Good day and welcome to the VSE Corporation Second Quarter 2024 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s remarks, 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 Michael Perlman, Vice President, Investor Relations and Treasury. Please go ahead..

Thank you. Welcome to VSE Corporation's second quarter 2024 results conference call. We will begin with remarks from John Cuomo, President and CEO. Also on the call this morning is Tarang Sharma, Chief Accounting Officer and Interim 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 would like to turn the call over to John..

Good morning. Thank you for joining VSE's second quarter conference call today. This morning, I would like to begin by discussing the current market environment for our Aviation segment. I will then provide an update on our 2024 strategic priorities and review both our second quarter financial performance and outlook for the remainder of the year.

Let's begin with a market update on the Aviation Commercial market. Global airline passenger traffic remains robust and has returned to and in many cases exceeded, record prepandemic levels. 2024 revenue passenger miles are forecasted to be approximately 4% above 2019 levels and are expected to continue to increase annually over the next 10 years.

Over the same period, the global in-service Fleet is expected to expand by approximately 3% annually to accommodate increased passenger demand. While Boeing and Airbus are attempting to ramp-up production to meet increased demand, quality and supply chain constraints have impeded their efforts.

As an interim solution, airlines are delaying aircraft retirements, driving increased demand for aftermarket parts and maintenance-related services on aging aircraft.

Within the business and general Aviation market, we've seen a structural shift in the use of private aircraft following the pandemic and as a result, more stability when compared to prior cycles.

Business jet activity was the first to recover following the pandemic and we have seen this activity stabilize near historically high levels and anticipate low single-digit growth rates in the near term. Moving now to Slide 3, where I will provide an update on our 2024 strategic priorities, beginning with the Aviation segment.

First, we continue to scale our new European distribution Center of Excellence in Hamburg, Germany, launched earlier this year. The facility supports an expansion of our Pratt & Whitney Canada aftermarket program which is performing in line with our expectations and is expected to be at the full year run rate by the end of the year.

The facility will support additional distribution products, including tires, tubes and batteries, from our Desser acquisition later in 2024. Second, the launch of our new OEM-licensed Fuel Control Manufacturing program is outpacing early expectations and contributing to segment profitability.

Our Kansas facility expansion which will support the manufacturing of this new product line is expected to be operational by year-end. The investment in this facility expansion accounts for most of the growth CapEx spent in the second quarter. Next, we are building a core competency in acquisition integration.

The Desser acquisition integration which includes integrating systems, processes, organizations, go-to-market strategy and branding remains on track and is expected to be completed over the next 12 months. Supporting this integration, we are developing a new e-commerce site that will support all VSE Aviation and legacy Desser customers.

This new VSE Aviation site will be launched in the third quarter of this year. And finally, our recent acquisition of Turbine Controls, or TCI, has exceeded our initial expectations and assumptions. Our initial focus for this business is adding capacity and expanding our scope with existing engine OEM partners. Moving now to Fleet.

Earlier this year, we announced the initiation of a process to explore and evaluate strategic alternatives involving our Fleet segment.

The review is progressing and in process and we expect to provide additional updates after both the USPS ERP transition is complete and the USPS revenue recovery has stabilized, both of which are anticipated by year-end.

In the interim, we have undergone several initiatives to better position this segment for future revenue growth, profitability and a potential divestiture. We remain committed to managing the Fleet segment through the near-term temporary disruptions caused by the USPS transition to a new ERP or Fleet Management System.

We continue to focus on customer diversification and scaling our e-commerce fulfillment and commercial Fleet businesses which are up approximately 30% organically year-to-date in the aggregate. At the Corporate level, we completed a successful follow-on equity offering of 2.4 million shares at $71 per share in May.

The net proceeds from the offering were used to repay outstanding borrowings under our revolving loan facility, including borrowings to fund our acquisition of TCI.

Additionally and as previously disclosed, the company expected to recognize restructuring charges related to the relocation of our Corporate and Federal Defense headquarters and other corporate restructuring initiatives supporting the finalization of the Federal and Defense business segment divestiture.

In connection with these activities, we recorded a $17 million charge in the second quarter. We have also made the decision to relocate our corporate headquarters to one of our existing Aviation segment's operating facilities later this year. We will provide a detailed update next quarter.

Finally, our CFO search is progressing well and we expect to announce a permanent CFO and onboarding plan soon, specifically before the end of the third quarter. Let's move on to Slide 4, where I will provide an update on our Q2 performance. In the second quarter, we delivered revenue growth of 30%.

This included a second quarter in a row of both record revenue and record profitability for our Aviation segment.

The record Aviation revenue and record profitability were driven by balanced performance, contributions from solid program execution on existing distribution awards, the scaling of new awards, expansion of MRO capabilities, the new OEM-licensed manufacturing program and contributions from both the Desser Aerospace and Turbine Controls acquisition supported these results.

During the quarter, Fleet segment revenue declined 9%, driven by a decline in revenue from the United States Postal Service as they implement a new Fleet Management Information System, resulting in a temporary slowdown in maintenance-related activities and parts usage.

To-date, 235 facilities have migrated to the new system versus 107 since our last update. The remaining 72 sites are expected to be transitioned by the end of the third quarter.

The negative USPS performance was partially offset by increased sales volume from e-commerce customers and fulfillment partners, supported by continued disciplined volume expansion at our Memphis distribution center and expanded product offerings, supporting new and existing customers within our commercial Fleet sales channel.

With that, I will now turn the call over to Tarang to discuss the details of our financial performance..

Thank you, John. Let's turn to Slides 5 and 6 of the conference call materials, where I'll provide an overview of the second quarter financial performance. VSE generated $266 million of revenue in the quarter, an increase of 30%, led by a 55% increase in Aviation revenue, partially offset by a 9% decline in Fleet revenue.

Adjusted EBITDA of $31 million increased 18% or $5 million compared to the second quarter of 2023. Aviation drove this growth up $12 million compared to the prior year's period. This was partially offset by a $6 million decline in Fleet.

Adjusted net income increased 5% to $11 million and adjusted diluted earnings per share declined 22% to $0.64 per share. Now turning to Slide 7, we'll review our Aviation segment's record second quarter results. Aviation segment revenue increased 55% compared to the second quarter of 2023 to a record $193 million.

Both Distribution and MRO businesses were solid contributors, up 32% and up 112%, respectively, compared to the prior year period.

The 32% increase in Distribution revenue was driven by strong end market activity and strong execution of existing OEM programs, the ramp of new programs, including our Pratt & Whitney Europe, Middle East and Africa agreement and contributions from the Desser acquisition.

The 112% increase in MRO revenue was driven by strong end market activity and the addition of new repair capabilities, market share gains and improved throughput across our MRO facilities and contributions from Desser and TCI acquisitions.

Excluding recent acquisitions, Aviation segment revenue increased by approximately 14% organically compared to the prior year. Aviation adjusted EBITDA increased by 61% in the quarter to a record $31 million, while adjusted EBITDA margins increased by 70 basis points to 16.1%.

The increase in margin was driven by contributions from new and existing distribution programs, MRO market share gains and our newly launched OEM licensed manufacturing program, slightly offset by lower margins from recent acquisitions.

For our Aviation segment, we are maintaining full year 2024 revenue growth guidance of 34% to 38% and adjusted EBITDA margin guidance of 15.5% to 16.5%. Now turning to Slide 8 to discuss second quarter results for the Fleet segment.

During the second quarter, Fleet segment revenue declined 9% to $73 million, driven by lower USPS revenue, partially offset by e-commerce fulfillment and commercial fleet sales growth. Commercial revenue was $46.5 million in the second quarter, an increase of 22% compared to the prior year.

Commercial revenue now represents 64% of Fleet segment sales compared to 47% in the prior-year period. USPS revenue which is included within our other government channel declined approximately 37% compared to the second quarter of last year.

As previously guided, USPS sales are expected to be down 40% to 45% in the third quarter and down 30% to 35% for the full year. Moving on to Fleet profitability. Fleet segment adjusted EBITDA decreased 66% to $3 million, driven by the decline in USPS sales volume. Fleet adjusted EBITDA margin was 4.5% compared to 11.9% in the prior year.

For the full year 2024, we maintained our Fleet segment revenue growth range of 0% to 5% compared to the prior year and our adjusted EBITDA margin range of 6% to 8%. We expect both revenue and adjusted EBITDA margins at the low end of the provided ranges. Turning to Slide 9.

In the second quarter, we used $18 million of operating cash flow, primarily driven by strategic inventory investments supporting new Aviation awards. Capital expenditures for the second quarter were $4 million, supporting new facility and equipment for our OEM licensed manufacturing program. Total net debt outstanding at quarter end was $445 million.

Pro forma net leverage which includes the trailing 12-month results from prior acquisitions was 3.2x. We are in a position to further improve net leverage in the second half of the year, driven by stronger free cash flow generation and the optimization of our inventory investments and working capital. With that, I'll turn it over back to John..

Thank you, Tarang. I would like to conclude our prepared remarks by recapping our 2024 priorities on Slide 10. As previously communicated, 2024 is a year of execution. Let's begin with our Aviation segment. First, our prior Europe program implementation is on schedule.

Our new Hamburg, Germany distribution center is now being positioned to support additional product lines in the back half of 2024. Next, the Fuel Control program launch continues to outpace early expectations and the Kansas facility expansion supporting this program is expected to be operational by year-end.

Third, we expect the integration of Desser to be completed over the next 12 months. Alongside the integration, a new e-commerce site will be launched in the third quarter, supporting both VSE Aviation and legacy Desser customers.

And finally, for our TCI acquisition, we are focused on adding additional capacity and increasing our scope with existing engine OEM partners. Moving to our Fleet segment.

We remain focused on our organic growth and customer diversification strategy and plan to drive commercial growth as we continue to scale our new Memphis Distribution and E-commerce Fulfillment Center. We continue to support legacy and USPS new vehicles, while managing the temporary disruption in activity brought on by their new system conversion.

Within Fleet, we remain committed to scaling our commercial Fleet business and managing through the near-term and temporary challenges within the USPS. Finally, from a cash flow perspective, we expect to generate solid free cash flow in the second half of the year, improving our net leverage and lowering our debt balance.

I would like to conclude by thanking the VSE team for all they do daily to support our stakeholders. We are really building something special here. Operator, we are now ready for the question-and-answer portion of our call..

[Operator Instructions] And our first question comes from Ken Herbert from RBC Capital Markets..

John, maybe just to start out. Within the Aviation segment, the guidance implies sort of consistent margins at these levels in the back half of the year. Can you just -- you've got obviously a lot of activity, a lot of things ideally wrapping up.

Can you just walk through the puts and takes as you see the second half sort of Aviation margin progression playing out? And if there's any particular risks around, whether it'd be the integration of some of these acquisitions, obviously, the new facilities, the ramp anything else?.

Yes. I mean, I think we posted a really strong operating margin in the first quarter and then the guidance has been slightly lower. We've got a bit of a mix with the acquisitions. We have TCI which is not a lower -- not a low-margin business but slightly lower than the 17%-plus that we posted in the first quarter.

We have really significant activities in the Desser acquisition happening starting actually next week that will -- you'll have a little bit of a slowdown for 4 to 6 weeks while we get the systems migrated in the U.S. So -- and we continue to ramp, it's all about mix. So I think we feel comfortable with the guidance that we put out.

If TCI was not part of the equation, we would probably be at the higher end of that guidance. With TCI and I think the midrange of the guidance is where we expect to be at this point.

Michael or Tarang, any other puts and takes you think of?.

Yes. I will just reiterate that. The TCI margin is dilutive, so that will certainly have an impact on the variability towards the back half of the year. And right now, we're just holding the plan. I mean, we've owned TCI for less than a quarter and so we'll update the guidance when we think it's appropriate..

Perfect. And coming out of the air show, a lot of commentary on maybe some softness at the lower end in terms of some of the airlines and their capacity growth or capacity reductions.

Are you seeing any change in your airline customers on either spare parts purchasing or sort of MRO spend as a result of maybe some slowing with low-cost carriers?.

We aren't yet. I mean you know I tend to be on the more conservative side of the market outlook but we have not seen any changes in demand. And our activity at Farnborough really centered around meetings with large OEMs and working with them in our -- our model is very OEM-centric.

And there continues to be a lot of very robust opportunities in terms of work that could be offloaded to us, back shop work for MROs, different distribution opportunities. But as of today, we're not seeing any impact or any change..

Okay. Perfect.

And just finally, free cash in the second half, could you provide any more specifics on sort of where -- how much we expect to generate or where we should think about sort of free cash for the full year?.

I mean, certainly, we expect to generate free -- strong cash flow in the second half of the year. I mean, our cash for the year has been impacted by the sale of FDS and the divestiture-related costs and also the Fleet's revenue declines. Then we've got new program execution in the first half of the year.

I'd say we're on track to just generate free cash flow and certainly anticipate that in the back half..

The next question comes from Michael Ciarmoli from Truist..

Just maybe to pick right up on that cash.

Is that cash positive second half or you guys think you could be cash positive for the full year?.

I think cash positive in the second half..

Yes, good question. The second half..

Okay. And Mike, more so in the fourth quarter versus the third quarter. I would expect free cash flow generation in the third quarter and more predominant in the fourth quarter..

Okay, perfect. And then, John, I think you said TCI is outperforming expectations. I think you originally said $55 million to $60 million revenue contribution.

Is that still the right bogey [ph] for the full year? Or is that truly coming in maybe above that high end?.

TCI is coming in above the high end and it certainly exceeded expectations for the months that we own them. I mean, you follow the 10-Q, you'll see that it's closer to the $20 million, $23 million mark for the time period. Again, on this for 2 months of....

Yes. It's hard for us to put a solid forecast after 90 days but I think as of right now, we feel at that they are at the higher end. I just want to have a little caution because we're still learning. We're actually in Connecticut this week but it's a lot of learning right now..

Got it. And then, John, I think I always kind of appreciate the conservatism, the reaffirmed Aviation guidance. I mean, it kind of, I guess at the high-end maybe a slight uptick but the midpoint or even low-end kind of assumes revenues kind of stall here at this kind of $193 million run rate on a sequential basis.

What sort of contemplated that would make revenues go down sequentially in 3Q and 4Q knowing just kind of what we've seen with some of the lower end, low cost airlines.

But anything to read into on the guide there?.

No. I would say it's really important to look at the year-over-year comps rather than the sequential comps. There is an element of seasonality in the markets, number one. Number two is we will have a more conservative third quarter on the Desser side because we're going to go through the system integration in the U.S.

So that starts literally in about 10 days. And you've got 6 weeks of integration work where you will see an impact in revenue as we integrate but it's obviously all for the positive as we -- and we'll realize synergies as we get to the back end of the year.

But I would say there's nothing to read into it from a quarter-over-quarter and year-over-year perspective. We're still -- we feel confident in posting growth based on that seasonality..

Okay. Last one for me. Just Southwest, they've obviously have a lot going on there, a lot of changes.

Anything you could say about your current program with them? Does this create more opportunities for you, less opportunities? Or just any kind of directional color there?.

Yes. I mean we have a strong partnership with them. We are managing all of the 737-700 teardowns for them, 200-plus aircraft over. I won't define the period because it all depends on when they're able to receive new aircraft. It's a solid program with strong contributions.

I'd say the acceleration of revenue and earnings on that program is more dependent on Boeing's ability to deliver aircraft to them than Southwest itself. So right now, it's stable and strong but we don't anticipate any kind of strong growth based on the current Boeing 737 MAX build rates..

The next question comes from Louie DiPalma from William Blair..

John, Tarang and Michael, Aviation organic growth remained solid at 14% and that shows continued market share gains with your view that the BG&A industry growth has decelerated to the low single -digits.

Are you able to categorize where these market share gains are coming from? And what is your view in terms of when the commercial industry growth will start to mirror the BG&A growth?.

Yes. I mean, first, with regard to share gains, it's interesting. I'd say we're winning more work from OEM partners as we talk about how to solve problems for them to support them in the aftermarket, whether it's distribution, MRO or some type of combination between parts and services needs.

More of the work is coming from those conversations than it is actually from a battle with competition over new business and taking share that way. And we are seeing it quite balanced across both markets, across business in general aviation and commercial and across both capabilities, MRO and distribution.

Your second question specifically was about?.

Commercial..

Commercial..

Yes. I'm slowing down, so I'm thinking about it. Again, I take a more conservative approach. I think we're going to see another year of growth in the market in 2025. I tend to think it's going to be more in that mid-single-digit range. And I think as you get into '26, '27, you're going to see it start to flatten out.

That's just my perspective of it which is slightly lower than what you see in kind of larger, more macro market communications..

And for these -- for the 14% organic growth, it's a very sizable spread relative to industry growth.

Do you have confidence that you can maintain that spread?.

I mean, I won't say every quarter is going to look exactly the same in terms of organic growth. We've -- it depends on how programs ramp as well. So we'll continue to give as much clarity and guidance as possible as we win new business.

And I think you see the transparency that we deploy in terms of winning new business, if there's any upfront cost to execute on the business and then when that revenue and earnings will start to flow through the P&L. So it's hard to just give a generic answer because each program does execute and implement differently..

That makes sense. And one more.

At your Analyst Day, John and Tarang, you forecast for 100 basis points of Aviation margin expansion in 2025 relative to 2024 and is that still a viable target as the utilization of the Hamburg facility increases and as you gain the efficiencies of the fuel control assets?.

Yes. I mean it's really 3 factors. It's the Honeywell Fuel Control and the kind of higher inventory that we had initially, the burn down of that as we bring on inventory where we're the manufacturer at a lower cost and that margin pick up there.

The second is, as we continue to grow the business, we're leveraging our operational costs and kind of the platform that we built. So the SG&A as a percentage of sales decline will provide some margin opportunity.

And the third is, we're starting to -- we've got some integration activities happening in the back end of the year and through 2025 and there are synergies involved with those integration activities which provide a little bit of margin uplift..

Sounds good.

And one more, of the USPS sites that have transitioned to the new IT system, have the volumes recovered back to where they were prior to the transition?.

No. So the first few sites that went live, went live in the first quarter. We have seen those bottom out and we've seen the recovery start to happen but they have not -- there are no sites that have gone live that are at pre go-live revenue run rates at this point.

And that's why we have given kind of that V-shaped guidance in terms of postal where we anticipate the remainder of the sites going live this quarter and really the bottom of -- you'll see a decline in revenue and earnings this quarter and then you'll see a slow uptick in the fourth quarter and going into 2025..

The next question comes from Jeff Van Sinderen from B. Riley..

So I realize it's early on TCI but I wanted to see if we could circle back to that just for a minute.

Do you think there's margin expansion potential there as you grow it based on what you're seeing so far?.

Yes. I mean, there -- each deal kind of has a different financial model. Some deals are -- we fully integrated and the synergies come from cost takeout. Our -- that is not the situation with TCI. TCI is about how do we expand and grow the business because we see a tremendous amount of market potential.

And then where we have, I'd say, on the product or service margin level where we have opportunities to expand margins there. Our approach is typically first 90 days, watch, learn, especially this is an A asset, make sure we feel comfortable before we put any plans in place.

And you'll see us start to focus much more on growth in capacity expansion plans in the back end of the year and into 2025. And as we bring on new programs, we'll be in a position to talk more about margin expansion..

Okay. Fair enough. And then I guess, it sounds like you're focused on the near-term system integration, you're about to execute.

What are kind of the next key things remaining to complete the integration of Desser over the next year?.

Yes. I mean, Desser is a complicated integration because it was a non-integrated business. So you have 2 MRO shops that are operating under separate systems and separate kind of legal entities. And then you have, I think, 3 distribution businesses that were all operating somewhat independently.

So we're bringing those together and there -- it's almost like 5 mini integrations. Coupled with that, there's more commoditized products in their mix which is a good thing. It's a lot of touch points with customers. And we've -- we're enhancing our e-commerce site and taking a new e-commerce site live in the third and fourth quarter of this year.

So what you'll see is the U.S. distribution integration happened throughout the remainder of this year. And then as we get into next year, it will be MRO systems and processes integration. We've already done the HR stuff, payroll benefits, organizational integration. So now it's all about systems and how we go to market..

Okay, great. And then if I could just squeeze in one more.

Just any more color you can give us on what you're seeing in the Honeywell business?.

Yes. I mean it's scaling exactly or better than anticipated. And we still feel we've given pretty robust guidance around that, including margin expansion in 2025 and still feel very confident in our ability to deliver on the performance that we've already communicated..

Okay, great. I'll take the rest offline..

The next question comes from Josh Sullivan from Benchmark..

As far as the post office changeover, if you look back historically when the USPS went through a similar -- or similar actions, what metrics is that tracking to your historical experience versus this cycle?.

It's a good question. And I want to be very cautious because we feel very comfortable in our guidance. And I would say at this point, we don't see any additional opportunity above the guidance but what it's tracking similar.

I think the difference in what we saw in the past is we did see pent up demand and that pent up demand kind of released at a certain point. We haven't seen that yet. So other than that, kind of the V-shaped kind of decline and then recovery we are seeing.

We just don't see -- at this point, we're not seeing any kind of indication that pent-up demand will yield any revenue. And above that in 2024, particularly in 2025 potentially, we'll deal with them but for right now, no..

Got it. And then, now that you've had a deeper look at TCI and I understand it's not too deep, just a couple of weeks but you mentioned the capacity expansion has been a focus.

How should we think of those investments versus any certification time lines? And then what's been the inbound from engine OEMs since you took ownership?.

Yes. I mean I'll start with the second question first. I mean it's such an outstanding business with such strong OEM-centric relationships in terms of back shop work as they're doing their own full maintenance, repair and overhaul on a commercial engine or a military engine.

We've seen a tremendous amount of interest from our OEM partners in how we scale and grow capacity to support additional back shop work. We -- as a public company, I mean you provide a lot of stability to large OEMs that are looking not just 1 year out but 3 and 5 years and sometimes even longer out.

So the conversations and kind of our activity at the Farnborough Airshow were very much centered around these OEM relationships. With regard to capacity, I'd say we're just at the -- we have -- there is -- there are some quick capacity expansion we can do within our capability -- our capabilities we have today.

I'd say as far as the next step of growth with these OEMs, we have to determine what that looks like. And then is it a new capability or an adjacent capability or not. I'd say we're not there yet to be able to say how quick I can turn that -- those ideas into revenue and earnings, give me another quarter or two..

Got it. And then just one last one on Desser. You talked about a core competency in acquisition integration.

Can you just expand on that? And then the e-commerce website, is that a new approach to this market in a way your commercial fleet e-commerce approach was?.

Yes. I mean, for us, it is. I've been with the business for 5 years now and our approach initially was almost anti e-commerce which I know sounds counterintuitive to what's happening in most markets but we wanted to build a lot of touch points inside the customer base.

We wanted to accelerate and differentiate in terms of our service capabilities and differentiate in terms of how technical our sales teams are, how much we know and understand the product.

We're now at a place where those -- kind of, we built that level of stabilization, where we believe the next way to grow and support these customers is with a semi-customized e-commerce site that's designed around the products and services that we support. So excited to get that site launched.

I'll share with you the website once it's launched, you can kind of get a feel for it and what's the same with other sites and kind of where we're different. But as we add more commoditized products, remember, about 85%-plus of our product is exclusive.

But as we have more commoditized products, it also give us another opportunity to expand that sales channel..

And our next question comes from Bert Subin from Stifel..

I guess maybe jumping off of Louie's question a little earlier on the 10% to 13% targets from your Investor Day.

The 14% that you're at now, do you see that incrementally getting better? Or do you think it's just sustained from here?.

I think near term, it's sustained as we get into 2025 and we give kind of guidance and outlook. And I've got a feeling of how the new programs that we have won are going to be implemented and executed. We can give you a little bit more clarity on that. Every program is kind of different.

It's like a distribution program, it depends is their inventory in the market and kind of how does that program roll out. We won some new OEM-authorized MRO work. How long do those transitions take because you've got to get fully authorized by the OEMs and sometimes get testing equipment on board.

So as we kind of are able to layer in new program by new program, I'll give a little bit more clarity to see if we can accelerate that. But at this point, I'd say the guidance is around what we've been able to do thus far..

Yes. That's helpful..

And remember, we're starting to lap pretty significant comps as well..

Correct. Yes. And I guess you mentioned the distro deals. You've won -- I mean, I think just over $1 billion or at least publicly announced just over $1 billion over since '23. How have those been ramping? How should those be ramping maybe over the next 12 to 18 months? And maybe....

Go ahead..

Well, I was just going to add on like how does that -- I realize that that's not all new work. Some of that is expansion, some of that is renewed work.

But between your aftermarket OEM split on those as well, if we do foresee a weaker aftermarket, how does that affect your ramp or your margins for that matter, considering operating leverage or whatever other levers come in there?.

Yes. I mean from a ramping perspective, some of the programs are fully ramped. Some of the programs are kind of half ramp. I see as we get to the back end of this year, most of what we have announced but even by -- let's say, first quarter of '25 should be relatively fully ramped.

I think that from a margin perspective, the Honeywell Fuel Control program which is not solely a distribution program will ramp throughout 2025 but other than that, most of it should be fully ramped by the first quarter. With regard to mix, we're essentially 99% aftermarket, supporting commercial and business and general aviation.

So we continue to watch demand in those markets. And again, most of our product is exclusive and it's more on the expensive side of the -- our products that you're not seeing. There's not a ton of inventory in the market on most of the product that we're selling. Our commoditized products, it's a different story.

But for our exclusive products, it's a pretty tight market in terms of how much inventory is at airlines or at kind of MROs or FBOs. So we feel like we have a pretty good control over kind of working capital and inventory spend..

Yes. And the only thing I'd add is our guidance built into the -- built in the mix and ramp dynamics that John just mentioned. So that's why we're holding up..

Okay. Helpful. And then maybe just on inventory as well. You're sitting on, let's say, like $532 million in inventory. How much of that is attributed to the lower-margin Honeywell fuel systems? And what you've talked about the burn rate, you're talking about the ramp into '25.

Like what's your burn rate on that? And how are you looking at replenishing that into '25? I guess, as a second part to that, your DSOs are sitting also at historically high levels over the last 2 quarters.

Is that the main reason? Or is there anything else driving that?.

So I'll take -- just to cover your Honeywell inventory question. Certainly, we are on track converting at the rate that we previously noted. I mean, we had about a year's worth of inventory. I think that's what we built out. And that ramp is continuing. And as the burnout happens, we'll then move on to building up inventory under the new agreement.

As far as the DSOs and the impact of inventory on the second piece, that again, is a mix between us ramping up new programs as we're launching new programs in Europe and also the impact of the fleet revenue decline as well. So that's certainly creating a bit of a challenge right now.

But again, as John mentioned, we've got the pathway and the recovery that we anticipate for USPS coming in the back half of the year..

Yes. And with regard to Honeywell Fuel Control, I mean, we don't specifically model out or share the -- how much inventory we have for each program. But we plan to be in a position through no later than by the end of 2025 for kind of the higher cost inventory to have been kind of utilized and the lower cost inventory to be replenished.

So it's in our modeling in totality, it was like an 18-month -- I mean, a 24-month kind of kind of burn down and kind of buildup of new inventory. If we have a chance to accelerate that, that it won't take the full year. It just depends on the demand profile of 2025. Our ability to get the parts..

Maybe just one last one and I'll jump back in queue here. But jumping back to the -- sorry to jump around here. But jumping back to the distribution deal commentary. If you win a deal like the Pratt & Whitney deal, where it's essentially a geographic expansion and you have your Germany facility as well going on.

Does that or should that then drive margins just through sort of the operating leverage that you were mentioning earlier?.

Yes. So it's a great question. So I've been here for, like I said, about 5 years or so. When you look at the business like kind of COVID time period which is kind of when Ben, who runs the business and I kind of arrived, you're looking at $120 million aviation business, the platform and the infrastructure does not support a $2 billion business.

So we have built out that platform and infrastructure. So does it mean that I don't have to add any cost or any CapEx as we grow? No.

But for the most part, there's a tremendous opportunity to scale and leverage facilities, teams, processes, systems, so that on a total basis, you'll see the contribution margin of those programs higher than they were historically and an opportunity to lower that SG&A as a percentage of sales and expand margins in totality.

I'd say that's a generalized statement. If there's something different because it's a very unique program, we'll kind of model it out and share that at that point. But you think you're looking at it the right way..

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

Yes. Thank you for joining our second quarter conference call. I appreciate the continued confidence in VSE and we look forward to speaking with you in late October after our third quarter. Thank you and have a great day..

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