Good day and welcome to the VSE Corporation Second Quarter 2024 Results Conference Call. All participants will be in a listen-only mode. After today’s remarks, there will be an opportunity to ask questions. 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 pre-pandemic 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. 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.

And our first question comes from Ken Herbert from RBC Capital Markets.

John, to begin with, in the Aviation segment, the guidance suggests that margins will remain steady at these levels in the latter half of the year. Could you discuss the factors influencing the Aviation margin progression for the second half? Are there any specific risks we should be aware of, such as the integration of recent acquisitions, new facilities, or other ramp-up issues?

Yes, I believe we had a very strong operating margin in the first quarter, though our guidance has been slightly lower. The acquisitions have created a mixed situation. TCI isn’t a low-margin business, but it is slightly below the 17% margin we achieved in the first quarter. We have major activities related to the Desser acquisition starting next week, which will cause a temporary slowdown of about 4 to 6 weeks as we transition the systems in the U.S. As we continue to ramp up, the mix will play a significant role. We feel comfortable with the guidance we've provided. If TCI were not included, we would likely be at the higher end of our guidance. With TCI factored in, we anticipate being around the midrange of the guidance. Michael or Tarang, do you have any additional insights?

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 seeing any changes in demand at this time. I generally have a more cautious market outlook, but our activities at Farnborough focused on meetings with major OEMs, as our model is heavily centered around them. There are still many strong opportunities for us, including back shop work for MROs and various distribution prospects. However, as of now, there are no noticeable impacts or changes.

Okay. Perfect. And just finally, could you provide more details on the expected free cash generation in the second half and what to anticipate for the full year?

We expect to generate strong cash flow in the second half of the year. Our cash for the year has been affected by the sale of FDS, divestiture-related costs, and the revenue declines in the Fleet. Additionally, we experienced new program execution issues in the first half of the year. Overall, we are on track to generate free cash flow and we anticipate this in the latter half of the year.

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 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 owned them. I mean, you follow the 10-Q, you'll see that it's closer to the $20 million to $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?

It's really important to focus on the year-over-year comparisons instead of the sequential ones. There is a seasonal aspect to consider in the markets. Additionally, we anticipate a more conservative third quarter for Desser due to the upcoming system integration in the U.S., which begins in about 10 days. This will involve six weeks of integration work, during which we will see a revenue impact as we integrate, but ultimately, it will lead to positive outcomes and synergies by the end of the year. Therefore, there isn't anything significant to interpret regarding quarter-over-quarter and year-over-year perspectives. We remain confident in achieving growth despite the 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.

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 and '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 this 14% organic growth, it's a very sizable spread relative to industry growth. Do you have confidence that you can maintain that spread?

I won't claim that every quarter will show the same level of organic growth. It really depends on how programs develop. We will continue to provide as much clarity and guidance as possible as we secure new business. You can see the transparency we provide regarding winning new contracts, any upfront costs involved in executing that business, and when the related revenue and earnings will begin to impact the financial statements. It's difficult to provide a general answer since each program is implemented and executed in its own way.

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, there are three main factors. First, we have the Honeywell Fuel Control and the higher initial inventory, and as we burn down this inventory while producing at a lower cost, we will see an improvement in margins. Second, as the business continues to grow, we are optimizing our operational costs, and the decline in SG&A as a percentage of sales will create additional margin opportunities. Lastly, we are beginning integration activities towards the end of this year and into 2025, which will lead to synergies that contribute to margin growth.

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. The first few sites that launched did so in the first quarter. We have observed that these sites reached their lowest point, and we are beginning to see a recovery, but none of the sites that have gone live have returned to the revenue levels they had before launching. This is why we provided guidance indicating a V-shaped recovery for postal services, anticipating that the remaining sites will go live this quarter. We expect to see a decline in revenue and earnings this quarter, followed by a gradual increase in the fourth quarter and 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. Each deal has a different financial model. Some deals involve full integration, and the synergies come from cost reductions. That's not the case with TCI. TCI is focused on expanding and growing the business due to significant market potential. We also see opportunities to improve margins at the product or service level. Our typical approach in the first 90 days is to observe and learn, especially since this is a top-tier asset. We want to ensure we are comfortable before implementing any plans. By the end of the year and into 2025, you will see us concentrating more on growth and capacity expansion plans. As we launch new programs, we'll be able to discuss margin expansion in more detail.

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. Desser's integration is complex because it was a standalone business, with two MRO shops operating under different systems and legal entities, along with three distribution businesses that functioned independently. We are now working to consolidate these operations, which feels like managing five smaller integrations. Additionally, their product mix includes more commoditized items, which presents many customer interaction points. We are improving our e-commerce platform and plan to launch a new site in the third and fourth quarters of this year. You will see the U.S. distribution integration progress for the rest of this year, followed by the integration of MRO systems and processes next year. We've already completed the integration of HR functions, payroll, benefits, and organizational structures, so now our focus is on systems and market strategies.

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.

The next question comes from Josh Sullivan from Benchmark.

Regarding the changeover at the post office, how do the metrics from this cycle compare to your historical experience during similar actions by the USPS?

It's a good question. I want to be very cautious because we are comfortable with our guidance. At this point, we don't see any additional opportunity beyond what we have projected, but we are tracking similarly. The difference from what we observed in the past is that we had pent-up demand which released at a specific time. We haven't seen that yet. Aside from the V-shaped decline and recovery we are experiencing, we do not have any indication that pent-up demand will generate any revenue. Looking ahead to 2024 and possibly 2025, we will address these issues, but for now, there is nothing to report.

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 timelines? And then what's been the inbound from engine OEMs since you took ownership?

Certainly. I'll address the second question first. This is an exceptional business with robust relationships focused on original equipment manufacturers, especially regarding their maintenance, repair, and overhaul needs for both commercial and military engines. There has been significant interest from our OEM partners about how we can scale and increase our capacity to take on more of this back shop work. As a publicly traded company, we provide substantial stability to major OEMs, who plan not just for the next year but also for three to five years, and sometimes even longer. The discussions we had at the Farnborough Airshow were largely focused on these OEM relationships. Concerning capacity, we have some options for quick expansions based on our existing capabilities. However, for the next phase of growth with these OEMs, we need to clarify what that will entail, whether it's developing new capabilities or expanding adjacent ones. At this stage, I cannot specify how quickly we can translate these ideas into revenue and earnings, so I would ask for another quarter or two before we can provide more insight.

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, it is important to us. I've been with the company for five years, and our initial approach was almost against e-commerce, which might seem unusual given most market trends. We aimed to create many touch points within our customer base, enhancing our service capabilities and the technical expertise of our sales teams. Now we have reached a level of stability where we believe the next step for growth and customer support is to develop a semi-customized e-commerce site tailored to the products and services we offer. I'm excited to launch that site and will share it with you once it's live so you can see how it compares to others and where we stand out. As we introduce more commoditized products—keeping in mind that over 85% of our offerings are exclusive—it also presents us with an opportunity to broaden our sales channels.

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 on 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.

You've mentioned the distribution deals and that you've secured just over $1 billion, at least publicly announced, since 2023. How have those been progressing? What expectations do you have for their growth over the next 12 to 18 months?

Go ahead.

I just wanted to add that I understand this isn't all new work; some of it is expansion and some is renewed work. Considering your aftermarket OEM split, if we anticipate a weaker aftermarket, how will that impact your ramp-up or your margins, taking into account operating leverage and any other factors?

Yes, from a ramping perspective, some of the programs are fully ramped, while others are partially ramped. By the end of this year and into the first quarter of 2025, most of what we have announced should be relatively fully ramped. Specifically, the Honeywell Fuel Control program, which is not just a distribution program, will ramp throughout 2025, but everything else should be fully ramped by the first quarter. In terms of product mix, we are essentially 99% aftermarket, supporting commercial, business, and general aviation. We closely monitor demand in those markets. Additionally, most of our products are exclusive and tend to be on the expensive side, which means there is limited inventory in the market for what we are selling. For our commoditized products, the situation is different, but regarding our exclusive products, the market is tight regarding inventory levels at airlines, MROs, or FBOs. Therefore, we believe we have good control over our working capital and inventory spending.

Yes. The only thing I would add is that our guidance is incorporated into the mix and ramp dynamics that John just mentioned. That's why we're maintaining our position.

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?

I will address your Honeywell inventory question. We are indeed on track with the conversion rate we previously mentioned, which involves about a year’s worth of inventory that we built up. This ramp-up is ongoing, and as we work through the current inventory, we will begin to build up stock under the new agreement. Regarding the days sales outstanding and how inventory affects it, this is influenced by the launch of new programs in Europe and the decline in fleet revenue, which is presenting some challenges at the moment. However, as John pointed out, we have a plan for recovery that we expect will materialize for USPS in the latter half of the year.

Yes. Regarding Honeywell Fuel Control, we do not disclose specific inventory levels for each program. However, we expect to use up higher-cost inventory and replenish lower-cost inventory by the end of 2025. Overall, we anticipate a 24-month process for depleting old inventory and building new stock. If demand allows, we could expedite this timeframe, depending on the demand profile for 2025 and our ability to source parts.

Could you clarify if winning a deal like the Pratt & Whitney agreement, which represents geographical expansion along with the operation of your Germany facility, should positively impact margins due to the operating leverage you mentioned 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 a $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.