Good morning and welcome to VSE Corporation Fourth Quarter and 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Michael Perlman, Vice President of Investor Relations and Treasury. Please go ahead.

Thank you, Meghan. Welcome to VSE Corporation's fourth 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 Web site, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about the future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation, which is posted on our Web site. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to John.

Thank you, Michael. Welcome, everyone, and thank you for joining our call today. I am very pleased and proud to speak today, to share both the outstanding record business results from 2023, and the significant progress and updates on our business strategy and transformation. Let's start on slide three of our presentation materials. First, last week, we announced an agreement to acquire Turbine Controls, or TCI, a leading provider of aviation aftermarket maintenance repair and overhaul support services, supporting complex engine components, as well as engine and airframe accessories. TCI has a strong presence across a large installed base of engine platforms, including those supporting several key next-generation aircraft. The business operates from two MRO centers of excellence in Connecticut and Florida, offering engine component repair and accessory capability, including rotating and static engine components, reduction, transfer, and accessory gearboxes, as well as pneumatic, hydraulic, fuel, and oil accessories. This is a very exciting addition to the VSE family. TCI's 45-year history of customer excellence, industry-leading MRO capabilities, and OEM partner-focused strategy aligned with VSE's go-to-market value proposition and long-term OEM support strategy. We expect to acquire TCI for a total consideration of $120 million, comprised of $110 million in cash, and $10 million of VSE common shares, subject to working capital adjustments. Steve will share additional financial details shortly in his prepared remarks. Next, we completed the sale of substantially all of our Federal and Defense operating assets. This marks a very important milestone in the execution of VSE's transformation to an industry leader of aftermarket distribution and repair solutions. We are pleased to find a good home for the FDS assets and their team, and close this chapter of our business transformation plan. The divestiture of FDS was completed in February with two separate transactions to two different…

Thanks, John. Let's turn to slides five and six of the conference call materials to provide an overview of our fourth quarter and full-year 2023 financial performance. Let's begin with our fourth quarter results. VSE generated $235 million of revenue in the quarter, an increase of 37% led by Aviation up 43% and Fleet up 26%. Adjusted EBITDA of $31 million increased 46% or $10 million versus the fourth quarter of 2022. Aviation drove $8 million of this growth and Fleet drove $2 million of growth. Adjusted net income increased 62% to $13 million and adjusted diluted earnings per share increased 31% to $0.85 per share. For the full-year 2023, we recorded $861 million in revenue, up 29% versus 2022 driven by growth in both operating segments, but primarily by a 33% or $136 million increase in our Aviation segment. Consolidated adjusted EBITDA for the year was $114 million, an increase of 45% or $35 million as compared to 2022. Aviation EBITDA grew $35 million and fleet grew $3 million which was slightly offset by $3 million of higher corporate expenses associated with the FDS divestiture. Adjusted net income increased 60% to $47 million and adjusted diluted earnings per share increased 45% to $3.31 per share. Now turning to slide seven, we'll cover our Aviation segment fourth quarter and full-year results in more detail. Starting with the quarter, revenue increased 43% versus the fourth quarter of 2022 to a record $154 million. Both distribution and MRO businesses were strong contributors up 41% and 49% respectively. Excluding recent acquisitions, the Aviation segment increased 18% as compared to the prior year. Desser Aerospace which was acquired in the third quarter of 2023 had a strong fourth quarter generating $23 million in sales. Distribution revenue increased by 41% driven by the ramp up…

Thank you, Steve. I would like to conclude our prepared remarks by reviewing our 2024 priorities on Slide 10. 2024 is the year of execution. Let's begin with our Aviation segment. First, our new Hamburg, Germany distribution center is open and shipping product as of January. Our initial focus for that facility is the execution of our Pratt & Whitney Canada program and supporting Europe, Middle East, and Africa customers with products and services under that agreement. We will expand this facility's usage to support other products later in the year. Second is the transition of our newly acquired fuel control systems program where we became the licensed manufacturer for over 340 unique fuel controls, spanning 120 platforms serving the business in general aviation and rotorcraft markets. And finally is the integration of the Desser Aerospace acquisition which includes full system and organizational integration. This project is underway and will continue throughout the year. Our next focus is on the Turbine Controls acquisition. We expect to complete the acquisition in the second quarter. And, build upon the strong VSE and TCI OEM relationships to drive strong 2024 performance and a combined growth strategy for the business. Moving to our Fleet segment; we remain focused on organic growth and our customer diversification strategy. We plan to drive commercial growth as we continue to scale our new distribution and ecommerce fulfillment center while continuing to support the U.S. Postal Service vehicle fleet transition. As we execute our 2024 operating plans, we remain focused on building upon the financial discipline and successes of last year. We are forecasting another year of above-market growth for both business segments growing profitability, and generating solid free cash flow in the back-half of the year. Finally, we expect to continue to make progress on our strategic transformation, including completing the transition of the Federal and Defense segment divestitures, repositioning our Virginia headquarters facility, and exploring strategic alternatives for our Fleet segment. I am so very proud of our 2023 results. All that we accomplished during the first two months of this year, the strong operating plan for 2024, and the amazing VSE team that makes it all happen. Operator, we are now ready for the question-and-answer portion of our call.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

Hi, good morning, everyone.

Morning, Jeff.

Just wondering if you could speak a little bit more about the Turbine acquisition. Any more color you could share on the organic growth rates, what drives that, what the margin profile is like, EBITDA, and then opportunities for synergies, and then what the integration process, you think, will look like that?

Sure. I'll talk strategically, and then I'll let Steve talk about the financials. What we love about the deal and about the business is that we don't plan to integrate the facilities. They have two centers of excellence in California, and in Florida -- I'm sorry, in Connecticut and Florida, and they're both very, very strong facilities that we plan to keep and operate as is. Where we see the greatest opportunity for synergy is with the OEM partners. This is similar to VSE, a very OEM-aligned business. Think of all the major engine OEMs and accessory OEMs, and that's who they're partnering with and supporting. We also see opportunity to expand into more airline-direct customers versus supporting the OEM. So, that's really -- the first year is going to be more about sales synergies than I'd say system and process synergies. Steve, you want to speak a little bit more to the financials and the margin rate?

Yes, I provided some guidance, Jeff. We expect this year to be about $85 million in revenue, $12 million in EBITDA. Obviously, not all of that will be VSE; we'll acquire the business later in the second quarter. That comes out to a sort of a mid-teens margin rate. Going to the question around organic growth prospects within the business, I would just highlight this business is very, very focused on commercial engines. And if you look at the industry-wide trends, I think commercial engines is where you'll continue to see a lot of organic growth naturally because of both the legacy fleet that are operating towards the end of their life that require more maintenance, as well as the new fleets that are coming into the market that require a lot of [entering the service] (ph) issues. And I think we see this business as having strong organic growth prospects.

Okay, terrific. And then, if we could turn to Desser for a moment, maybe if you could just touch on what's left to do on integration there, and then more color on what you see as the drivers of growth for Desser, and also the APAC expansion?

Sure. So, the Desser business was kind of group of businesses that wasn't fully integrated when we acquired it. So, we're integrating each business unit separately. We are well underway -- organizational integration is already relatively complete. System integration and prep work is done. We have a new e-commerce site that will be up and running for our VSE Aviation business some time in the second quarter. After that site is up and running, then we'll start migrating one business unit at a time in Desser from a system perspective. As you know, our philosophy is to fully integrate assets and realize synergies. And also be able to offer a one got-to-market strategy to the market. Where we see is -- biggest opportunities is probably with the new European distribution center. So, I'd say that, towards the back-end of the year, we'll start to put tires and other products that, right now, are only in the U.K. distribution center, into the European distribution center. And that will enable us to provide a more seamless transaction path for our European customers.

Okay, great. Thanks for taking my questions. And let say congratulations on strong metrics, and the TCI acquisition. We'll take the rest offline.

Thank you.

Thanks, Jeff.

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

Hey, good morning.

Morning, Josh.

Morning.

Just digging into Turbine a little bit, is there or are there dominant products or customers that are more than, say, 10% individually?

It depends on how you define customers. So, when you look at the OEMs that they're supporting work for, the answer is yes. When you look at engine types and end-user customers, it becomes a nicer, more fragmented operation. Josh, there's a bunch of things that are attractive to us, but part of it is us building balance and diversification in our own VSE Aviation business. As we've grown over the last three to four years, our distribution business and our business in general aviation business have really accelerated that growth. This provides much more commercial content. And, obviously, it's a 100% MRO business. So, the total balance for VSE Aviation is another significant strategic advantage that this business brings to us.

Got it. Then maybe one on Desser, what are you seeing in the retread market just as airlines gear up for summer travel? Any noticeable changes in seasonal trends here geographically?

Not really. We're not seeing any noticeable trends. Most of the U.S. airlines are direct with manufacturer, so we have a lot of more regional airlines, and a lot of European airlines that we serve direct. And I wouldn't say we're seeing any major trend shift in 2024 compared to 2023.

Got it. And then if I could just sneak in one last one on Fleet. What does the utilization of the Memphis facility look like today, and maybe what does it look like with the '24 guidance?

It's a great question that I don't have a precise metric on. I would tell you that, with 2024 and the continued scaling and well-above market growth, we won't even be at half capacity.

Yes, I think that's a fair synopsis. We contributed an incremental -- almost $50 million in the year. And I think we referenced last year that that was kind of be like 20% to 25% utilization. And although we forecasted commercial growth between 40% and 50% this year, that still leaves us with a lot of excess capacity as we look out to '25, and beyond.

Great. Thank you for the time.

Thank you.

Thanks, Josh.

Our next question comes from Louie DiPalma with William Blair. Please go ahead.

John, Steve, and Michael, good morning, and happy Thursday, and congrats on closing the Federal and Defense sale; I know that's been a long time coming.

Thank you. And I agree.

For John, geographic expansion is obviously a big driver for you. You referenced how you've had solid contributions from your Asia-Pacific expansion. I think Pratt & Whitney Canada was one of your anchored customers in that region. Are you still in the early innings in Asia? And are your other OEM partners looking to also give you distribution business over there?

The answer is yes to both. We're in our early innings outside the U.S. in general. During COVID, when I arrived at the business, we did a complete restructuring. We essentially shut down most of our international operations. And they weren't in ideal locations or set up with the right team. So, it's much more of a startup mentality in terms of Asia and Europe today. And we do have a few pilot customers. We have other products as well, some business in general aviation. Honeywell content, that's more Asia-specific as well. We have tires and distribution that we've set up in Australia, and have continued growth opportunities there. So, we have some near-term opportunities. And yes, there's a pipeline of longer-term international focus as well.

Great. And you also -- you mentioned how, for the Turbine Controls acquisition, how it's involved in several strategic next-gen aircraft platforms. What are some of those platforms?

Yes, I mean it's on the MAX, and it's on the NEO, meaning they're supporting the engine types that support both of those narrow-bodies. And then, I'd say, across the board, they've got capabilities to support almost every engine product type in the commercial space. So, there are just a few major OEM partners out there, and I'd say their capabilities are able to support all of the most wide-body and narrow-body. They do a little bit of military work, but it seems to be much more commercially oriented.

Thanks, Steve. And another question, from a high level, how do you see Boeing's issues impacting the aftermarket industry? And related to that, one of the major aftermarket providers has commented that there's rampant price inflation in the industry right now due to heavy demand. Are you also seeing that?

Post-COVID, we saw a tremendous amount of price inflation. We still see aftermarket pricing as a lever that many OEMs continue to utilize. I think there's an element of stabilization that we've seen entering 2024 compared to 2023. And I'd say, with regard to Boeing, I mean, we all want our OEM partners to be successful. It is in all of our best interest. For us, we're serving the aftermarket. The same supply chain that does work on new build, it does work on aftermarket. So, for us, we're looking more at two trends, I'd say. Number one is, our aircraft that plan to be retired not going to be retired? And are there any areas of opportunity for us to capitalize on that? And then number two is, how has the supply chain impacted? And would impact -- does that have for us? And how do we find opportunity in those areas? So I'd say, that's where we focus.

Great. And one final one that you may not be able to comment on, but what has been the preliminary buyer interest for the fleet business?

Our words that we started an initial process is exactly that. We kicked off 2024 and in seven weeks, we sold the two FDS assets and acquired the TCI business or announced the acquisition of that business. That was all done in seven weeks. We have not started the strategic review process. We've announced it. We've retained advisor. And we'll kick off that process and go through a true strategic review over the coming months.

Awesome, sounds good. Thanks. Thanks, everyone.

Thank you, Louis.

I appreciate it.

[Operator Instructions] Our next question comes from Sam Struhsaker with Truist Securities. Please go ahead.

Hi. Good morning, guys. On for Mike Ciarmoli, I was curious, you guys give me a little bit of an update on the Southwest [Teardown] (ph) program, how that's going?

Yes, I think the program is going really well. So, we've been in a few years of that product or that service that we've partnered on with Southwest. Really that's about bringing a service to that specific customer. It also provides an opportunity for our repair shops to continue to support the 737s that are coming out of service with some of the USM that comes out of those and turn into rotables. I'd say, the program has launched really well and this year was a peak year. I mean, we did more work this year than we did in the year before. And the fourth quarter was another record quarter for that program. But I'd say it's a great contributor to our business and more than anything, I think it shows the flexibility that we have with some of our key customers to find creative ways to partner with them on a solution that fits for what they need. And that's what we did for Southwest, and we think it's an important service that we offer to them.

Great, and maybe, is there any additional detail you guys could give on kind of your de-levering trajectory once you close that TCI in 2Q?

Absolutely, so you heard us reference, we expect to go just over four times on a net debt to EBITDA basis post the acquisition. Really what we look for in the second-half of this year is, I'll go through a couple different drivers. First is contributions from growth in EBITDA. So, obviously we've got some top line growth expected as well as some, therefore profitability growth expected as well. The second thing that we expect to do is deliver some strong second-half free cash flow. I think we've got a pretty good demonstrated track record of doing that over the last couple of years and we project that out into the back half of this year. So, that puts us in a strong position to be in a good point from a net leverage perspective. The third thing that I would kind of offer is, obviously, as John referenced just a couple minutes ago, we are going to go through a strategic evaluation associated with the fleet segment. And I think there is an element around shoring up the balance sheet associated with that. So, we'll provide more updates towards the back half of the year once we complete that strategic review.

Great, thanks guys.

Thank you.

We have a follow-up question from Louis DiPalma. Please go ahead.

Thanks for taking the follow-up. I was wondering, you mentioned in the press release, I believe, a potential 23 million for corporate restructuring. Do you have any sense on what could be the savings in 2025 from that restructuring?

Yes, Louie, we're just kind of kicking off this progress for this process at this point, but I would say this is really about eliminating, I'll call it some excess costs following the FDS sale, and it's primarily related to facilities expenses. So, we don't have anything necessarily we would share at this point, but I'd say it's more so about eliminating some of that overhead expense that remains behind following the FDS sale. And, you've got a range there, but obviously it comes down to multiple different factors in terms of discussions with some of the contractors and vendors. So, we'll provide more updates on specifics around it once we complete the process.

Great. That's it for me. Thanks, everyone.

Thanks, Louie.

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

Thank you. Thanks, everybody, for joining our call today. Very, very thankful, and appreciative of the VSE team, the strong 2023 results that we were able to produce, and the outstanding start, both strategically and operationally to 2024. Look forward to speaking to you all in May after our first quarter earnings call. Have a great day. Thank you.

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