence by both customers and other agencies that kind of rate these repair shops. We're very pleased with the acquisition and how it fits into our future aviation strategy.

With cap at around three times EBITDA, could you talk about the reason behind expanding the debt facility by $100 million, do you see us going over three times?

In balance sheet, the balance sheet discipline remains a priority and will always be a priority to the business. That said, increasing the balance sheet optionality is always a good thing for a growing business. Currently, we remain slightly below three times net leverage, but for the right transaction, we would consider increase temporarily increasing that leverage with the long-term objective to remain at about three times or below.

Okay, thank you, John. That concludes -- oh, we have one last question. Can you tell us about the strategic rationale behind the sale of Prime Turbines?

Thanks, Christine. We're while I mentioned a minute ago about 1st Choice and how will that business fit into our strategic focus area. The Prime Turbines business did not fit our strategic kind of criteria for the business. The business was not a market leader. It didn't meet our margin expectations and the engines we serviced are not in a high growth market, you'll see us again apply a more disciplined approach to M&A and organic growth to make sure things meet our investment criteria as we move forward.

Okay, thank you. I believe that concludes all of the questions that we have. John, would you like to say a few closing remarks?

Sure. Thank you, Christine and thanks, everyone for taking the time to listen to the first ever VSE Investor Call and the overview of our strong Q4 and full-year 2019 results. I look forward to sharing the company's go-forward strategy with you in late April when we report our Q1 2020 earnings. We have a very exciting and compelling vision for VSE's role in transportation, aftermarket distribution and services markets and I'm confident excited about what's ahead. Thank you everybody.

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