Greetings. Welcome to the VSE Corporation First Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] At this time, I will now turn the call over to Elizabeth Huggins, Corporate Vice President of Strategy, and Chief of Staff. You may now begin.

Thank you. Hello, and welcome to VSE Corporation's first quarter 2020 results conference call. Leading the call today are our President and CEO, John Cuomo; and Chief Financial Officer, Tom Loftus. Thank you in advance for bearing with us as we make this all from remote working locations and for your patience with any delays we may experience in the transition to Q&A. The financial performance and strategic overview presentation we are sharing today is on our Web site, and I encourage you to follow along accordingly. Please note, that during the first quarter of 2020 the company renamed its reporting segment to reflect the strategic focus to each business moving forward. The Aviation Group was renamed Aviation segment, the Supply Chain Management Group was remained Fleet segment, and the Federal Services Group was remained Federal & Defense segment. 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 risks 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. 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 for questions. Please email your questions to questions@vsecorp.com, and we will answer as many as possible during the allotted time. Again, that's questions@vsecorp.com. With that, I would like to turn the call over to John Cuomo for his prepared remark.

Thank you, Elizabeth, and welcome everyone and thank you for taking the time to join our call. Today, we will begin by providing an overview of our recent results, including an update on our COVID-19 mitigation strategy. Tom Loftus, our CFO, will then provide a detailed update on our financial performance. I will then introduce our new corporate strategy, a framework that we believe positions our company for long-term profitable growth. As Elizabeth noted, we will conclude with a question-and-answer session. We will begin on side three of the conference call presentation. VSE reported strong first quarter results highlighted by year-over-year growth in revenue, margin capture, and profitability. Total revenue increased 4.4% year-over-year, ending the quarter at $177.4 million. Our total adjusted net income increased 32% year-over-year, to $9.8 million or $0.89 per adjusted diluted share. Adjusted net income excludes $6.5 million or $0.59 per share of nonrecurring items related to the sale of Prime Turbines, the sale of a property, and a performance earn-out related to our 1st Choice acquisition. We ended the quarter with total adjusted EBITDA at $22.7 million, up 15.4% year-over-year. Despite the market challenges resulting from COVID-19, we expect to be both profitable and free cash flow positive for the full-year 2020. At the end of Q1, we had $176 million in cash and liquidity, and total net debt of $273 million or 2.9 times trailing 12-month adjusted EBITDA. Before we discuss our first quarter financial and operational performance in more detail, I'd like to share the recent actions taken by our management team in response to the COVID-19 pandemic. Turning to slide four, during this global health crisis the health and safety of our employees remains our top priority. Our team has adapted to ensure business continuity and operational readiness at our facilities. All…

Thanks, John. Turning to slide five, our first quarter revenue grew 4.4% year-over-year primarily driven by organic growth in our Aviation and Fleet segments. For the trailing 12 months our revenue is up $70 million or 10%. As illustrated on slides six and seven, our total adjusted EBITDA was $22.7 million, up 15.4% in Q1 2020 compared to the same period of 2019, and our trailing 12-month adjusted EBITDA was $94 million, up 17%, driven by growth from aviation and improved profit margins in our Federal & Defense segment. Now, I will discuss each of our three operating segments starting with slide eight. Aviation segment revenue increased 18% to $58 million in the first quarter of 2020 through balance contribution from both our distribution, product sales, and MRO services. Excluding non-cash, non-recurring cost related to the sale of prime turbine and other asset, Aviation operating income increased 49% to $4.5 million in Q1, while Aviation segment adjusted EBITDA increased 21% to $7.6 million. Year-over-year increase in the first quarter adjusted EBITDA was attributable to organic revenue growth in both the aviation distribution and repair entity. Turning to slide nine, revenue for our Fleet segment increased 3% to $53.2 million in the first quarter of 2020 while operating income decreased 1% to $6.9 million. This segment continues to successfully execute on its customer diversification strategy with commercial revenue growing $4.8 million or 122% in the first quarter on a year-over-year basis. Fleet segment EBITDA decreased 2% in Q1 2020 to $9.6 million. The decrease in operating income and EBITDA was primarily attributable lower margin, customer and product mix, and investment associated with the expansion of our commercial portfolio. Slide 10, our Federal & Defense segment revenue declined 4% year-over-year to $66 million in Q1 2020 while our operating income increased 45%…

Thank you, Tom. As I complete my first journey in this organization, I want to spend the remainder of today talking about our business strategy. You can follow on beginning on slide 17. VSE is a 60-year-old aftermarket business with proven past performance and service excellence. Our new strategy will seek to the take the core of that service excellence and expand on it with unique differentiated value proposition, capable of driving above market growth in return in each of our segment. Turning to slide 18, we report and operate under three business segments. Aviation which includes part distribution and MRO services; Fleet which includes part distribution and supply chain management services; and Federal defense which provides logistics and sustainment services along with MRO services and IT and energy consulting. All of our business segments support aftermarket activities that are associated with supporting customers with extending the life of their critical aging transportation assets. We have a strong balance of stable multi-year government contracts, and long-term customer relationships representing approximately two-thirds of revenue, balance with higher growth potential commercial customers. Turning now to slide 19, VSE offers a unique value proposition to market. First, we are a pure play independent aftermarket provider of parts and services. That is important because our singular focus is supporting our customers and suppliers. Our attention of resources and capital are not diverted to other strategies, for example, as a core manufacturing company maybe. Second, we are specialists, not generalists. We have highly technical team to support all the transportation assets. We help sustains and parts and repair capabilities we provide. We further specialize in end of life assets, which provide higher margin opportunities. Third, we've created business units that are agile, lean, and empowered to quickly support both customers and suppliers with industry-leading service…

Thank you. I'll now turn the call over to Elizabeth Huggins for today's Q&A session.

Thank you. So we've received several questions about the COVID-19 impact, let's start there. For each segment could you provide an overview of the COVID-19 impact you currently see? In each segment, what part of your work is considered essential and what isn't?

Thanks, Elizabeth. First, all of our business units are operating. Our consulting businesses are fully remote, unless they're onsite at a customer. Our base operations repair, and distribution businesses have not experienced any downtime, and we continue to support our customers. We neither -- we're not going to give guidance, nonetheless by segment, but I'll give you a little color on each of the business segments. First, let's talk a little bit about Federal & Defense. This was a planned transformational year for us with both new leadership and a focus on rebuilding our brand, business development backlog, and future pipeline. Business was relatively stable, but most importantly the performance is exceeding our internal expectations. We announced new business wins this quarter, and we anticipate continuing to announce new business wins throughout the year. Our Fleet business, our Wheeler Bros. subsidiary, our DoD and USPS business are steady, as expected. Also, we did announce a one-time opportunity this quarter to support one of our customers through this crisis. So our organic commercial customers that their growth is expected to continue in 2020. We had a strong Q1. We do expect Q2 to be a little softer, but most of our customers, like our 3PL truck providers, utility customers, sanitization customers, and the like are all performing quite well. And we do expect a full rebound by the third quarter. Aviation clearly the [indiscernible] impact, you know, airlines around the world have grounded fleets, suspended routes and flights. Our businesses directly -- our commercial business, I should say, is directly correlated to revenue passenger miles, but we also have a significant amount of business and general aviation customers. Since we support these customers and can't create demand, our opportunity is really about market share gain. When you look at Q1, we organically grew that business 18%. So we're heading into this downturn having both grown capabilities in our repair business and taking share and added new products in our distribution businesses to help mitigate what will definitely be an unavoidable decline.

Thank you, John. Next question, have you encountered any material parts shortages within your supply chain? Do you have sufficient inventory on hand?

Yes, I mean first the answer is no, there's been no material part shortages. And yes, we have sufficient inventory on hand. You know, as always, there's a few minor parts that we're closely managing. We are a stocking distributor with industry-leading planning organizations. We did procure additional product and we were pretty proactive at the beginning of the year to get ahead of any supply chains concerns. So we do not see supply chain issues or any product shortages impacting our operations going forward.

With regard to the $13 million or so in cost reductions that you mentioned, can you help us understand, (a) the types of cost reductions, and (b) where most of the cuts landed by segment?

Yes, Tom, why don't you jump in and answer this question for us?

Okay, sure, John. Of the $13 million in annualized cost reductions, unfortunately most of the reductions came from our existing workforce, about 65%. The rest is from travel, consultants, and other incentive compensation reductions. Part two of that question, our Aviation segment was impacted the most with about half of the workforce reductions coming from that segment. Our other two segments were also impacted as well as the corporate team. We will start to realize the benefits of these reductions in Q2.

Thanks, Tom. Okay, so how do your government-facing businesses perform in the next 12 months; do you anticipate additional contract wins similar to the ones that you recently announced? I know you touched on this, John, but if you'd care to elaborate.

Yes, I mean we've talked about this year being a year of rebuilding, but I can tell you it will be a year of not only some progress, but definitely results. I mean during the first quarter the new awards we announced had 31% year-over-year bookings with those -- as new business awards. And although revenues declined about 4%, operating earnings were up about 45%. So the mix and -- is really supporting a strong profitable year for us. We support naval and army logistics and repair program, that's the majority of our business on the Federal & Defense side. What you'll see in 2020 is us growing some capabilities, including more defense aircraft maintenance programs. I'm really proud of the progress that the team is having and looking forward to sharing more details throughout the year, and announcing more awards as well.

Okay. Quite a few questions about the Aviation segment, so we'll try to group these together.

Sure.

As John assumes leadership of the Aviation segment could he expand on his experience in the previous downturn and how VSE might take advantage of any dislocation?

Sure. I mean I was with an aviation distribution business for about 18 years. So I went through both the 9/11 and 2008 financial and aviation downturn. So I have experience in kind of the two sides of what you need to do here, which is managing the capital requirements and adjustments, if needed, to support the business and support a strong balance sheet through these times, as well as at vision on how to execute strategic initiatives so we could exit the downturn much stronger than our peers. We highlighted today in our strategy presentation the key areas of growth for our aviation business. We haven't adjusted that presentation or that strategy base on COVID-19. So we feel very grounded in our -- the principles of our strategy, and look forward to aggressively focusing on executing them, even through this downturn.

Okay. Can you talk about how your Aviation segment is exposed to the current airline fleet? And if we do see broad-based retirements of older planes how that may affect your growth?

Sure. I mean our repair business is -- or our component repair business, I should say, supports mostly commercial aviation. Our engine accessory repair business supports mostly business and general aviation. Our commercial aviation exposure, we do have a significant amount of cargo business, which is obviously performing quite well for us right now, and we do support all the new platforms. So we are watching, as everybody else is, the retirement of the fleet, but we don't anticipate that having a negative impact on our business. We just see the total revenue passenger mile trends really driving the effect of the business.

Okay. Aviation again, as the airlines grapple with these cost pressures do you believe they will outsource more work to independent MROs in an effort to further cut costs or lean out their cost structure?

Yes, I think there's two reasons that the independent MROs will perform well. I think number one is, yes, they will look for opportunities on how to lean out cost structure. And independent MROs traditionally are able to do that in a more competitive way than their internal shops. The second thing I think that is important to highlight is the technical talent that the industry doesn't want to lose. So I think you're going to see both from the OEMs as well as the aftermarket, that the desire to keep independent teams both supporting stocking distribution, as well as technical repair is critical and important for the industry, and I believe our airline and aftermarket partners will continue to support us to make sure that we're around as well as our competitors in the future. A – Elizabeth Huggins: Okay, and aviation again, compared to your peers, you are in a unique position with the Aviation segment, where they are all pretty much 100% in aviation and is obviously less than a third of revenue. Do you see ways to use the situation to your advantage to grow market share when others are retrenching?

The answer is yes, but first I just want to maybe clear although we're not giving guidance, I don't want to diminish the unprecedented industry decline and the impact it will have on our business, I mean airlines are reducing capacity between 70% to 90%, everyone will feel both near and kind of long-term, midterm I should say impact. That said, we do see a few opportunities in front of us. Not only are we well diversified with our military and truck fleet aftermarket customers, but we're also as I mentioned earlier, pure play aftermarket business. In recent years, many OEMs and others have entered what was at that time, a robust aftermarket opportunity. We see many of those businesses kind of contracting to focus on their core, while aftermarket is our core. In the near-term, I would say distribution represents the most and the greatest opportunities for near-term market share gains. I don't want to be kind of qualitative today in the conversations we will share these when and be more quantitative, I should say in the future. I mentioned on our last earnings call or first earnings call that will have a renewed focus on investor transparency, and you'll see some more of that both in how we communicate going forward, but also as we file our 10-Q this week, you'll see a little bit more detail on both our distribution and our repair businesses. So, you can see how they'll perform separately throughout this market downturn. A – Elizabeth Huggins: Okay, I'm not entirely sure if this question is segment specific. I will ask in general terms, what are you seeing in the month of April in terms of MRO and parts demand? Should we think of revenues tracking down with capacity? Do you have any repair work currently in your facilities that may provide some buffer?

Yes, I've only answered in terms of all the segments, we're not seeing any impact on the MRO activity in our federal and defense business. Our fleet business doesn't do any repair. That's a supply chain, parts distribution and logistics business. In Aviation, when you look at revenue, passenger miles on the commercial side, roughly in the month of April, we're seeing our business declined by about half of that. So we do have significant backlog, and again we also entered into that market. It's an 18% organic growth. So we believe that we'll we know we're performing better than the market today. It remains to be seen, how long that will continue, but we do have a good pipeline, we're still winning new business obviously then the work is significantly impacted, but right now our business is tracking better than revenue passenger miles at this time. A – Elizabeth Huggins: Okay, thanks, John. This is about our Fleet segment. In recent quarters, we know Wheeler has grown its non-U.S. Postal Service business, which represents approximately 20% of segment revenue. Help us understand the opportunity around this commercial customer expansion and the margin profile of this business?

Sure, what we're highly focused and we mentioned last quarter on our fleet segment, customer diversification strategy and penetration into this commercial market. We have such a great distribution business as a stocking distributor, great proprietary systems in terms of our Just in Time technology, and great e-commerce fulfillment opportunities. So we're investing in that organic growth opportunities, and very pleased with the strong margin and inventory turn profile of this new market for our Wheeler Bros Subsidiary. It is slightly diluted to our legacy business margins specifically as we enter this market, and we're investing more in headcount and other investments to support the initial organic growth. That said it's the multibillion dollar market of which we have a very, very small share. We do see this as a profitable and cash-generating growth engine to the segment. It's hard not being [indiscernible]. A – Elizabeth Huggins: I think we're doing great. Okay, back to cash flow, on the cash flow outlook to be positive for the year, what does the quarterly cadence of cash flow look like?

Tom, do you want to take this one?

Yes, we expect to be cash positive for the year. The timing between quarters sometimes is impacted by certain transactions. For example, like second quarter, our cash flow might be impacted by the timing of our recently announced $26 million award, but that will be collected in early Q3 if it's not collected at the end of Q2. A – Elizabeth Huggins: Okay, thank you. What are the foremost strategic priorities for VSE under your leadership, John, over the next 12 to 24 months? Where are you allocating capital and resources to grow the business? A – John Cuomo: Well, I highlighted a strategic plan today. I know we kind of went through that pretty quickly as we were reporting the results as well, but we will continue to be transparent and share more details with each quarter and talk about the progress on that plan as we go through quarterly results, but when I started with the VSE a year ago, the first thing I noticed is the company's outstanding program on customer execution company. The near term focus has been on how do we take those core competencies and organically grow them through three different ways. First is through a market share gain which is from new customers. And that's for all of our business segment. So, it's really a renewed effort, really targeted business development to sell what is unique about what we do in our business to new customers, our current capability. The second thing is about that capability expansion. So, if you look at what we offer in the federal and defense space again you will see us enter more into that military aftermarket, aviation aftermarket repair. In our aviation business you will see us expand our core component repair capabilities. So, you will see us consistently focused on maybe some of ecommerce system expansion and the like. So really how do we take our service offerings and focus on core capability development there. And some of that will require some capital as well, and last but certainly not least is new products. So, this is customer we call it share vault gain. How much they are spending on either commoditized or proprietary product that fall within our market basket but are products that we don't sell today. So, how are we are going to attack that market and add additional product both sole source proprietary product from new OEM partnership as well as high margin and fast turning kind of commoditized products that we feel are relevant for our portfolios. So in addition, our fleet business we have our private label product growth as well. So, although we are reducing capital spending, we will continue to allocate capital to support the future whether they are products or requirement to support new services.

Okay, John, Tom, that concludes what we have time for today.

Thank you, Elizabeth, and thank you everybody. We remain available by phone and look forward to conferences and in person meeting to you in the future. With that, thanks for your time today and your continued support and interest in VSE. Stay safe everybody. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.