Vse Corp Q4 FY2021 Earnings Call

Greetings. Welcome to the VSE Corporation Fourth Quarter and Full Year 2021 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Noel Ryan. You may begin.

Thank you. Welcome to VSE Corporation's fourth quarter and full year 2021 results conference call. Leading the call today are our President and CEO, John Cuomo; and Chief Financial Officer, Steve Griffin. 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 the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our presentation where available, which is posted on our 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. And with that, I would like to turn the call over to John Cuomo for his prepared remarks.

Thank you, Noel. Welcome, everyone. Thank you for taking the time to join our call today. During the fourth quarter and full year 2021, we continue to successfully execute on our multiyear business transformation plan. One engineer to develop a market leading global aftermarket distribution, repair and services company positioned for long-term value creation. Last year, we moved closer to the end user, identifying new and varied ways to support complex customer requirements. We also aligned ourselves with both new and existing global Tier 1 OEM supplier partners, while expanding our diverse portfolio of products and capabilities. During the fourth quarter, our VSE Aviation segment continued building backlog with new business wins. Most notably, we entered into an agreement with a major U.S. airline to become the exclusive end-of-life solutions provider for their 737NG aircraft and surplus materials. Under the terms of this agreement, we will support this major domestic airline with the dismantling and disposition of retired aircraft. The program allows for the refurbishment of used parts for fleet support, and the sale of used spares to airlines, OEMs, brokers and other third parties. During the fourth quarter, we began making investments in the program management infrastructure to support the launch of this agreement. This program requires limited capital commitments, as VSE is not purchasing any aircraft. Most importantly, through this agreement, VSE Aviation will now become one of the largest global suppliers of refurbished 737NG material. In our Aviation segment, we are building a business in the general aviation platform that encompasses a full breadth of products and services. A tip-to-tail approach to support the requirements of business and general aviation customers, a strategy that builds upon our established MRO capabilities and industry-leading parts distribution business. Our 15-year, $1 billion engine accessories agreement with Pratt & Whitney Canada remains our most significant business and general aviation contract executed to date. In 2022, we estimate approximately $45 million of revenue from this contract, representing the first full year of revenue contribution. Once this program is fully developed, we anticipate contract revenue in excess of $60 million annually. Our aviation markets continue to recover. In 2022, we anticipate distribution will remain strong within business and general aviation and commercial market activity, and recovery to continue to accelerate throughout the year. Within MRO, we expect increased demand for spares and component repairs in all markets, supported by market share gains, robust business and general aviation flight activity, and increased commercial aviation flight hours. Looking ahead, we see multiple avenues for profitable growth across each of our operating segments. We have streamlined our value proposition, while placing more emphasis on niche market opportunities. We maintain our bidding discipline even as we enter new markets. Our Fleet segment continues to successfully execute upon our commercial customer growth and diversification strategy, specifically focused on growth and success in e-commerce. Our Federal and Defense segment launched new divisions in 2021 to support MRO and distribution capabilities, as it continued to focus on a long-term pivot to more technical capabilities and higher margin niche markets. Entering 2022, VSE is in a strong position to accelerate our strategies and drive profitable growth as we continue to build a leading global aftermarket distribution, MRO and services brand. Aviation finished 2021 as the largest segment for the first time in our history. As we continue to execute on our long-term company strategy, prioritize the deployment of capital and other resources across the business, aviation will increasingly become our growth engine. We will continue to use a disciplined approach to M&A transactions as we did in 2021 with our acquisitions of HSS in March and Global Parts in July. 2021 represents a strong upgrade of systems, talent, facilities, processes and capabilities to drive the ability to scale our businesses as we grow in 2022 and beyond. We continue to focus on the VSE culture and brand. We are building a high-performance, customer-focused culture that will allow us to develop a leading global aftermarket distribution, repair, exchange and solutions, single go-to-market brand. Additionally, Wheeler Fleet Solutions is continuing its path to become a market-leading vehicle distribution and e-commerce brand. We finished 2021 on a strong note, as fourth-quarter revenue increased by 40% versus the prior year, contributing to growth in both net income and adjusted EBITDA. This was driven by a combination of new contract wins, strong performance from core programs, the addition of new MRO capabilities, and continued growth within our distribution and e-commerce platforms. Within our Aviation segment, fourth-quarter revenue increased 115% year-over-year to a record $82.8 million. The sixth consecutive quarter of sequential revenue improvement driven by both new program execution and contributions from the Global Parts acquisition. More specifically, aviation MRO revenue increased 27% versus the prior year period, while aviation distribution revenue increased 174% in the fourth quarter, driven by a combination of organic share gains within the business and general aviation market, together with acquisition-related contributions. Aviation distribution revenues remain above pre-pandemic levels, supported by organic contributions from new distribution awards. Turning now to review of our Fleet and Federal segments. Fleet revenue increased 12% on a year-over-year basis in the fourth quarter, driven by continued growth in our commercial e-commerce fulfillment business. Commercial revenue increased by 61% on a year-over-year basis in Q4 2021, representing 32% of total revenue in the period. Our Federal and Defense business had a solid quarter with revenue up 16% on a year-over-year basis, driven by a combination of organic growth contributions and the recently completed HAECO Special Services acquisition. Federal segment backlog increased 1% year-over-year during the fourth quarter, supported by increased new business development activities. In summary, the fourth quarter was a solid finish to a transformational year for VSE. In 2021, we acquired two strong businesses to add products and service offerings, added MRO and other technical capabilities to our portfolio, expanded our e-commerce solutions, enhanced our distribution product offerings with market-transforming agreements and product additions, and improved internal processes, systems, centers of excellence and talent to support all that lies ahead for VSE. I am incredibly proud of the VSE team, the culture we are building, and all that was accomplished in 2021. This year, we will continue to execute on our winning strategy and playbook, solving customer problems, winning new business, adding new service capabilities and expanding product offerings to our customers. We are off to a strong start to 2022. We remain in the early phase of an exciting multiyear transformation. During the third quarter of 2022, we intend to host our first-ever Investor Day. During this event, we will outline our strategy and multiyear roadmap for growth in greater detail. Stay tuned for additional information on this event in the coming months. With that, I now turn the call over to Steve for a detailed review of our financial performance.

Thanks, John. Now let's turn to Slides 5 and 6 of the conference call materials for an overview of our fourth-quarter performance. We reported $210.2 million in revenue in the fourth quarter, an increase of 40% from the prior year period. Within Aviation, year-over-year revenue growth was driven by a combination of new program wins, share gains and contributions from our Global Parts acquisition completed in July 2021. Fleet segment growth was supported by commercial fleet and e-commerce fulfillment revenue, while revenue from the United States Postal Service was flat year-over-year. Federal segment revenue growth was driven by inorganic contributions and new business awards, partially offset by the completion of certain DoD contracts in 2021. We generated adjusted EBITDA of $17.8 million in the fourth quarter, an increase of 3% on a year-over-year basis. Adjusted EBITDA margin rates declined 300 basis points year-over-year to 8.5% as margin compression within Federal and to a lesser extent within Fleet offset significant margin expansion within our Aviation segment. Turning to Slide 7. Aviation segment revenue increased 115% year-over-year in the fourth quarter. Both our distribution and repair businesses grew on a year-over-year basis, with distribution outperforming repair primarily driven by improved end-market demand and new contract wins. Distribution revenue, excluding $18.6 million of revenue contributions from our Global Parts acquisition, is approximately 60% above pre-pandemic levels. We continue to see commercial repair recovery in line with the overall market. We anticipate further repair revenue recovery throughout this year as we continue to invest in new capabilities and expand our integrated solutions across a growing base of business in general aviation customers and new commercial customers. Aviation adjusted EBITDA increased by more than 400% year-over-year, while adjusted EBITDA margins increased 580 basis points year-over-year to 9.4%. Delivering outsized revenue growth remains the top priority for this segment, as we implement new programs, win new awards and drive scale as commercial markets recover to expand EBITDA margins. For the total year, Aviation segment revenue was up 50% versus the prior year, and adjusted EBITDA was up 66%. Turning to Slide 8. Fleet segment revenue increased 12% versus the prior year period as higher commercial and e-commerce fulfillment offset a decline in DoD revenue. USPS revenues were flat on a year-over-year basis. Commercial revenues were $20.8 million in the fourth quarter, an increase of more than 60% versus the prior year period. Commercial revenues have grown to 32% of total segment revenue, up 14 points on a year-over-year basis. Segment adjusted EBITDA of $7.6 million was down 10% versus the prior year period. While adjusted EBITDA margins declined 310 basis points year-over-year, given a higher mix of commercial revenue. For the total year 2021, Fleet segment revenue was up 8%, excluding the effect of a one-time PPE order in 2020. For the full year 2021, commercial revenues were up over 70%, which combined with the over 90% growth in 2020 continues to highlight the strong end-market demand and revenue diversification opportunities for the segment. Turning to Slide 9. Federal and Defense services segment revenue increased 16% on a year-over-year basis, driven by contributions from the HAECO Special Services acquisition and new program wins, offset by the expiration of a contract with the U.S. Army and the effects of the supply chain-related disruptions to our U.S. Navy programs. Federal adjusted EBITDA was $3.6 million in the quarter, a decline of 58% year-over-year, while segment adjusted EBITDA margins declined 9.4 points year-over-year to 5.3% as some previous fixed price awards have converted to cost plus, and as the business works to mitigate some of the broader supply chain-related disruptions. For the full year 2021, Federal segment revenue was up 6%, and backlog was up 1%. Turning to Slide 10. At year-end, we had $122 million in cash and unused commitment availability under our $350 million credit facility. Our existing credit facility includes a $100 million accordion provision, subject to customary lender commitment approvals. In the fourth quarter, we generated $10 million of free cash flow, which with our third-quarter results puts us at $31 million of free cash flow in the second half of 2021. As of year-end, we have acquired the majority of the inventory for our newest aviation distribution programs. We anticipate for the first quarter of 2022 we'll have completed all cash outflows for these programs and expect that full year 2022 free cash flow will be positive in line with our previous guidance. As of December 31, we had total net debt outstanding of $284 million. Adjusted EBITDA for the trailing 12-month period was $73.6 million and excludes full year EBITDA contributions from the Global Parts and HSS acquisitions. At the conclusion of the fourth quarter, net leverage was 3.9 times. In 2022, we are positioned to be free cash flow positive, as full year contributions from recently launched programs and completed acquisitions support incremental growth in EBITDA.

We are now ready for the question-and-answer portion of our call.

Hey, good morning, guys. Thanks for taking the questions and thanks for the detail. Maybe just housekeeping, I don't know if I missed it. Did you guys give the organic growth rate in the quarter?

Good morning, Mike.

60%, okay. Got it. Okay. And then just can we maybe focus a bit on margins? I know you called out kind of the nice year-over-year gains, but it looked like, sequentially, there was significant pressure across all segments. I know you talked a little bit about mix and supply chain. But what specifically drove the sequential margin declines, and how should we be thinking about recovery here into the current quarter and maybe progression through the year?

Sure. Steve?

Yes, absolutely. We highlighted a bit of the margin walk details on Slide 6 of the materials. And specifically, what we saw on a year-over-year basis for the fourth quarter was pressure within the Federal and Defense segment, which was driven by a couple of different things. First off, a different mix in terms of our fixed price versus cost plus awards, we saw more of a shift towards cost plus within the quarter. And then secondly, there were disruptions within the business in terms of supply chain delays, which delayed our ability to get the material to our customers and subsequently record revenue. So, we're going to be working through some of those supply chain related disruptions as we start to recover the business. But what we've communicated in the past is that this business unit you should expect to be in the mid-single digits over time progressing to the higher single-digit range. And so, we're continuing to see that business progress towards that long-term. And then we saw to a lesser extent, as I mentioned, within the Fleet portfolio, there is a mix difference between the commercial work that we do versus the work that we performed for some of our government-related customers. And so that pressure is something that's continued as we expected. But we're very pleased with the overall performance of the Fleet business as revenue diversification is key to that portfolio. And then lastly, and probably most importantly, you saw the margin expansion on a year-over-year basis within the Aviation portfolio that helps to contribute actual overall expansion from a margin rate perspective to the total company level. But if you look at it for the fourth quarter, specifically, that helped to drive over 500 basis points improvement within the segment, as we continue to recover that business's overall margin rate back to its mid-teens margin rate over the long term.

Right.

And, Mike, one thing I will add there is, if you look at the MRO business, the commercial MRO business, which is a higher margin business in the portfolio of Aviation, the recovery is a little slower-than-anticipated. So, we do continue to expect, and we’ve seen month-over-month, quarter-over-quarter recovery just not at the level of robustness that we would anticipate and that we’re seeing in the other parts of the Aviation business. So that will scale back and that will drive incremental margin improvement. The other thing I want to add is, you're hearing from other companies out there regarding the amount of supply chain pressure on margins. We have that pressure on our Federal and Defense business really because we're seeing push outs in terms of deliveries, and the distribution and sales are at a higher margin than some of the service sales which are more transactional in nature. But on the Aviation business, it's much more about the infrastructure that we put in, and we're now being ready to scale. We've invested a tremendous amount in that business in 2021 to get that business to scale. I mean, you see the year-over-year growth rate in distribution and the year-over-year growth rate in total organically in that business, there was a tremendous amount of expenses that we added and we do anticipate as we get to the back end of this year, just to start to that business scale where we're not adding operating expenses and you're starting to see the incremental revenue in the product margin, or the service margin just drop to the bottom line.

Got it. I guess, too, though. I was looking more at 3Q to 4Q. I get the year-over-year, but you had nice sequential aviation growth of about 13%. The incrementals were weak and the EBITDA margin declined from 3Q to 4Q, and you had the steep fall-off in Federal sequentially as well. And it sounds like, I guess, a lot of those contracts slip, like what happens sequentially from 3Q to 4Q in Aviation to pressure the margins?

Go ahead.

Yes, sure. I'd say, first and foremost, as you can see, we've combined in now the Global Parts business. The Global Parts business operates at slightly lower margin rates. We have a first full quarter of margin contribution. And we've communicated that when we acquired the business. And then, as John mentioned, we continue to make investments as part of the growth. So, I know he referenced it a little bit earlier in the call, but generally speaking, we continue to make investments to drive the scale as we continue to grow next year. But as John mentioned, we continue to see dip in opportunity to drive scale on that investment.

Got it.

Within the sequential performance, we had a mix shift in the contracts.

Got it. Okay. Let me ask one more question before I return to the queue. John, what are your thoughts on pricing and what you think you can achieve? We just saw this morning's inflation number at 8%, so presumably you have the ability to adjust prices in aviation. Can you share your views on how you might keep pace and the pricing power of the business?

We have a minimal amount of long-term fixed price contracts in our business. Our primary focus is on the aftermarket, which is mainly transactional. We have the capability to adjust pricing as inflation occurs, so we do not view this as a long-term concern for our business. We believe we can pass on pricing increases to the end customers.

Okay. Okay. In Federal and Defense too, do you think that that's a little bit more challenging? I guess it really depends?

No, it’s the same thing for that business.

Thanks.

That's just really a timing issue right now.

Yes.

That business is experiencing a significant delay from Q4 to Q2, particularly with our Federal and Defense distribution orders, which are likely to be pushed closer to mid-year.

Got it. Got it. Perfect. Thanks, guys. I will jump back in the queue.

Thanks, Mike.

Thank you. Our next question is from Ken Herbert with RBC Capital Markets. Please proceed with your question.

Good morning, Ken.

Good morning. This is Steve Strackhouse filling in for Ken Herbert. I would like to ask about the recent 737NG agreement. Can you share more details on how this program is prioritized and what the anticipated revenue contribution for this program might be in 2022? Additionally, while I understand you mentioned the investment requirements would be minimal, could you please elaborate on those?

Yes, let me start just at a high level, and then Steve, I will turn it over to you on the financials. So, we highlighted kind of earlier in my script that this is not a traditional used service material deal where we're buying aircraft. And I want to be transparent on that. It's a very asset light kind of partnership, where we are helping to manage the total process of dismantling of the aircraft, and then selling of the assets that are associated with the aircraft. So that's the kind of the first thing that I want to highlight. So, when we look at expenses that we added in the fourth quarter, it's really building the team that is going to manage that program and then contracting with the outside labor that's going to be doing the tear downs. As far as financial forecasts, there's not much in 2022 as we start to look at the ramp-up really going more to 2023. But Steve, I don't know if you want to jump in there and give any more color.

Yes, I would just say, I wouldn't expect too much of a material contribution from this program in 2022. As John mentioned, we're just getting the program launched right now. So, we'll be able to provide more guidance for you in terms of both what to expect from a revenue standpoint as well as investments, as we head into probably the first quarter and actually get some of the experience underneath our belt. But generally speaking, I think probably the most important dynamic associated with this deal is the opportunity for us to continue to embed ourselves with our deep commercial relationships and look for partnership opportunities as we continue to expand our repair capabilities. So, it's further establishing us within the networks of our customers and continue to help provide services to them.

That's perfect. Thank you so much for the color. And then just one follow-up, if I may. How are the 2021 acquisitions with Global Parts and HAECO performing relative to your expectations?

They are performing at or above expectations. I am really pleased that we did a small equity raise last year, which allowed us to invest in two deals that have very favorable multiples for the business. Both of those integrations are well underway and progressing faster than we initially planned. I am very satisfied with both acquisitions, particularly the capabilities and the team we brought on board.

Perfect. Thank you so much. I will hop back in the queue.

Right.

Our next question is from Louie De Palma with William Blair. Please proceed with your question.

Good morning, John, Steve and Noel.

Good morning.

Good morning.

Is the new Boeing 737NG program with an existing U.S airline customer? Are you able to disclose that? Or is it for like a new logo for you?

It's an existing customer that we support in both our distribution and MRO commercial MRO business. We're currently supporting virtually all airlines in those sectors. Right now, we are not in a position to publicly announce the airline until we are ready to launch the program to the market. We will have a more marketing-oriented announcement in the coming months.

Great. And for that program, I think, Steve, you mentioned how there won't be much of a revenue contribution in 2022. But will there be a negative margin impact as you ramp up the program?

There are some minor impacts related to investments in the program, but they aren't significant. As John mentioned, we've made some investments in the program management team, which will likely continue through the first or second quarter until it reaches a point where it becomes self-sustaining. What excites us is that it will further enhance our cross-selling opportunities as we approach the end of 2022 and move into 2023.

Great. And for the Pratt & Whitney Canada partnership, I believe you announced that last April, and when you announced the deal, you targeted distributing, I think, over 6,000 engine accessories. Are we there yet in terms of you fully scaling to all 6,000? I know that, Steve, you said that outflows associated with inventory for some of your large programs generally end towards the end of March. And so, I guess in the next few weeks, should we be fully scaled for this program? And should that mean that like for the Pratt & Whitney program that will be around the peak profitability margin for the program?

Steve, you want to take that one?

Yes, I'm happy to address that. Regarding the material acquisition, we are fully ramped up on the program. There are a few details we are finalizing as we approach the end of the year and into the first quarter to complete the remaining components, but overall, we are on track. Looking at this year, we've provided guidance of $45 million, with the potential for the program to exceed that as it progresses. As for the margin rate and business performance, we expect to reach full optimization by mid-year. This acquisition is akin to a complete business takeover; we've established new sales teams and customer service representatives, and we're focused on scaling effectively this year. At that point, we will be able to optimize our partnership for both our customers and internally.

Great. And you recently announced an extension for your NAVSEA contract. Do you have any visibility in terms of the timing of the potential long-term contract work?

I'm going to give you a guess. My guess would be end of Q3 would be kind of an announcement on the longer-term contract. Pleased to get the $100 million Bridge contract in place. We do have task orders and backlog on our legacy contracts, plus now another $100 million commitment through next year. And then our anticipation is an award, I'd say end of Q3.

Okay. And I know you didn't provide formal financial guidance, but are you able to provide any color on how we should think about in terms of margins trending across your Aviation, Fleet and Federal segments? I know you did speak about how, like the peak margin for the Pratt & Whitney Canada program in the summer, and there's been the supply chain impact on the Federal side and there's the mix shift with the Fleet side. Is there like any high-level guidance that you can provide on like, how we should be modeling the margin trends for 2022?

I'm going to start with some background on the Federal business. I've previously mentioned that this business is currently at mid-single digits, and we aim to progress from mid-single digits to high-single digits. Right now, mid-single digits is appropriate as we focus on increasing our scale and addressing supply chain disruptions. For the Fleet segment, we experienced some margin compression last year, and that trend will continue somewhat. However, we are optimistic about achieving greater scale in the second half of this year. Last year, we made significant investments in commercial growth, particularly with our sales teams, and we look forward to seeing the results in the latter part of this year. From an Aviation standpoint, we anticipate continued improvement as we work towards scaling the business. I mentioned the trends we expect from the third to the fourth quarter within the Global Parts business. Looking ahead, our long-term target remains around a mid-teens margin rate, which we are confident we can reach, but achieving this depends on the commercial repair business returning to pre-COVID levels, which will take time. Many in the market are aware of the ongoing delays in the repair business. Therefore, we need to align our progress with market conditions. Expect that the commercial MRO sector in aviation will take some time to recover. However, on the distribution side, we are back to pre-pandemic levels.

Thanks for the color, Steve and thanks, John and Noel.

Thanks, Louis.

That’s it for me.

Our next question is from Josh Sullivan with The Benchmark Company. Please proceed with your question.

Hey, good morning.

Good morning, Josh.

Just to kind of follow-up on that a little bit. On the commercial narrowbody activity, I know you said it's obviously going to take a while to recover here. But in the Spring of '21, there was a lot of optimism for summer travel by the airlines. If you could just compare how that '21 activity or behavior contrast with what you're seeing here in '22 heading into the summer.

My anticipation is we're going to continue to see month-over-month improvement in the commercial MRO business and our parts trading business that's connected to that business. So, each month we do see a level of increased activity, a level of increased backlog and a level of increased work in our MRO shops. Is it as robust as any of us anticipated? No. I think when you look at the initial market studies that were done when COVID hit about getting back to 2019 levels, sometime in late 2023 to early 2024, those statistics are probably going to come out to be quite accurate in the end. So, it's the slowest part to recover. But that said, month-over-month, we are seeing continual improvement in that business. And that will drive the margin improvement because again, we've got kind of a base of fixed costs that we can scale from as that recovers.

Got it. And just on the end-of-life service supplier agreement you've got here, what are your thoughts on commercial airline fleet retirements going forward? Has the recent spike in energy caused any change in thinking by your customers? And then just curious what pricing looks like for used service material?

Yes, we don't see any change. And I think we saw that fleet shift during COVID, parking of 767s and people hoping they were going to be able to accelerate their 787 deliveries, which hasn't happened, but we don't see a major shift in retirements or how our airline customers are using their fleet. I think with regard to pricing on used service material, that's why we haven't given any clear guidance on the program. We're just doing the first kind of tear down as we speak, getting our arms around the inventory. And then we'll do an analysis on what we think pricing will look like and model this business out a bit more, and we'll share color on that kind of midway through the year.

And then, just on that contract you mentioned, it's not a typical contract, but with an existing customer. So, does that change your exposure to any particular service schedule A, B, C, or D? Does it include the engine? Just curious on what types of new verticals you might be focusing on over time?

Yes, it's great that it does not include the engine. I'm not as technical as you, Steve, but from our perspective, we aim to be one of the largest suppliers of these NG products in the market, although we can't claim to be the largest. There's a substantial overlap between some of these parts from the NG to the Max, which enhances our capabilities. These NG aircraft will continue to operate in other markets, allowing us to sell there as well. Given the ongoing supply chain disruptions, we see this opportunity as even more promising than we initially anticipated. Steve, would you like to provide any additional insights on the product?

Yes, I would just say it includes the whole aircraft, excluding the engines, but does include the QVC kit. We will be working with our partners to make sure that we optimize all the opportunities to see where that inventory can go and find the best possible place for the customers, brokers and repair shops.

Got it. Thank you for the time.

Thanks, Josh.

Thank you.

Our next question is from Jeff Van Sinderen with B. Riley. Please proceed with your question.

Good morning, everyone. Just to clarify earlier comments, were you saying that we should see second half year-over-year inflection in the Fleet segment? And that also wasn't clear, if you were suggesting similar timing for year-over-year inflection on the Federal and Defense segment?

I think within the Fleet segment, we continue to see the top line grow accelerate within the commercial side of the business offset by the USPS, as we've mentioned. But as I was referring to the margin rate, my point was specifically that we've brought a point now where we've seen that mix shift take place; we're going to continue to see that mix shift take place. But as we drive scale towards the second half of the year, we do expect to be able to drive growth there. Within the Federal and Defense space, we haven't necessarily given specific guidance associated with where we expect to see the margin rates trend ratably throughout the year. What John mentioned, though, is we do expect some of the supply chain-related delinquencies that have affected both the first quarter and last quarter to start to free up towards the back half of this year.

Okay. And then realize it's early on the new 737 contract, but any sense of expectations for margins around that particular contract? I know it's not going to be much this year, but …

The short answer is no. I wouldn't say it's going to be materially different from where we'd given the guidance for the Aviation business. And as we get our arms wrapped around it, we'll be able to share more details with you in terms of magnitude and impact. But right now, I wouldn't expect it to be materially different from what we've communicated for the overall segment.

Okay. And then just kind of turning back to the general inflationary cost pressures out there, it seems like everybody's experiencing. Any particular areas that you feel are more vulnerable than others for that, or do you just see that as something that's going to probably just impact everything, and you'll take up prices where you need to, or just, I guess, anything else to call out around that?

Yes, we are closely monitoring labor markets, which vary significantly by region and type of work. We believe we have a strong grasp on this and maintain a stable workforce. Regarding product costs, we might experience a delay when we get price increases from vendors. Additionally, we have some customers locked into prices for a quarter, and we are facing some inflationary pressures. However, we anticipate that by the next quarter, we will be able to adjust quickly, so we don’t expect long-term effects. There might be a short-term impact on our product pricing, but we do not foresee significant long-term consequences due to our pricing power and the absence of long-term fixed contracts with our customers, which is typical in our industry.

Okay. Thanks for taking my questions, and best of luck.

Thank you for your time.

Thank you.

Hey, everyone. Thanks for the follow-up. John, could you provide some insights on what you're observing from your airline customers as they prepare for summer flying? Specifically, any updates on quarter intake, bookings, and any challenges you might be facing regarding access to raw materials or turnaround times, especially in relation to labor and the supply chain?

Sure. Steve, you want to kind of kick it off, and then I'll give some color at the end.

Yes, sure. I mean, I think from an overall market standpoint, we continue to see order intake being high, but I think there is some uncertainty as we receive customer orders for repairs and the like around need and readiness levels for the summer. So, I think it's hard to predict at this point, just given some of the overall market uncertainty as for access to raw materials, and the impact as to our supply chain. At this point with the stocking levels that we had last year, I think we're in a pretty healthy position from an inventory perspective. Turn times are a little bit longer than probably what they've been historically. But I wouldn't necessarily tie it back to something for VSE tied to specific raw materials. It's probably just more tied to just general supply chain delays. And then from a labor perspective, I think we're in a good spot from a labor perspective. We've invested in the teams, I think we've got a really good culture and brand that the teams are excited about. We feel like we're well-positioned to capitalize as the market recovers.

Yes, if I break it down further in the revenue streams, the pure distribution is showing relatively stable revenue with nice month-over-month improvement in the commercial backlog and customer activity. There's no aggressive stocking from airlines, meaning we are not seeing them make large purchases; instead, we have consistent order flow. Many of our products are somewhat expensive, so they're not treated as consumables that can be overstocked. On the repair side, we are seeing consistent month-over-month improvement in input. However, airlines will provide us with a repair unit to quote, and then they are saying to hold it rather than speeding up the repair and delivery. This process is a bit slow, and I expected more urgency in wanting their products back. The third piece of revenue, which is the perishables pool within our repair businesses, is the slowest to recover. However, I believe that as the market starts to pick up, we will see that recovery occur quite quickly toward the end of the year.

Okay. And maybe this is too early and a bit real-time, but are you seeing any behavioral changes yet as a result of rising oil prices and fuel costs? You kind of mentioned airlines giving you units quote, hold it, rather than accelerated. I mean, is it too soon to see those behavioral changes or how are you guys thinking about oil?

Yes, we are very focused on the domestic market. While we do have an international presence, domestic U.S. airlines and general aviation customers account for a substantial part of our revenue. We are not observing any changes in this customer mix. Internationally, they have been quieter, but there haven't been any significant changes at this stage.

Okay, got it. Thanks, guys.

We have reached the end of the question-and-answer session. And I will now turn the call over to John Cuomo, President and CEO for closing remarks.

Thanks for the time and interest today. We appreciate all the continued support to VSE. We really have an exciting year ahead, look forward to connecting with you all in late April to discuss our first-quarter results. Have a great rest of your Thursday.

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