Good morning, and welcome to the VSE Corporation Fourth Quarter and Full Year 2024 Results Conference Call. [Operator Instructions] 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.

Thank you. Welcome to VSE Corporation's Fourth Quarter and Full Year 2024 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update 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. 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. 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. Thank you for joining us today for VSE's Fourth Quarter and Full Year 2024 Conference Call. 2024 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 & 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. The transaction is valued at up to $230 million, including a $140 million cash payment at closing, a $25 million seller note and up to $65 million 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 2025, subject to customary closing conditions. This divestiture and the strategic actions we've taken over the past 5 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. The Aviation segment supports both the commercial and business and general aviation aftermarkets, 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 an uptick in business jet utilization. The commercial aircraft aftermarket parts and services…

Thank you, John. Let's turn to Slides 5 and 6 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 million 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. Adjusted EBITDA increased 26% to $40 million compared to the fourth quarter of 2023. Aviation drove this growth, up $13 million compared to the same period in the prior year, partially offset by a $3 million decline in adjusted EBITDA per fleet and a $2 million increase in corporate admin expenses. Adjusted net income was $18 million and adjusted diluted earnings per share was $0.90 per share. For the full year 2024, we recorded approximately $1.1 billion in consolidated revenue, up 26% versus 2023, driven by record aviation growth. Adjusted EBITDA for the year was $136 million, an increase of 20% or $22 million as compared to 2023. Aviation contributed to a $41 million year-over-year increase, partially offset by a $15 million decline in fleet adjusted EBITDA and a $3 million increase in corporate admin expenses. Adjusted net income increased 20% to $56 million. 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 7, where we'll cover Aviation segment's record fourth quarter results in more detail. Aviation revenue increased 48% to a record $227 million as compared to the fourth quarter of 2023. Both distribution and MRO businesses were strong contributors, up 32% and 87%, respectively. The 32% increase in distribution revenue was driven by strong execution of new and existing OEM programs and 29 days of revenue and earnings contributions…

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. 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. 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 Desser, TCI and Kellstrom 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. 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.

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

Good morning, guys, and congrats. Maybe my first question, John, for you, with 35% to 40% aviation growth, it 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?

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 Kellstrom, 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 Kellstrom about the USM business. And although we love the business and there's a place for that business inside of VSE, 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 -- 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. And I'd say as far as, Michael, when you think about the year, it's not heavily back-ended, right?

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

Yes. 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 million of contribution over the last 8.5 months versus $85 million was the full annual contribution we initially expected. So what drove some of that TCI outperformance? And how do we think about the revenue synergies opportunity with Kellstrom outside of the assets you'll prune off?

Yes. I mean it's a great question. So each deal we look at both has a different strategic focus. And then as we integrate it, what we expect out of it. TCI was all about creating capacity and working with our OEM partners to manage the opportunity set that's in front of us. 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 Kellstrom, it's a combined kind of focus that's slightly different. 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 -- 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 Kellstrom.

Great, thank you so much.

Thanks, Sheila.

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

Hi, good morning. Hey John, appreciate the revenue and EBITDA bridge assumptions here as we think about 2025. I wanted to ask maybe the growth question in a different way. So the guidance implies about, call it, 500 basis points of outperformance relative to some of your market growth assumptions for VSEC. 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 disproportionately driving the outperformance for the business relative to the market?

I mean to be honest, no, which is a good thing. Even when I looked at the -- we grew 17% organically in the fourth quarter. 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 balanced.

I think 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.

Okay. Perfect. And as we think about, give or take the 50 basis points 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 may be some incremental opportunity on the core business just as you get further into, obviously, the TCI and the Kellstrom integration?

Yes, Ken, that's a good question. I think 50 basis points to 60 basis points is a good way to think about it. I think you're going to see more realization of synergies, especially with Kellstrom throughout 2025. So you'll see that realized in 2026 as well. And I think we're continuing to optimize our fuel control program as well as we transition to full light manufacturing capabilities. So we -- there's some SG&A carryforward 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. So I think those two elements will help the expansion as you go into 2026.

Perfect. Thanks, Adam. Thanks, John. Michael. Nice quarter. I Appreciate it.

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

Hey, Good morning, guys. Nice results. Thanks for taking the question. 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? 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.

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, 2024 to 2025, obviously, in 2024, we had the big inventory provisioning around the Pratt program. So we spelled that out, call it, in the $35 million range. We also had impact from the FDS transaction as well in the $15 million range. 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 million payment in 2025 and another $6 million payment in 2026. And then we also are ramping the Honeywell program in 2025. 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, Kellstrom, 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.

Got it. Helpful. And then maybe, John, just pivoting back on topline growth, when you laid out your kind of 2026 targets, I think that was 2023. I think the framework called for high single-digit organic. 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?

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. And hopefully, we'll have a few during the year to share. But I actually like when it's more of the blocking and tackle growth. Our model is, again, very OEM-centric. And what's happening is as we're embedded and 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. And again, it's quite balanced across both market segments, B&GA 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 Kellstrom. So when you look at, again, just the stuff that we do that is hard and you want to get credit -- you want to follow the good markets, the commercial engine market natural pace is at the higher end of the market growth.

Yep. Got it. All right. Good stuff. Thanks guys. I'll jump back into the queue.

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

John, Adam, and Mike, good morning.

Good morning, Louis.

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 forma margin for this year?

Yes, 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 FDS transaction, we said around $3 million to $4 million, 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 forma 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. So once we close that transaction and come up with a more precise number around stranded costs, we'll update you on pro forma margins.

Okay. 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 a margin uplift should that contribute for the 2026 year in terms of the remaining synergies there?

Very little in 2026 because we've been able to capture -- even though we're implementing it, we're capturing the margin improvement as we implement it. 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 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 2026 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.

Great. And one final one on the subject of M&A, many investors -- VSE investors hope that Boeing will put Aviall 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 Aviall, 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 fit.

Yes. I mean I think -- 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 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. And with the fleet business kind of exiting in the second quarter and our team being able to kind of, for lack of a 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&A pipeline that's kind of more known and kind of our market positions.

Great, Thanks, John. Thanks for having me.

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

Good morning, everyone, and let me add my congratulations. Just wanted 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?

I mean there's one business that's kind of publicly sort of-ish in the market. I say publicly-ish because everything is 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. 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.

Okay. Fair enough. And then just wanted to clarify on the margin -- the overall aviation margin progression this year. 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.

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.

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?

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.

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

[Operator Instructions] Our next question comes from Josh Sullivan of The Benchmark Company. Please go ahead.

Hey, good morning.

Good morning, Josh.

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

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

Yeah. So in terms of OEM rate of production, I think we're pretty confident in 2025 into 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. In terms of TCI and Kellstrom opportunities that, I guess, we mentioned earlier that these two companies are in the largest and 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 -- for the outlook for 2025.

Yes. So I think to Michael's point, 2025 and 2026, we feel very, very good about. As you look at 2027, I'd say we still feel there's 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, market growth. But we do not expect a market decline over the next three years at this point.

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 once you're done integrating?

Yes. It was and is an amazing asset. And 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. So I'd say it's a multiyear plan to kind of double capacity.

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.

Great. Thank you for your time.

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

Thanks everybody for the time today. Look forward to speaking with you in May to report our first quarter of 2025. Thanks and have a great day.

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