Good day and welcome to the VSE Corporation Third 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’d 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 third quarter 2024 results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John.

Good morning. Thank you, Michael, and thank you for being a part of today's third quarter conference call. This morning, I would like to first officially welcome Adam, our new Chief Financial Officer, to his first VSE earnings call. Adam joined VSE in early September and has already made a significant impact, providing valuable support for the recently completed equity raise and the negotiation and signing of the Kellstrom acquisition. Adam, it's great to have you as my partner and welcome to the team. I'd like to begin my prepared remarks by discussing the current market environment for our Aviation segment, followed by an update on our progress to date on our 2024 strategic priorities. The Aviation segment now supports more than 70% of total company revenues. Those revenues are derived from both the commercial and business and general aviation aftermarket. In the third quarter of 2024, global demand in the commercial aerospace aftermarket remained at near-record levels, driven by high passenger traffic. The market is navigating declining OEM production rates and ongoing supply chain disruptions, which continued to hinder the availability of new aircraft. The shortage of new aircraft is a significant obstacle for airlines looking to increase capacity and retire less efficient, older aircraft. As a result, airlines are extending the operational life of existing fleets, which continue to fuel demand for aftermarket parts and maintenance services. The business in general aviation aftermarket is also operating near historic highs and has entered a period of stability compared to previous cycles. Private air travel sentiment remains robust. In summary, we expect strong demand in the commercial aftermarket with near double-digit revenue growth to continue into 2025, supported by high passenger volumes, OEM production challenges and an aging global fleet. The outlook for business and general aviation also remains positive with more stable low to mid-single-digit growth into 2025. Let's now move to slide 3, where I'll provide an update on our strategic priorities. Let's begin with our recently announced acquisition of Kellstrom Aerospace. Last month, we announced that we entered into a definitive agreement to acquire Kellstrom Aerospace, a leading full-service aftermarket solutions provider of value-added distribution and technical services for the commercial aftermarket. Kellstrom is a strong strategic fit and aligned with VSE's core strategic focus areas. First, Kellstrom increases VSE Aviation's customer base and market exposure to the commercial aerospace aftermarket with a focus on engines. Second, Kellstrom expands our distribution products and aftermarket service offerings. Third, Kellstrom aligns with VSE's core OEM-centric strategy with over 95% of Kellstrom distribution revenue being generated from exclusive long-term relationships with marquee aerospace OEMs. Fourth, Kellstrom expands our international reach. Kellstrom operates across 75 countries and approximately half of revenue is generated outside of North America. And finally, the acquisition presents significant synergies with a planned integration. Kellstrom generated approximately $175 million of revenue and approximately $20 million of adjusted EBITDA for the trailing 12-month period ended September 2024. We expect to generate run rate synergies of approximately $4 million within 18 months of close and are confident that we will be able to deliver greater than 15% EBITDA margins for the business as we integrate and optimize the businesses together. The total consideration for the acquisition is $200 million, comprised of $185 million in cash and approximately $15 million of common shares of the company, subject to working capital adjustments. The acquisition is expected to close in December. I would now like to provide an update on our 2024 strategic priorities for our two segments, beginning with Aviation. Our European distribution expansion initially supported by the Pratt & Whitney Canada, Europe, Middle East and Africa aftermarket product support program is ahead of schedule and remains on pace to reach a full year run rate by the end of the fourth quarter. We have begun expanding our product line offerings in Europe with plans to support additional product lines in the near future. Next, the financial performance and implementation of our OEM-licensed Fuel Control Manufacturing program continues to outpace expectations. The implementation of the manufacturing capabilities supporting the launch of this new program, are expected to continue into 2025. The integration of the Desser acquisition, US distribution business, which included integrating systems, processes, organization and branding, was completed in the third quarter. Supporting this integration, we launched a new e-commerce platform, shop.vseaviation.com, where all legacy Desser products including tires, retreads, tubes and batteries are now available for purchase. Finally, following the acquisition of Turbine Controls in April 2024, we remain focused on adding incremental capacity and increasing our scope with existing OEM partners before integrating the business. The performance for this business remains well ahead of our expectations. Moving now to our Fleet segment. During the third quarter, the United States Postal Service completed the implementation of its new Fleet Management Information System with all 307 vehicle maintenance facilities now live. Following this system implementation and beginning this quarter, we expect to see a gradual increase of repair activity and subsequently, an increase in the usage of our parks and we remain committed to supporting the USPS through this period of transition. Within our commercial sales channel, we are focused on scaling our e-commerce fulfillment facility, diversifying our customer and supplier base and adding new products and brands to our portfolio. Fleet segment's strategic review remains in process and we will provide an update in the near future as the USPS revenue continues to stabilize. Corporate level, we completed a very successful follow-on offering of approximately 2 million shares at $87 per share in October 2024. The net proceeds from the offering will be used to fund a portion of the cash consideration for the acquisition of Kellstrom Aerospace. The remaining balance will be funded through the revolver. Now, let's move to Slide 4, where I will provide an update on our business segment Q3 performance. In the third quarter, we delivered both record revenue and record profitability for our Aviation segment, driven by a 34% increase in aviation sales in the quarter. Our Aviation segment balanced revenue growth was driven by strong execution on new and existing distribution programs and expanded portfolio of MRO capabilities and contributions from the TCI acquisition. The Aviation segment also reported record profitability, driven by balanced contributions from new distribution programs, the optimization of existing distribution programs, MRO market share gains, and our new OEM licensed manufacturing programs and contributions from the TCI acquisition. During the third quarter, fleet segment revenue declined 11%. USPS revenue declined as forecasted due to the final phase of implementation of a new fleet management information system. The conversion of their facilities to this new ERP platform resulted in a temporary slowdown in maintenance-related activities and parts usage, with recovery anticipated to begin this quarter. The USPS revenue decline was offset by 20% organic growth from the fleet's e-commerce fulfillment business 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 Adam 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 will provide an overview of our third quarter financial performance. VSE generated $274 million of revenue in the quarter, an increase of 18%, led by a 34% increase in Aviation revenue partially offset by an 11% decline in Fleet revenue. Adjusted EBITDA of $33 million increased 3% compared to the third quarter of 2023. Aviation drove this growth, up $7 million compared to the same period in the prior year, partially offset by a $5 million decline in adjusted EBITDA per fleet. Adjusted net income was $13 million and adjusted diluted earnings per share was $0.71 per share. Now, turning to Slide 7, where we will review our Aviation segment's record third quarter results in more detail. Aviation revenue increased 34% to a record $204 million as compared to the third quarter of 2023, both distribution and MRO businesses were strong contributors up 12% and 86%, respectively. The 12% increase in distribution revenue was driven by strong execution of existing OEM programs and the ramp of new OEM programs. This growth rate remains above market on a blended basis as the business and general aviation distribution market is growing at mid-single-digits, and the commercial aerospace distribution market is growing at low double-digit growth rate. Our MRO revenue grew by 86% in the quarter, driven by the expansion of new repair capabilities, market share gains, improved throughput across our MRO facilities and contributions from the TCI acquisition. Excluding contributions from the TCI acquisition, MRO revenue increased organically approximately 17% in the quarter. Aviation adjusted EBITDA increased by 29% in the quarter to a record $33 million. The increase in adjusted EBITDA was driven by scaling of new distribution programs, strong performance from existing distribution programs, an increase in MRO activity and contributions from TCI and our newly launched OEM licensed fuel control manufacturing program. Aviation's near record adjusted EBITDA margin of 16% was negatively impacted by lower margin TCI contributions. We are increasing our full year 2024 revenue growth range from 34% to 38% to 39% to 41%. Revenue contributions from the Kellstrom acquisition, which is expected to close in the fourth quarter of 2024 are not included in our updated guidance. We are also maintaining our adjusted EBITDA margin guidance of 15.5% to 16.5%, respectively. As John mentioned earlier, we are very excited about our recently announced acquisition of Kellstrom Aerospace. The acquisition is strongly aligned with VSE Aviation's distribution business and highly complementary to our recent TCI acquisition focused on the commercial engine aftermarket. The combination of the two businesses is expected to yield significant sales and operating synergies, better positioning VSE in the global aviation aftermarket. Now turning to Slide 8 for our Fleet segment's third quarter results. In the third quarter, Fleet segment revenue declined 11% to $70 million, driven by lower USPS revenue, partially offset by e-commerce fulfillment and commercial fleet sales growth. Commercial revenue was $45 million in the third quarter, an increase of 20% compared to the prior year. Commercial revenue represents 64% of total Fleet segment sales compared to 47% in the prior year period. USPS revenue, which is included within our other government channel, declined approximately 40% compared to the third quarter of last year, which was at the lower end of our previously provided guidance range. We expect to see USPS sales begin to recover in the fourth quarter, resulting in a 30% to 35% decline for the full year. Moving on to fleet profitability. Segment adjusted EBITDA decreased 59% to $4 million, driven by the decline in USPS sales volume. Fleet's adjusted EBITDA margin was 5.4% for the third quarter. For the full year 2024, we are lowering our Fleet segment revenue growth range from 0% to 5% to a decline of 5% to 10% compared to the prior year based on actual revenue to date and planned customer growth in the fourth quarter. We remain confident in our ability to support USPS revenue recovery and continued above-market growth within our Commercial business segment in the fourth quarter and continued into 2025. With respect to fleet adjusted EBITDA, we are maintaining the previously provided margin range of 6% to 8%. Turning to Slide 9. In the third quarter, we generated $10 million of operating cash flow and $4 million of free cash flow, driven by disciplined working capital management and strong operating results. At the end of the quarter, our total net debt outstanding was $442 million. Adjusted net leverage, which includes the trailing 12-month results from prior acquisitions, was 3.3 times. Following our recently completed equity raise, which has temporarily reduced our adjusted net leverage ratio to 2.1 times, and the planned completion of the Kellstrom acquisition in the fourth quarter we anticipate our third quarter 2024 adjusted net leverage ratio to improve to approximately 3 times. Our adjusted net leverage is expected to further improve in the fourth quarter driven by stronger free cash flow conversion on adjusted EBITDA basis in the fourth quarter as compared to the third quarter of 2024. With that, I will turn it back over to John.

Thank you, Adam. I would like to conclude our prepared remarks by recapping our 2024 priorities on slide 10. It's been a busy year at VSE. We divested all non-core federal and defense assets, acquired two market-leading commercial aftermarket engine-focused businesses, expanded our footprint and won and implemented significant new business. Let's begin with our Aviation segment. First, our Pratt & Whitney Europe, Middle East and Africa program implementation is ahead of schedule, and we have introduced new product lines in our new Homburg, Germany distribution center. We will finalize these implementations before year-end as we continue to position the facility to support additional product lines in the near future. Second, our OEM licensed fuel control manufacturing program launch continues to outpace expectations. The implementation of the manufacturing capabilities supporting this program are expected to continue into 2025. Third, the integration of the Desser acquisition, US distribution business was completed during the third quarter. The remaining business integrations are expected to be completed within the next year. Supporting these integrations we launched a new e-commerce platform. We will continue to optimize this platform in the quarter ahead. Fourth, we remain focused on adding incremental capacity and expanding turbine controls partnerships with existing customers and OEM partners, while working through our integration plan. And fifth, we expect to complete the acquisition of Kellstrom Aerospace in December and look forward to begin integration activities in the first quarter of 2025. Moving now to our fleet segment. First, leadership transition will lead the priorities for the fourth quarter. As reported earlier this year, Chad Wheeler, Group President of the Fleet segment is transitioning from his leadership role this month to a consultant. Chad will support with the transition over the next 12 months. I would personally like to thank Chad for his incredible partnership and countless accomplishments achieved over a 33-year tenure with the company. Next, we remain focused on scaling our new distribution and e-commerce fulfillment center, including adding new e-commerce channels and exclusive brands. Third, we will continue to support all USPS vehicle types, including legacy and new vehicles, while managing through the temporary disruption in activity brought on by their new system conversion. Fourth, we remain focused on our organic growth and customer diversification within our commercial fleet businesses as we look to add partners, products and exclusive offerings. In summary, we continue to make significant progress on our aviation operating priorities and remain focused on delivering another year of year-over-year revenue growth and improved profitability. Within fleet, we remain committed to scaling our commercial fleet business and managing through the near-term and temporary challenges within the USPS. We are focused on generating much stronger free cash flow in the fourth quarter as compared to the third quarter of 2024. I would like to conclude by thanking the VSE team for all they do daily to support our stakeholders, where we are building a recognized industry brand and it is all the result of our outstanding teams around the globe and how they support their customer and supplier partners and each other each and every day. Operator, we are now ready for the question-and-answer portion of the call.

Thank you. We will now begin the question-and-answer session. Our first question comes from Sheila Kahyaoglu from Jefferies. Please go ahead.

Thanks. Good morning, guys and great quarter and welcome on. Maybe, John, for you, let's talk about aviation growth, just another phenomenal quarter, up 13% organically. How much of the guidance range would you say comes from organic outperformance versus better contribution from TCI that you're seeing running ahead of plans?

The wait, so the third. Good morning, Sheila. So the 13% was excluding TCI, correct?

Correct.

Yes, the 13% is excluding TCI. TCI experienced outstanding growth this quarter. I just wanted to confirm that I understood your question.

Perfect. So what's driving that aviation up….

What’s driving it. Yes, it's interesting that there is higher growth in MRO than in distribution. I was really pleased with the growth rate because, as you know, we operate in general aviation and commercial, and that business aviation market is stabilizing nicely around mid single digits right now. Overall, when we examine our above-market growth, it represents a strong performance in our specific markets. Our growth is indeed greater in the MRO side compared to distribution, but it was fairly balanced. We received contributions from nearly all of our major programs, saw some nice share of wallet gains, expanded some of our capabilities on the MRO side, and achieved several new smaller business wins that are performing better than we anticipated. It’s a great balanced quarter, so there isn’t just one factor driving it, which is the best scenario we could hope for.

Okay. Maybe that brings to my second question. And John, since it was pretty balanced distribution up fall, so neck and neck in terms of organic growth. Maybe how do you think about the exit rate as we exit the year underlying market for MRO versus distribution? And maybe share gains like you had given the wins you have. How do we think about that as we exit the year and into 2025?

Yes, as we approach 2025, we feel very confident overall. We've stated that we will continue to exceed market growth and achieve double-digit organic growth next year. This does take into account a moderation in the general aviation sector, which is expected to grow between 4% and 6%. However, we are still optimistic about our growth trajectory for next year, given the market share we have gained and the potential that has yet to be realized.

Okay. Thank you.

Thanks, Sheila.

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

Hey, John and Adam and Michael, good morning. Maybe, John, looking at the growth you're seeing within your end markets within Aviation, how much for the industry do you think distribution is taking share as a part of overall parts sales into the aftermarket?

Yes, I think it's a great question. I think on a personal level, I think I've shared with you a number of times, Ken. I think the market is growing a little slower on the distribution side than what you see in totality. I think many of us have been gaining share over the last number of years and we're starting to realize those gains. So I think that on the commercial side, you're really looking at kind of mid to high single digits. And I think on the business and general aviation side, it's like mid single digits in terms of where I think the market is and then the rest is us outperforming that market with share gains and kind of share of wallet expansion and the like with our existing OEMs and our existing product lines.

Okay. That's helpful. And as we look into 2025, can I appreciate the commentary on the top line. Maybe without getting specific in terms of margin expectations, maybe you can just walk through a couple of the maybe moving pieces as we think about Aviation segment margins next year and how they could look compared to 2024?

Yes. I think we have some work to do internally on how to present it because we obviously have a $200 million business coming on board in the fourth quarter, that's at a lower margin percentage, so how we kind of share both the impact of TCI and Kellstrom next year, to give investors and yourselves confidence that our kind of core business and integrated assets that that margin has kind of stabilized, let's say, 16 plus. And then you're going to see an impact on that TCI and Kellstrom until we start integrating. We will start integrating pretty quickly, but we need to find the right way to demonstrate that because you've got some puts and takes. But I'd say if you do the math that way, you can get a feel of the core organic business. And the biggest driver of margin improvement there is going to be the Honeywell Fuel Control program and that implementation. And then you've got those other two businesses, which is on a margin percentage is slightly dilutive, but there's integration and other activities that will happen throughout 2025 to put them in a stronger position as we get into the end of the year.

Okay. Very helpful. As we evaluate the core organic business, excluding the fuel control or licensing EBITDA contribution next year, we should anticipate that the base MRO and distribution business will experience margin expansion at the levels seen in 2024.

Right, that's what they look at it?

I would say based on what we said, Ken, going back to November of 2023 on our guidance that we provided, the initial increase in 2025 over 2024 was related to the implementation of the fuel control program. So we've been able to take some of those benefits upfront in 2025, but we see incremental benefits in 2025 as well as we fully build out those capabilities and burn off that higher cost inventory.

Okay. Perfect. Thanks, Michael. Thanks, John and Adam.

Thanks.

Thanks, Ken.

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

Hey, good morning guys. Nice results. Thanks for taking...

Good morning, Mike.

Good morning. Thank you for taking my question. I would like to focus on the topic of market share and growth. Are you gaining market share or finding opportunities specifically related to Boeing Global Services? Additionally, regarding the MRO side, there appears to be a significant capacity shortage, with established players increasing their capacity. Do these factors influence your growth moving forward?

Yes. I mean, Mike, you look to ask the competitive question. So I think about how much I want to share publicly. But I would say there's three real areas of growth for us. Number one is we're very OEM-centric and what we do. And as our model is starting to resonate with OEMs, the OEMs are coming to us, and we're having strategic conversations of, hey, here's work I'm doing today that I don't want to do or I shouldn't be doing or I need to find another solution for. And we're winning a lot of work that way. So that's work that's not competitively been in the market. My competition is not running after that work. And it's not kind of in the market today, it's being done by the OEM. The second group is definitely traditional share gain, and you are thinking of the largest player out there specifically in terms of distribution. And I think many of us in the market are looking at opportunities to gain share against that large player. And you are correct on the third, we saw really strong growth in our MRO businesses in the third quarter, including TCI. And it's really a function of creating capacity. So we’re really doing a lot of capacity planning, looking at different shifts, looking at how we manage our shop floor because opening up that capacity in and of itself is what's driving the revenue. Turnaround time continues to be the most significant kind of differentiator in the market in terms of MRO ability to win new business.

Got it. That's helpful. And what about pricing? Is there any pricing contribution to kind of your growth or above market growth? Are you able to get price? I mean, obviously, yes, turn times and able to win business. But are you seeing price across distribution and MRO?

Yes. We consider both price and volume when assessing growth, as price affects volume. Since I joined the company during the COVID period and the subsequent recovery, I've noticed that price had a more significant influence than in previous cycles. It seems to be stabilizing now and remains a factor in the overall growth rate, but it is definitely less impactful than it was two years ago.

Perfect. Thanks, guys. I’ll turn back in the queue, John.

The next question comes from Jeff Van Sinderen from B. Riley Securities. Please go ahead.

Hi. Good morning, everyone. I wanted to follow up on the fuel control business. Could you remind us what is driving that segment to perform better than expected? Additionally, based on the current run rate of the fuel control business, when do you anticipate depleting the high-cost inventory?

Yes, you already addressed the question. The focus is on reducing the inventory. The model is quite straightforward, and it depends on how quickly the supply chain can bring in new inventory at the new cost and how quickly we can sell either complete units, partial units, or kits at the old cost. This is crucial for determining improvements. It’s a combination of factors. The market is strong, but the supply chain is the key driver. Even if I have 80% of the parts, I can’t ship a full unit without 100% of the parts. Strengthening the supply chain and obtaining all necessary products will help us assemble complete units, which will effectively reduce the legacy inventory. Our forecasts extend to 2025, and we are slightly ahead of our plan. I don’t anticipate any significant changes moving forward.

Okay. That's helpful. And then with the overall growth of your MRO business, can you touch on the current margins there that you're achieving? And then maybe speak to opportunities to potentially increase the margin rate as MRO scales further?

We don't provide detailed margin breakdowns by sector. However, I can share that our margins vary across our portfolio for various reasons. On a total EBITDA basis or within the aviation maintenance, repair, and operations segment, we have a general manager in each shop, and I would say we've seen income margins improve. This improvement comes from better supply chain management, increased efficiency in the shops, and improved labor management. These enhancements are part of our ongoing commitment to continuous improvement in those areas. Thus, it's not just a one-time change; it's due to multiple contributing factors.

Okay. Great. That's helpful. And then I guess, just any other color. I realize it's still early and you haven't even closed the acquisition yet, but just thinking about 2025 with Kellstrom realize you still have integration to go. But I guess any thoughts on how that the integration might proceed in 2025 kind of when you get through that, what the cadence might look like?

Yes. I mean they run their business in a few different business segments. So our next earnings calls about end of February, early March, we'll be in a position then to kind of walk you through the integration plan and kind of let you know what to expect. So we plan to look at it and integrate it kind of business segment by business segment. But I would tell you that at this point, it will probably go ahead of TCI. TCI, our work there is more about adding capacity in the shop floor, and it needs less kind of integration support. And we'll probably work on the customer integration piece first because it will drive some sales and other types of synergies that we want to realize as soon as possible. So we're actually meeting with the team today to kind of finalize how we feel about 2025 and put ourselves in a position to hit the ground running January 1.

Okay. Great. Thanks for taking my questions.

Thanks, Jeff.

The next question comes from Noah Levitz from William Blair. Please go ahead.

John, Adam and Michael, good morning. This is Noah on for Louie DiPalma. Thanks for taking my questions.

Hey, Noah. How are you doing?

Doing well. Thank you. To start off, you've acquired now both Turbine and Kellstrom, which serve the commercial engine aftermarket. Can you talk a little bit about what you're finding particularly attractive about the commercial engine aftermarket space as you're expanding beyond the business and general aviation side? And the $4 million in synergies, is that expected to be more cost synergies? Or will there be some revenue contribution as well? Thanks.

Yes. First, I’d like to discuss the market. Many public companies such as StandardAero and EPTIE have strong businesses that complement rather than compete with us, and their growth rates are impressive. The market is thriving due to several factors, including an aging fleet facing more unplanned repairs than expected because of decreased production rates at the OEMs, alongside new engine types entering the market. This shift allows OEMs to concentrate on newer engines, leading to increased work on legacy engines for third parties like us. These are the two primary reasons we find the market very appealing. Additionally, it’s a complex market where distribution and MRO play crucial roles and provide significant value. Regarding synergies, we see them coming from various sources. We have a strong core competency in integration and are confident in our ability to realize these synergies in the next 12 to 15 months, a timeframe we’ve publicly shared.

Thank you for your response. I have a follow-up question. Now that you've completed those secondary transactions and given yourself more flexibility with leverage, can you discuss your future plans for mergers and acquisitions? You've been quite active in this area this year. Is this still part of your strategy? Is there anything potentially in development? And would pursuing these acquisitions shift your focus from the new commercial engine aftermarket that you've been emphasizing recently? Thank you.

Yes, that's a great question. We've been active in acquisitions and will continue to be, though it's not essential to our strategy. This isn't simply about consolidating; we are enhancing our capabilities, customer base, and product offerings. We want to engage with the right opportunities that arise, especially since many assets remained untouched during COVID as they awaited market recovery. This year, several opportunities have emerged, and we've pursued two that align well with our strategic objectives. The key distinction between us and others is our commitment to fully integrating our acquisitions. As we look ahead to 2025, our focus will be on integrating and optimizing our businesses, ensuring our platform is prepared for the next stage of growth, both organic and through acquisitions. We always have potential M&A opportunities in the pipeline, but there are no immediate transactions pending. However, if an appealing opportunity presents itself, we will evaluate it. For now, our primary focus is on finalizing the acquisition of Kellstrom. We'll prioritize integrating Kellstrom first, expanding capabilities at PCI, and preparing for the growth and opportunities that lie ahead. If tuck-in acquisitions arise, that's great, but if they don't, we plan to maintain a strong balance sheet and aim to improve our free cash flow by the end of this year and into the next. We're committed to making our balance sheet more robust while concentrating on execution.

Great. Thank you. That’s all for me.

The next question comes from Josh Sullivan from Benchmark. Please go ahead.

Hey good morning. What's your sense of the overall aftermarket cycle at this point? The conversation around aftermarket versus OEM momentum is picking up, Boeing resolving the strike, supply chain slowly improving, but maybe not fast enough. What's your view of the aftermarket, both from demand side, as well as supply side as you guys are exposed at this point?

I believe the market is somewhat weaker than many perceive. I feel it is leaning more towards 10% on the commercial side rather than exceeding that. This is due to a number of factors, including ongoing capacity constraints and unresolved supply chain issues. It seems like each time one issue is addressed, another one arises. I see various factors at play here. Looking ahead to 2025 and into 2026, I don't expect build rates to return to historic levels, but rather I anticipate modest and steady growth in new aircraft build rates. Therefore, I think we have another couple of years of strong organic growth ahead of us.

And then maybe one on the fleet segment, just the post office operating system any different now with this new ERP in place, as it relates to your business historically?

This is to you, Michael.

Yeah. No, I would say from the new FMIS system our position with them is as strong as it has been. We are very much embedded within their supply chain. So it's a matter of just working with them, working through the kinks and the processes and helping them essentially repair these legacy but also the new vehicles that are coming into the installed base. So we continue to be here to support the USPS through this transition and we see positive results in terms of the vehicle maintenance facilities that had been moved to the new ERP system and have now begun to recover. Now that we've passed this point in time in terms of the completion, which happened during the third quarter, we should see a nice recovery into the fourth quarter. And that should extend into the first half into 2025.

I think it's important to mention that after meeting with the team last week, I find Europe's forecast quite accurate, even though it's a bit complex. At this stage, it's primarily a mathematical exercise. We have data from the initial sites that went live and their recovery progress. However, the system isn't the most efficient yet. Even for sites that launched a year ago, we're not seeing the same performance levels as before the system transition. The increase has been slow and gradual, and as we approach next year, the main question is where the recovery will stabilize. The fleet transition is likely around 85% of what it was at its peak.

Great. Thank you for the time.

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

Thank you, everybody, for making time for us today. I look forward to a strong finish to the year and speaking with you early in 2025. Have a great day.

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