Thank you, guys. We're going to continue our program here at the 47th Annual Aerospace and Defense Conference at TD Cowen. My name is Gautam Khanna, Research Analyst here at TD Cowen on Aerospace and Defense, and I'm very fortunate to have with me VSE Corporation's CEO John Cuomo and CFO Adam Cohn, right?
Yep.
I want to pronounce that right. Gentlemen, first I just wanted to give you a moment to maybe give your thoughts on PAG and kind of the transformation that the company's undergone and undergoing.
Yeah, first of all, thanks for having us. It's a great conference. Great to be here for our second year. Yeah, this is an exciting year for our business. You know, I've been with the company for six years. You know, my five-year transformation process took maybe a year longer because of COVID, but we essentially transitioned a kind of a sleepy defense contractor into a 100% commercial and business and general aviation aftermarket-focused business over the last five years. Took revenue in that segment from just under $150 million a year. We finished 2025 at just north of $1.1 billion and focused on the growth, you know, that will come from here. When we look at the kind of what we built, we just announced our largest and most transformational acquisition with PAG.
Essentially bringing the two businesses together puts us in a position where we'll have one of the largest MRO footprints in the globe, supporting commercial, business, and general aviation rotorcraft customers. Not only is it most extensive, but really kind of bespoke technical, unique products and capabilities that I think really sets us up for what we believe will be our next area of opportunity and our next chapter of both growth in terms of top line, but more importantly, I think, is ability to expand margins, hopefully in the next 24 months to north of 20% on a consolidated basis.
Can you talk about the genesis of the PAG deal? How did you come across them? How did this actually come together?
Yeah, I mean, it's a deal I've been working on for probably almost a year now. I mean, as far as the details of it, but really, you know, for years, investors would say to me, "What's your transformational kind of, you know, big deal out there?" And I said, "There's probably two, and this is one of the two." Knowing it was private equity-owned made me know that there would be an exit at some point. What we did was get ahead of a process. The asset probably would have come to market this year. So we put ourselves in a position of doing a lot of pre-diligence, spending time with both the CEO and the sponsor. Every time we spent time with them, we liked the asset more. Diligence became clearer and clearer. And we actually went in unsolicited with a bid in late summer.
They did run a mini process to kind of validate our bid, but felt great about the work we had done, tremendous amount of diligence, and put us in a solid position to, I think, create a win-win for both the sponsor and what the legacy of the PAG asset that they've done at such a great job building and bringing it into the VSE family.
Was PAG built via acquisition itself?
It was. It was really like built initially. It was kind of a scrappy business, very much like a broker solving problems for customers. And what I love about that is that DNA as a mature, you know, business still exists. But they did, you know, building these MRO businesses, you know, we've done a lot organically. You know, I think we've grown the business organically over my tenure, kind of in that 15% range on a compounded annual growth rate. But it's to really scale these businesses on the MRO side. M&A is a little bit easier in terms of time. I mean, some of these programs will take two or three years to stand up, you know, on an organic basis. And being able to buy the capability set and the technical know-how and then just scaling it from there has been really powerful for us.
Their model has been different but quite similar in terms of how they've grown the business.
So, I'm curious, like within PAG, how does it operate? How do the various sites operate synergistically with them?
Synergistically, I'd say we have probably a bigger, a more integrated model than they do. They integrate on the sales side that from a culture perspective, they operate very similar in how they connect inventory to the maintenance, repair, and overhaul sites. So, meaning, I would use an iPhone example. If your phone's broken, you bring it into the Apple Store and it's going to be three weeks to fix. They've got an exchange on hand to swap that out almost for everything that they repair, which is quite unique in the market. I think it's driving a lot of business towards them for people that don't have inventory or a backup part. And they have taken that model and no matter what business they've acquired, kind of adapted that model across the board. But I'd say they're probably less system integrated and process integrated than we are.
We do see some integration opportunities as we bring the business together. They run it like small individual P&Ls, and that's exactly how we run our business as well.
Okay. I'm curious now with PAG, once it closes, what is the like who do you compete against? Who are your big?
It depends on the market. So we've got kind of three verticals. Let's look at our kind of distribution vertical, new parts, and kind of USM. So that business, let's just say roughly, you know, $700 million, you know, of the portfolio. If you look at kind of 2020, you know, backwards looking, 2025 numbers, that business, you know, you're competing. We have a lot of large competition on the distribution side. You're, you know, Boeing and Airbus both have competitive businesses. You know, public companies like HEICO and AAR have competitive businesses. It's a few private equity-backed businesses as well. So you're really dealing with very well-capitalized, large distribution businesses.
When you look at the maintenance, repair, and overhaul, we've got really, you know, a number of capabilities on the engine, engine accessory and component side, avionics, kind of generic components like hydraulics, pneumatics, things like that, and wheel and brake. And I'd say it depends on the market segment of who we compete with. That one starts to get kind of granular. We're very OEM-centric. So a lot of our engine work, we're actually doing back shop works for the large OEMs. We kind of listen to our OEM partners. It's like, where do you want us to play? And we kind of flex there. And a lot of that is they want to control the end market. So we're supporting them with capabilities. A lot of the non-engine work, we're going direct to end users. And then we'll compete with kind of local shops.
We'll compete with large public companies as well. But I'd say on the business and general aviation side is where we have probably the biggest competitive moat. And on the rotorcraft side, where when you look at the combined VSE and PAG, when we go into an engine like the PT6 or a Rolls-Royce 250, or you're in a program like a PC-12 or a King Air, we're able to support one of those business and general aviation, either airframes or engines, I think, with more capabilities combined than anybody else in the market. And with that, we probably have a more competitive moat around that space than we do in the commercial market.
Interesting. And like you mentioned on the engine side, so the engine OEMs will outsource the work. You guys will bid on the work as a DER repair or what have you?
It depends. Sometimes it's DER. Sometimes it's fully authorized by them. We let them dictate the relationship. I think that one of the biggest differentiators that we bring to the market compared to our peers is, you know, I kind of use this somewhat data point, somewhat made up market data of like $150 billion total addressable market for distribution and MRO. And again, about $100 billion of that is the OEMs going direct. And then about $50 billion is me and my peers kind of battling for work. When I came into this business, I was like, well, how do I get the whole addressable market rather than just fighting for the $50 billion? And where we try to play is where do the OEMs not have the right partner? And what does the right partner mean?
They've got to monetize that aftermarket because they're not making a ton on the new build. So we need help in monetization. It's IP protection because they don't want to have a PMA part. And helping them monetize is giving them the ability to raise prices on an annual basis. And the third is managing that 10, 15, 20,000 end users, depending on their market, in a better way than they can. And so we built an entire model around, yes, we're independent, but for that OEM, how do we attract, you know, some of their business? And specifically with the engine OEMs, we found that they're coming to us more than we're coming to them and saying, hey, I'm stuck here or I'm doing this work direct and I can't manage this capability set.
How do I build out a long-term program with you because you're unique and you're not as competitive as your peers are? And we found that about, you know, we haven't been able to give precise data, but let's say north of 80% of our new business wins are actually coming direct from the OEM. They're not, you know, this big competitive battle that I'm competing with my peers on. So that's where someone like Pratt is working on, you know, GTF work. And they may sit down with me and say, great, we know what we want to do and we know where we need your help. Let's build out a 10-year program where you build the capacity and I'll run, you know, meaning Pratt will run the end users and we'll support into their, you know, West Hartford facility with back shop work.
That makes sense. What about parts? Like you mentioned on the distribution side, you're actually reselling parts. Is there any movement afoot to actually develop your own parts?
Yeah. So we have three kind of buckets of proprietary content of IP-related work in our business. We have number 1, we call our OEM solutions business. That's where we actually buy the IP from a large OEM. They're kind of done with something. It could be more end of life for them, 20 years left on a program, or they want to reallocate resources because they're not in that space anymore. And we have two programs today that we're active in that space, both on the PT6 engine. It's a fuel pump that came from Triumph and the fuel control that was formerly a Honeywell fuel control. And then we have our DER repair business, which that's where we're taking used serviceable material parts or PMA parts.
We have our own DER on staff and we are allowed, kind of oversimplification by the FAA, to issue our own tags and have an authorized repair. So we own that IP. Really, where we're utilizing that is where we're stuck with supply chain. So we try to make it as OEM-friendly as possible where it's like, hey, OEM X, you can't get the 1,000 parts you need to support new build and I need 200 of those parts to support your same your aftermarket customers, our collective aftermarket customers. Let you take all the new parts. Let me take some used serviceable material or an alternative solution. I'll create a repair and support there. And then the third is very, very small, is where we have a PMA business today. It's less than $10 million, honestly, of revenue today. But we see it as a growth area.
Again, it's really where we see supply chain constraints. We're not doing it to be competitive. We're doing it actually to be additive to our OEM partners to say, hey, again, you can't get these products. Let us get a contract manufacturer. And these are not the OEM's parts. These are not engine parts. So we don't do any of that or hot section parts. These are more kind of in the rounding, more consumables and expendables that have a proprietary content to them, maybe some seals, latches, bearings, things like that, where we can add some value in the supply chain to get them contract manufactured.
On the OEM parts, the two product lines that you mentioned, is that just opportunistic if they come about?
Yeah, it's hard to figure out that addressable market, right? Because it's where does the OEM say, hey, I want to raise my hand. I want to get rid of some IP and outsource something. For them, they're able to monetize something that they've already monetized in a great way. And now they can really get a one-time kind of big check for it. And for us, we get to own the end-to-end aftermarket. You know, we're in a position that's much stronger because, you know, we are, we take out the middleman, right? We've got the repair capability, the distribution capability. Now I own the IP. So we love it as well.
Right. Okay. But those are sort of episodic. You can't actually figure that out. Okay. It's funny because I remember when you took over as CEO years ago, you were trying to figure out you had this vision of becoming this all-inclusive aftermarket supplier in aerospace. Look out five years. How will the company be different post-PAG? Is it just more of the same?
Yeah, I think. So like when I got here, you know, I built a business that, you know, you know it well, a consumables business that Boeing acquired in 2018. And when I was there with Boeing and really working in that global services group, I saw what they did really, really well, but I also saw gaps in the aftermarket. And I realized that the Amazon model that we're used to of just going online and buying something and getting it in five minutes and that one-stop shop doesn't really work. That, you know, when you look at the aftermarket, things break and you need a new part, a used part, or some type of repair. And none of those things cohesively exist together. You go to this distributor for new parts. There's these USM players for used parts and these people repair things.
There was a gap in, hey, like all I know is something is broken. You as the service provider, tell me like what's most economical for me and how do I solve this the right way? I felt like that bringing those three together was going to be somewhat disruptive and unique to the end user. That's the impetus of the model. Then it was where are the capability sets that are super technical and that a generic part isn't just a part? You know, again, these OEMs need help and support in that $100 billion market. We built this very, very technical organization where, like if you come and get a site tour, I don't give the tour. We'll have whoever's working that day, I'll have given not only the shop tour, but I'll have talk about some of the OEM product lines.
You can get a feel for how embedded they are into that process and how much they know, you know, about that OEM product line. They know it many times better than the OEM does. And that's become the unique driver. So to me, the model will continue to be, I've got this like framework of these two distribution businesses, new and used parts. I've got these six big capability sets in my MRO, which can keep growing underneath them. And then I've got these three proprietary solutions. That will be the framework for the future. It's just what falls under there. And it's listening to my end users and listening to my OEMs and what fits and what doesn't fit.
Gotcha. That makes sense. You know, you have done a couple of deals also. Aero 3 was fairly recent. Vortex before that. Just in terms of integration, can we talk about how complicated this is? Are you bandwidth constrained? How do you know you can hit the synergies? You know, what should we be looking for?
Yeah. I mean, integration is something that I believe if you look at some of my peers and how they acquire businesses, they really don't integrate the assets. I mean, my last business was 18 companies. When we sold it to Boeing on one ERP system, one invoicing entity, it was one organization structure across 52 locations. And, you know, so you can be in any location and put up, you know, order a part and it can ship from anywhere to any customer. So that model is one that I, you know, built from, you know, in the long tenure that I spent at that business and I brought here as kind of a core competency. I'd say it's actually a little bit easier here because when I buy these businesses, they're businesses within businesses.
So I get to almost de-risk the integration and just integrate one MRO shop at a time rather than this like big light switch that I have to turn on in this one fell swoop. This business won't be as integrated as my last company. I see us on groups of core systems. Some of the MRO capabilities, the processes, you know, don't connect with maybe distribution. So let's just say over time, we'll have five or six kind of core ERP systems with a big ERP database that exists on top of it. And we're integrating under those so we don't ruin the secret sauce and the processes of what made these businesses special.
So, you know, but we very much believe that the end user gets a lot of value when there's one CAGE Code, when there's one invoice, and they can drive a stronger and more efficient supply chain. And so therefore the integration model, I know it's different than what most of my peers do, will continue to be part of the model. The synergies we shared with PAG really are more cost-type synergies. And we have a very good line of sight for them. I hope to be, you know, in the back end of this year, share kind of an update on how we're doing. And then with that also, here are more of the sales and kind of the things that are more opportunistic that I can kind of crystallize into some data.
By that point, I've got ideas, but I want to make sure I can kind of tick and tie them before I publicly share kind of a number out there, but feel really good about what we can do. I'd say we've got about 24 months of detailed work though on integration. And then what you can expect to see to be more specific is we're very clear on here's what's integrated. Kind of every quarter we'll kind of share what that looks like. And then, you know, I always say the answer is always in the margins, right? So as you're integrating, you should see the margin profile continue to shift upward on a consolidated basis.
How has customer reaction been thus far to the proposed combination?
Yeah. I mean, it's been quite positive. I've had probably about a dozen customer and supplier meetings myself. I think that there's, you know, people always get a little concerned when you get big that you don't lose the secret sauce. That's probably the thing that keeps me up at night is we're super nimble, we're super agile, we respond on a dime. I want to make sure that the way we structure with these many P&Ls doesn't change any of that. I'd say that's always the caution. I'd say the receptivity to what we're bringing and everyone sees the investments that we put in the assets that we acquire and the capability expansion that comes with that. There's a lot of excitement, enthusiasm around it.
I asked that question because you mentioned you're not going to give a sales synergy target anytime soon. But what kind of things could you envision conceptually?
I mean, you know, conceptually, there's a number of things. Number one is how much internal work we could do for each other. So meaning, you know, like I'll give an example. You mentioned earlier the Vortex acquisition. So the Vortex acquisition is a large commercial engine hospital shop business. So think about going to your primary care doctor and then your primary care saying, well, you should go to a specialist for your need. Now that specialist is making the money on, you know, when you go to them. We can be our own specialist, right? So as we're looking at that Vortex business and understanding the core things that we find at that, you know, shop visit, we're building those capabilities at my engine shop in Connecticut so we can insource and keep that margin in-house rather than outsourcing.
So the first thing I do when you look at the capability set of MRO shops we have is what can we keep in-house to drive existing margins upward? So it's less of a sales synergy than a profit synergy. The second thing is that you take that PT6 engine, you take a King Air. We're building out kind of what capability we have in proprietary solutions, repair, or products from a VSE perspective. Then you lay on the PAG perspective. We're going to be able to go into King Air operators and basically have a second to none category in terms of capability set. And when you look at the proprietary solutions, yeah, from our perspective, we're thrilled because they're higher margin because I own the IP.
But when you're talking about an old aircraft that you want to keep running for the next 10, 15 years, you know, getting a 10% price increase on everything every year gets hard. So if I'm able to lower or hold steady some price for them and get a little bit extra margin for myself, those create a tremendous amount of opportunities to bring more work in-house for us. So we see a lot of this platform by platform, capability by capability, expansion opportunities to go into these platform owners and just do a deeper dive where we may collectively have 20% of the business and hopefully we can build a path to double that.
It's fascinating. So is BGA a more attractive economic business to be in for you guys than large commercial air transport?
I mean, it's a great question because we're in a new cycle of that market that I think none of us know what happens five, 10 years from now, right? So, you know, like we've been in the business a long time and we've seen the cyclicality in that. That cyclicality is changing and that won't exist the way it existed in the past. That said, like what is the new norm? I don't know. We'll see. What we saw was a post-COVID boom and then a really nice. I'd rather have a 5%-6% growth rate for 10 years than these 15% growth rates because that usually means what comes up comes down a bit.
So what we've seen is a nice—it's a lower growth rate than commercial, but it's steady, it's consistent, it's kind of half price, half volume, and it's that mid- to upper single digits. And we see a very clear path for 2026 and probably 2027 to look quite similar. What I like about the model is that people need us more because you're dealing with if you look at business in general aviation, you've got from your, you know, G650 down to a small helicopter from, you know, a crop duster literally to, you know, a Lear 45 and everything in between. So it creates, you know, 15,000 end users. I can't count this number of platforms both on the engine and the airframe side. So we're able to dive deep and create these kind of competitive moats in terms of capability sets that I think are unique.
You also have OEMs that are less focused on some of the end user products and not making them anymore. So it gives us an opportunity where, again, being very OEM friendly, we can bring those proprietary solutions in. So we see it as an extremely attractive market for us to build this moat, to expand that IP at a faster pace than probably on the commercial side, which I love the commercial side, but you got all the big boys and girls.
That's what I was wondering. Yeah, that makes sense. On the distribution side, how do you attract OEMs to actually ask you guys to distribute?
Yeah. I mean, you know, I joke with my sales teams because I see their kind of probability of win rate. I actually knock it down. I'm like, you're not going to win all of that because not everybody, you know, respects what we bring to the table. We are a technical distribution business. So we track by minute, like when we put parts in a box and get it out the door. So the efficiency of the execution is super strong. Our quality and our operations teams in distribution are second to none. But that's not really what our competitive edge is. Our biggest competitive edge is that we will know that OEM product better than they have ever known it or any of their other suppliers. So about 80% of our products we are exclusive on. They're an OEM product.
Think of your large tier one, two, and three OEMs. We're supporting that product for their end users. We know when they need a new part, when they need an exchange, when they potentially need just a repair, when they're looking for a used part. We understand the competitive landscape in terms of PMA pressure or an alternative source and how do we protect their IP? Like we're looking at this on a detailed part by part. Every part has a story based on how do we really help this OEM protect that intellectual property while making that end user as happy as they can be? Because of that, we've got this product line strategy that's a little different, a little bit more expensive. With it, you know, it's not just a pick, pack, and ship.
We might not be everybody's favorite choice if that makes sense.
Yeah, it does. How many SKUs do you actually distribute at this point?
Active, you know, just about 50,000-55,000.
Okay. Wow. Is that kind of like the old KLX B/E model?
Not that we're at 1 million SKUs.
No, I get it. But in terms of like overnight availability.
Oh, yeah. You know, I have a lot of my team, you know, came from my our largest distribution center is in South Florida, a few miles from where my old business was. So Michael, who runs our operations, was an operations leader in my last business. So they're used to the flawless execution in terms of how we like to operate. And yes, you can expect that. I mean, I can share with you, I get the AOG report every day for every aircraft on the ground. Me and my COO look at it every morning. If we miss an aircraft on the ground part, we want to know why. And we dive into every detail. So we are working 24/7 and we have what we believe is industry leading service.
You know, you're used to, as consumers, going to Amazon and especially you live in a city like you get it same day or the next day. You know, unfortunately, aerospace doesn't work that way. We're trying to change that reputation. We're trying to let our end users know that we have the inventory and we can execute exactly the way I did in my last business, which is on a dime and, you know, with that level of precision.
In terms of supply chain or labor or whatever, are there any constraints that you're actually encountering in the business today that are?
Yeah. I mean, supply chains are like Whack-A-Mole. You fix one thing and the next one pops up. I mean, I've been in the industry since 2000. It's never worked. I mean, it's always been, there's always something that goes on. So I think it's just getting a lot more press lately. You know, but remember you're dealing with, you know, we talked about all the business in general aviation groups, including rotorcraft. And then you've got defense, you've got commercial, you've got space, you've got, you know, these eVTOL things now. Everyone's from a quality perspective, that barrier of entry for these manufacturers is quite high. And everyone's dealing with the same manufacturers on new build and on the aftermarket. So if somebody is growing, you know, you're pulling pressure and resources from someone else and there's always some kind of constraint.
It's my responsibility to understand that and to find alternatives around it, to know how to stock around it and the like. From a labor perspective, the highest end of the technical end, specifically servicing engine MRO, we're still. I would say there's still a labor shortage. And I'd say in totality, if the market had a little bit more labor, you'd even see growth rates move a little higher.
Okay. I was curious just at a high level, what is your visibility walking into a quarter?
Yeah, it's a great question. It's funny because, you know, you work in these aftermarket businesses for so long and, you know, you don't what's great is I can change price on a dime, but even my long-term contracts are PO to PO based. So, I mean, our, you know, we've got in many instances, most of our orders are shipping, you know, within one to three days. So there's not a lot of distribution backlog. And on the MRO side, it depends on the shop, on our wheel and brake shops. You know, we're turning wheels and brakes in under a week. In some of our engine shops, you've got 30-45 days depending on the criticality of, you know, of an engine part. So, but there's not, I would say there's not a lot of inherent backlog in our business.
Because of the proprietary content on distribution and because we have a strong element of proprietary content on, or not necessarily exclusive, but OEM authorized content on our repair shops, it does probably give us more visibility because more of our end users are not stocking parts and there's less competitive competition around some of my MRO capabilities. I tend to look at what are shop visits looking like for engines and airframe because those book out first and then using those, we can kind of extrapolate data to do our data, you know, analysis. It's not really like a firm contract.
How real-time is your actual information flow?
I mean, it's all, you know, we get a daily flash every day. But I mean, I could go in the system now and pull an order book in five seconds if I wanted to.
You would know like revenues today, what cost today, etc.
Because we're still integrating. So some of the systems, you know, there's still duplicate systems. Over time, it'll become simpler. So we have somebody aggregate the data each night as well.
Okay. That's good to know. Can we talk about the balance sheet? Because you just did an equity offering to help finance the deal. Adam, what's sort of the target leverage and what period of time do you think you can get there?
Yeah. So, yeah, we're in great shape from a balance sheet perspective. We saw the equity raise. You know, we should be, you know, well within our leverage parameters. We've said we want to operate under 3.5x leverage. So we feel, we feel very good about that. And I would say this proposed transaction will enhance our free cash flow profile as well. It's less working capital intensive than our legacy distribution business. Distribution could be more like 50% working capital to sales percentage. MRO is more, call it 25%-30% on the high end. So we should see the free cash flow profile continue to improve. We did say publicly too that we expect to be free cash flow positive in 2025. And so that's a big improvement if you look year-on-year for us.
Right.
We've given a pretty wide range in terms of the leverage profile because really, you know, we do a decent amount of M&A. So leverage could go up to 3.5 and then we, you know, we moved it down into the 2s pretty quickly. So that's why we've given a little bit of a wider range than probably others have in the past.
How, like post the PAG acquisition and the integration, which you said may last 24 months or what have you, how quickly would you be willing to do additional acquisitions if they come up?
I mean, there's a ton of little tuck-ins that we can do quickly. Like, you know, like if I buy a small MRO shop, I can get it integrated in like three months. I mean, so, you know, like we're going live on an integration next week. You know, again, we're looking at them in small bites. So there's a lot of this that's the interesting and the positive part about running these MRO businesses versus the distribution businesses; there's not a lot of inherent competition that I'm forced to go fast on integration. So if it takes me a little bit longer and they're running independently with some side systems, it's okay. So it doesn't inhibit the inorganic growth if the right assets are in market.
Okay. Gotcha. I wanted to open it up to questions from the audience if they have any because we're at time. Nothing. All right. Terrific. Well, thank you guys. I really appreciate it.
Thank you. Yeah, likewise, John.
Yeah. Thanks.
Thanks a lot.