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..

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, United States Department of Defense, and commercial aftermarket high-duty cycled truck and fleet customers.

Supply Chain Management Group represented 28% of 2019 revenue. Our Federal Services Group, which represented 42% of 2019 revenue, provides aftermarket refurbishment services to extend and maintain the lifecycle of military vehicles, ships, and aircrafts for the U.S.

Armed Forces, federal agencies, and International Military independent customers as well as provides energy consulting services, healthcare IT, and IT data solution.

Early in my tenure as CEO, our objective has been to refocus each of the business groups on improved operational performance, market differentiation, and targeted business development, all while investing in each business to establish a clear value proposition and firm foothold within our served market.

Looking ahead, the collective focus of our leadership team is to generate above market revenue growth and total return over the long-term. Turning to slide four, our financial performance reflects stable year-over-year growth in revenue, margin capture, and profitability. Our revenue for 2019 was $752.6 million, up approximately 8% over 2018.

We ended the year with net income at $37 million, up 5.5% year-over-year, and our diluted EPS was $3.35 per share, which was a 4.4% increase over 2018. For the fourth quarter, our revenue was $195 million, up approximately 8% compared to the same period of 2018. We recorded net income of $10 million, up 8% compared to the fourth quarter of 2018.

Finally, we ended the fourth quarter with diluted EPS of $0.90 per share, up 7% as compared to the same period of 2018. We'll go into more detail on our operating segment shortly, but you can find a general overview of the segment performance on slide five.

I will now turn the call over to our CFO, Tom Loftus, to discuss our 2019 financial performance..

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 prime turbine subsidiary in Texas, a move that is expected to position us to focus on higher growth, aftermarket component and accessory repair and parts distribution opportunities to serve the global commercial and general aviation market.

Turning to slide 11, and 12, Supply Chain Management Group revenue increased 2% year-over-year to $53.6 million in Q4 of '19, while the full-year 2019 group revenue was essentially flat at $214.5 million.

Operating income increased 5% year-over-year to $7.4 million in Q4 2019, while full-year 2019 operating income declined 3% to approximately $30 million. Supply chain management EBITDA increased 2% year-over-year in Q4, to approximately $10 million. Now full-year 2019 EBITDA declined 3% to approximately $41 million.

The decrease in the full-year 2019 operating income was mainly attributable to a decline in demand related to the U.S. Postal Service. This group continues to focus on diversification beyond the U.S.

Postal Service managed inventory program, with non-USPS, group revenue growing nearly 20%, as John mentioned earlier, on a year-over-year basis, in 2019, supported by increased activity in ecommerce and commercial parts distribution. Turning to slide 13, our Federal Services Group revenues declined 5% year-over-year to $80.6 million in Q4 of 2019.

While full-year 2019 group revenue declined 7% year-over-year to $313.6 million. Operating income increased 47% year-over-year to $5.2 million in Q4 of '19, while full-year 2019 operating income increased 15% to $18.1 million.

Federal Services Group EBITDA increased 28% year-over-year in Q4, approximately $6 million, while the full-year 2019 EBITDA increased 5% to approximately $21 million.

The year-over-year increase in operating income for the fourth quarter and the full-year 2019 was related to improve sales mix, resulting from more fixed price work with government agency. In 2019, Federal Services Group bookings declined 29% year-over-year to $228 million, while funded backlog to find 27% year-over-year to $213 million.

The decline in bookings and funded backlog was attributable to a combination of minimal new business development activity, together with the loss of a contract. As John will cover shortly, we are actively engaged in building both bookings and backlog in this segment through new business development initiative.

We recently hired a new group president, who was highly focused on adding BD staff and revitalizing this business with an emphasis on developing the pipeline and customer activity in the near term.

Turning to slide 14, at December 31st, 2019, we had net debt of approximately $270 million and trailing 12 months adjusted EBITDA of $91 million, implying a net leverage ratio of 2.9. Net leverage has now declined for the fourth consecutive quarter.

Following the completion of the 1st Choice acquisition in January 2019, in December, we announced the amended loan agreement with our bank group. Under the terms of the amended agreement, our bank group, increased total availability on the company's term loan and revolving credit facility by a combined $100 million.

Following the close of the transaction, total committed capital under the amended loan agreement increased from $373 million to $473 million. At year-end, we have a total cash and unused commitment on our credit facility of nearly $200 million. With that, I'll turn it back over to John, for his closing remarks..

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..