VSE Corporation (VSEC) Earnings Call Transcript & Summary

Again, Jason Gursky from Citi, the firm's aerospace and defense analyst. Okay, I have the pleasure today of welcoming to the stage the leadership team of VSE Corp. CEO, CFO and how will we describe your job?

IR and Treasury.

IR and Treasury. I didn't want -- I knew that there was 2 parts to it. I just didn't want to leap off this -- the second part and it's a good combination of roles. I did that myself at one point, and that was a lot of fun. I'll let the 3 of you guys maybe introduce yourselves, if that's okay, and go through your background, how you got to the company. And yes, maybe we'll just start with that. Let's start with the biographical intros, and then we'll go into a little bit about the history of the company. So I'm not sure.

Sure. I'm John Cuomo, CEO. I've been here for about 5 years. I spent 18 years prior at a variety of roles in B/E Aerospace and KLX, which were 2 former publicly traded companies that have been sold to, back in the day, Collins and to Boeing. But really, most of my career was on the distribution side prior to this. I led KLX business once it spun off from B/E. There was a distribution business, about $1 billion of revenue that we grew to just under $2 billion, sold it to Boeing in 2018 for about $4.5 billion. So that's kind of where I got my sea legs in, growing in aviation services business and then came here to VSE, more of a fixer upper, and we'll talk more about that in a minute.

Adam Cohn, I'm the CFO at VSE. I'm the newcomer, so I've been here, call it, 5 or 6 months. Been in aerospace my entire career, started out more on the M&A investment banking side. And then I was at a publicly traded aerospace company called Triumph Group recently in the news for about 10 years. I left as a Treasurer and Company Officer, and then I was the CFO of a private equity-backed aerospace services company for a couple of years before coming here.

Michael Perlman, I lead Investor Relations and Treasury at VSE. Early in my career, I was in the office supply industry, a number of different financial disciplines, shifted over into the aerospace, was at the B/E Aerospace, KLX companies for about 10 years. Did something more entrepreneurial for the next 3. And then I've been here at VSE Corporation leading IR and Treasury for the last couple of years.

Okay. Great. I'm sure that there are plenty of people in the room that know the company, but there might be a few that don't. I think it might be beneficial to level set everybody in the room with a little bit of a history of the company?

Yes. I mean, it's a unique history. It's a 65-year-old publicly traded company, federal and defense business for majority of its life. I'm only the third leader in the company's history. First leader was all about kind of boom and bust in government outsourcing work. The second leader kind of like continued that model and then decided to diversify the business and create a very diversified industrials aftermarket business within automotive business and aviation business with a number of assets and a federal and defense business. None of which had any synergy to each other and a market cap only about $300-some-odd million. So when you look at the big players out there and Honeywell and GE separating, I came in here and said why are these businesses together? So this is very, very much all about a transformation story. So I go back to, as we sold the business yesterday, really sat back and looked at it like kind of my vision that I shared with the Board 5 years ago of what we were going to do with business, and it was basically to do what we did, which is build, find a unique spot in the aftermarket for aerospace that did not exist and take core assets of VSE and focus them that way. So sold all of our Federal and Defense businesses last year, announced yesterday that our fleet business, our automotive distribution business is sold, and we'll hopefully close on that early second quarter. And in the 5 years that I've been here, we've taken the aviation business and aftermarket from about $125 million, $135 million of revenue, if you look at run rate for the third quarter because we haven't released earnings yet, just about $1 billion of revenue. But most importantly, it's about the value proposition that we built in the aftermarket and that's all about -- you have large OEMs. Our goal is to be extremely friendly and OEM-centric. We look at their businesses and their business models. They need the aftermarket to work profitably and to service their customers to make sure that the model really works for them because they don't make money on the new build, if anything. So what we do is we don't reverse engineer. We are very supplier partner focused. And our goal is how do we help them monetize that in the aftermarket, whether it's with new repair capabilities, distribution capabilities or some other kind of technical services.

Okay. Great. With all of that being said, talk maybe a little bit about some of the core capabilities and the differentiators of the company. It sounds like the focus on the OEM customer and not really competing against them, but from a technical capability perspective, what do you view to be the company's kind of core moats?

Yes. I mean at the end of the day, when you live in a services business where you're fixing something in distributing products, the how you do what you do is so important and it's hard to crystallize those messages sometimes to investors. But because you look at a website with just a bunch of buzzwords. But it's really -- it's the execution. We had some investors in yesterday, so you have a lot of people in town this week, walking the floor. And it was interesting to have our supplier focused teams and our product line and MRO teams tell the story rather than me because that's the secret sauce in the business. So what we do is, if you think about your iPhone that's sitting next to me or some other type of product that is broken, when that product breaks, what do you need? Do you need it to be fixed? Do you just need parts on its own? Or do you need something used or something to exchange while it's in repair? And our goal is how do we bring those things together in a way that they've never been brought together before to support solving that customer problem. So we have capabilities on MRO maintenance repair and overhaul. We don't repair full engines, full aircraft or like large landing gears. Think of components and accessories. So highly technical things that touch the engine: fuel nozzle, fuel pump, rotating parts, hydraulics, pneumatics. Those types of things from major OEMs that you can think of, we're supporting them. And then we're distributing their products. And when I talk about OEM parts, think of intellectually property kind of IP-related parts. So how do we keep that IP up in the market so they can keep price up and avoid competition from kind of generic parts as well. That's the kind of the core competency. We're not everything to everybody. I describe it as you go to the fancy department store that really selects what designers they have and they know everything about them. We're much more of that model than kind of just a generic store that sells everything.

Okay. Talk a little bit about who your core customers are, your top 3 or 4 customers?

Yes. So we service both the business and general aviation market and the commercial market. So if you look at end-user customers, you're looking at the large business and general aviation end users and you think of the -- yes, like fractional ownership -- those type of people like fractional ownership, that's about what Michael? 40% of the market are fractionals today. So those are the larger end of the customers on the business aviation side. There's a huge tail as you think of private owners and private like fixed-base operators and small MRO shops. On the commercial side, our mix is very much in line with the size of the airline or MRO. So if you look at the largest of the carriers in the world and the largest MROs in the world, those are typically end to be our largest customers as well.

Right. And maybe give a little bit of color to those in the room on it. What exactly you're doing for them?

Yes. So when it comes to the end user, so you talk about leading with the OEM. So again, if you think about it in that department store model, you go into a department store now, they've got like the big brand there. So they know you're carrying that and you're a specialist in that. So these -- the end-user airline customers are coming to us knowing that we are, in most instances, exclusive. Probably about 85% of our product lines are exclusive to us. So they're coming to us knowing we are the place to go for that product and it's again solution oriented. "Hey, this is broken." Many of our products -- I don't know the percentages today with some of the acquisitions we've done, but many of our products are coming because something breaks, not because it's planned maintenance. And the question is not just can you fix it, but what is the right solution that's the cheapest, the most efficient? And how are we going to extend the life of our aircraft, keep things flying at the most cost effective price, and it's different each time. So sometimes it's a replacement part. Sometimes it's a used part. Sometimes it's the full maintenance repair and overhaul.

Okay. Do you guys count SKUs? Like is that kind of how you think about the business? Like you're...

It's funny. My last business, I did -- because I was everything to everybody. This business, I'm less concerned about SKU numbers and more concerned about the quality of the products and the technical capabilities that we have. So we're more narrow and deep than I'd say we are wide and broad.

Okay. So something's broken. Customer comes to you and they say, can you give me the parts to fix it or here, take it and fix it for me?

So it's a great question because the way the market has traditionally worked is a customer is going and say, "I know you can fix something, so fix it. Or I need parts and they went to another person to get the parts." Where we're trying to be different than in people that are in the market is we're saying, just tell us when something is broken, and we'll help you with the right solution. Because it depends on cycles in the product line, it depends on how fast you can turn -- turn time is really important in MRO, how fast we can turn the product and get it back to you, is there a used one on the shelf that might be a better solution? So our dream situation with end-user customers is they just call us when they have a problem and unplanned maintenance event and then we're solving the problem for them and with them depending on whatever criteria is most important to them. The traditional market does work in the other way. Phone breaks, send it into the person who come repair, and that's just what they do, but that might not always be the right solution.

Okay. And so are you then either co-located with your customers or nearby or have central distribution facilities? How does it all work?

Yes. So from a distribution perspective, we've got central distribution. We've got 3 in the U.S. We've got Europe, Asia and Australia. And those centers are more than sufficient to support the network that we have. From an MRO center, most of the things are size of a table or smaller. We've got some engine rotating parts that are a little larger. So most things can be overnighted to us. So we built our model rather than being a customer proximity, we built more centers of excellence with our -- we have 12 centers of excellence with MROs and each site becomes an expert. We won many Part 144 Topshop awards for the centers of excellence that we have, and that's kind of the model that we run.

Okay. Great. And let's see here, the partnerships that you have then with the OEMs themselves. Talk to us a little bit about the heritage there, where you have -- are you overweighted to one OEM or over another?

Yes. I mean if you look at kind of RTX in totality, I'd say they're probably our largest partner. There's a lot of diversification underneath that between Collins, Pratt U.S. and Pratt Canada. So again, we're supporting business in aviation and commercial. So we do both work. And they all operate relatively independently. So as a parent OEM, they are probably our largest OEM partner. But when you kind of get under the hood, there's a lot of diversification within those.

And when you say that you're exclusive in these -- in some of these situations, does that mean that you were literally the only one that has the part? Or can the OEM themselves ship it in as well?

It's a great question. Most of the time, literally because the OEM doesn't have the part. Some of the OEMs do have parts and they would only do -- because they're outsourcing the work to us, they don't have the infrastructure anymore to do it. But sometimes if there's a part that's shortage and they have one, they can obviously ship direct. But when we take over an exclusive program, they no longer have the infrastructure to do that work anyway.

Okay. Great. So let's see here. You mentioned RTX as being a big OEM for you. What about GE, Rolls, other Honeywell? Just kind of...

Yes. So in our engine MRO shops, we work with all -- again, we're very OEM-centric. So it's mostly back shop work that we're doing on our engine work. So think about the large OEMs have the relationship with their end users, and I know there are many out there that go compete with them. But for us, they're bringing in the engine, they're servicing the end user with an authorized repair and as they're tearing apart the engine, there's either components or accessories or rotating parts that need to be repaired, and we have centers of excellence that support them. So we are working with all of the engine manufacturers, Safran included to that list on MRO capabilities.

Okay. Great. So OEMs are very friendly towards you because you're exclusive. You're not doing PMA. So let's talk about then the competitive set. When you do go to compete for business, who do you typically bump up against?

Yes. I mean it depends on the market. In the business aviation market, it's, as you can imagine, it's a very fragmented market because it's a fragmented group of OEMs, if you think about Textron and Bombardier and Gulfstream and then the Rotorcraft market. I mean, they're all very unique aircraft to each other, and there's a lot of diversification there. So there are sometimes specialists in each of the areas or regional specialists as well. So on that side of the table, there's a lot of -- a lot more diversified competitors and you see less kind of larger competitors. When you're in the commercial space, when you're looking at MRO and distribution, you're competing against some large public companies and you've got the HEICOs and the [ AERs ] of the world. And then there are some large private businesses as well that we compete against, including Boeing and Airbus. They both have distribution businesses that support more than just their aircraft. So we are competing against some of the larger players out there. And as I tell my team, I have a slide, you got to kind of fight above your weight class sometimes.

And the Boeing capability, is that in part the KLX asset?

Well, it's more -- we don't really compete against the business that I ran, it's hard. When you run a business for 18 years, I want them to be successful in their world forever. So I mean more of a -- the competition we have is more with their legacy ABL business. That business is more kind of OEM-centric part distribution that we do today.

Okay. Great. One of the things that we hear frequently in the investment community is the dearth of MRO capacity out there. We've had some production challenges, I guess, on the new side. And airlines have struggled to get a hold of new lift. We've got some engines that are dealing with teething problems, and we've got quite a few AOGs. So we've talked to airlines and they're like, I got to run my older aircraft for a lot longer because I can't get a hold of new lift. So maybe just talk a little bit about what you're seeing in the market from supply-demand imbalances in the MRO. How much visibility do you all have going into any particular quarter or year? Kind of how your -- how do you forecast this business?

Yes. I mean there's a few questions kind of to unbundle in there. I think that -- I think that we are seeing the market is exactly right. It's been a robust market, and there's still a tremendous demand for our products and services in the market. I look at engine aftermarket being the largest still area of growth, commercial non-engine is second in kind of business and general aviation is third. But all 3 are growing markets. And in all 3, I can tell you specifically in my MRO shops, like there are 2 shops, one business in general aviation and one commercial shop that -- we've just expanded both facilities, and now we're working very aggressively on staffing up because the faster we can staff up, the market is there for us. So we are still seeing a pretty robust market. I've been in the industry now -- I was just updating my -- one of our filings and it's interesting to be 25 years in the market rather than not 20. But in 25 years, the supply chain has never worked. So I mean it's gotten more like buzz of press and stuff that people talk about it. But it's just -- if you think about it, you have a narrow group of suppliers, and there's always consolidation of things that happen. You have a tremendous barrier of entry because of quality and you have defense, business and general aviation, rotorcraft, commercial and now space, all like buying for the same OEMs to build parts. So there's always been a push and pull there. And that's why I believe strong -- well-capitalized, strong performing. We're very good at data. Aftermarket players really have a space in this market because we know how to work with these OEMs and how to manage getting product and supporting them the right way so that they can focus on delivering product to the aircraft OEMs, so they can still build airplanes. So we have not seen -- I'd say it's almost like a whack-a-mole. You fix some supply chain, 60-week, 80-week lead time parts start to come down, and then the next one pops up somewhere else. So for us, how we look at data is so important. How we look at history of data on a part number-by-part number basis and on a vendor-by-vendor basis of how they're performing in the market. And what they tell you they're going to deliver and what they actually deliver, that's what builds all the algorithms on a part-by-part basis until how we plan. I'd tell you, planning is 70% science, 30% art, like you still have to look at each part and understand the dynamics around it. So that's kind of on the supply side. On the actual customer demand side, it's not an easy situation because a lot of -- most of your data is backwards looking. You think about the aftermarket, you need something because you're fixing something at home and you don't have it. So you already needed it when you go to the store to buy it. So we have -- you would think that airlines and MROs, there is some element of proactive planning, but there's also a lot of reactive parts of the market as well. So I'd say that like for the majority of our business, we have a decent line of sight to give us a range in the forecast, but there's not a tremendous backlog in the business. And it's not like there's a tremendous -- like no one's buying capacity from us in those types of ways. So there is an element always of kind of risk and opportunity each year as you dive into business.

Yes, because you mentioned earlier that this is -- a good chunk of your business is break-fix. It's not statutory, checks coming in on it?

Correct.

So what percentage? Is it like 100%?

No, it's interesting. We were talking about this earlier. We're now with our new -- one of our new acquisitions. I would tell you it's probably in the 60-ish percent range, but that's kind of an estimate, 60%, 65-ish, and then 40% is more required maintenance.

Okay. So that's got a little bit more visibility to it, right?

Yes, definitely got a little more visibility to it.

Yes. But that would be a wide range.

But it's interesting, the level of consistency. If you take the market data on kind of what revenue passenger miles are doing or takeoffs and landings, are doing inside of business aviation. Then you look at kind of the history, look go backwards to look at kind of how the business has performed on a product-by-product and on a capability-by-capability basis. The data our teams can extrapolate from that and the consistency of demand is really important -- is really surprising. What's interesting though, and what I love about these for us and for our OEM partners on these is exclusive distribution agreements. When there's not a lot of inventory flooding in the market because we're exclusive and we don't -- we're not selling you 100 when you only need 3 because people can rely on our delivery and our stocking ability. If you're not sure if someone's going to have it next time, sometimes you'll buy a few extra. Now that we've built a brand in the market of reliability, you're starting to see our end user customers kind of reduce their own inventory and working capital. That's actually a benefit for the total market and for the planning piece because you're not seeing destocking as markets go up and down, and it gives us a lot more visibility to forecasting because there's not trapped inventory that we're unaware of.

Right, right. Okay. Let's shift gears really quickly and audience, you can start warming up your brains. I'm going to come to you all in a few minutes to see if you have any questions from the floor, if that's okay.

Sure.

Okay, great. It should have -- these guys are in their quiet period, so nothing about the fourth quarter, that kind of thing, if you do choose to ask a question. Let's go to the next 3, 5 years for the company. and talk a little bit about what you view to be -- we'll start with you on the growth drivers, and then I'm going to get these guys down here have involved a little bit and talk about the margin drivers. Is that...

Yes, that sounds great. I mean I'm really excited for like, we call it the end of this -- I just sent out a corporate memo this week on organization changes after our announcement of our fleet sale on Monday and kind of what's next because we've teed up very quickly how we're bringing the businesses together. We did 2 acquisitions last year. We divested our federal business in 3 sales and our fleet business announcement this week. So it's a busy, busy 13, 12.5 months. What I'm excited about is as we close this divestiture, finish the separation and integrate the assets that we have, that's the goal of 2025. By the way, that will drive margin improvement, but it will also put our platform in a position to really support the next phase of growth. So it's not just about the growth coming and how we're going to get there, it's our level of performance. It's the #1 metric I look at every day is how are we performing to customers first. The financials I'll look at second. I want to make sure that we don't dip as we grow. And I'm super proud of the team to take a $125 million business to $1 billion without seeing any movement in terms of how we support the customer. For growth this year and as we get into the kind of medium term, we've got a few big drivers. Number one is distribution agreements. So we only -- you asked earlier, the large OEMs that we support, but there's also tons that I'm not supporting. There's a few big ones. Hopefully, I can get a deal done with this year that are in the pipeline. We brought on a new Chief Growth Officer last year. He worked with me in my last business and was at Boeing for a number of years, but north of a $5 billion responsibility. So you're bringing in people that have the prowess to kind of go grow and scale this business. His job is all organic. Organic growth pipeline, build it deep, and we're ready now. The business is ready to start to scale organically. Those are both distribution agreements and new authorized MRO facilities where, again, think of your Apple iPhone, they'll put that logo on our door and we'll be authorized to do that work. Those are the 2 biggest organic areas of opportunity. The third is a unique one. We did a Honeywell license agreement last year. We bought the intellectual property on our fuel control. So we've been distributing this product for a long time. We've been repairing this product for a long time. We just bought the IP. We are now the "manufacturer of record" or we're not yet, but we will get there this year. That opportunity is not just like doesn't just bring a lot of longevity and consistency into the business because you now own the IP in perpetuity. But what it does is it drives another level of margin because you're taking out one of the players in that chain, right? So we see that as an interesting driver for the future. It's more of a '26, '27 event. Once we get this first program, really perfected, we're going to do it really well. And we see that as kind of the third organic driver. From an inorganic perspective, we've proven to be strong acquirers of assets. We believe we bought strong assets at below market multiples, and we have fully integrated or in the process of fully integrating assets. That means IT systems, back offices, you name it, and that drives an element of synergy. So we've got a decent pipeline of kind of small and medium-sized deals, but we're good at tuck-in deals as well. Many of them in expansion of products or capabilities. So really, we're ready if we kind of kind of call it our path to $2 billion internally. I haven't given any time lines around it, but -- and how to -- and we've got kind of the 5 pillars in how we get there.

Okay.

You guys could talk a little bit more about the margin.

Yes. I mean I think it goes along with the pillars that John talked about. I think, obviously, organic growth is the big one and operating leverage that you gain naturally. I think integrating the businesses, especially the acquisitions we made in 2024, and we put out some public comments about some synergy targets around those. So that's very important. I think we'll continue to optimize the portfolio and scale the portfolio. And obviously, there's a nice breadth there between MRO distribution and then the OEM Solutions business that John talked about. And I think it's just incrementally improving supply chain initiatives, just really honing in on costs across the business as we scale and get larger. So -- but I think the 5 pillars that John mentioned, that's really the path to margin expansion.

Yes. And we shared a little bit of real numbers around like the next 18 months. Like the Kellstrom acquisition was about $20 million of EBITDA. And publicly, we've shared that there'll be at least $4 million of synergies. On a percentage basis, that's real margin expansion that was out there, publicly committed that we'll drive to.

Have you put out any medium to longer-term targets on normalized margins for this kind of a business?

Yes. Pre the recent acquisitions that we made this year, we did talk to about -- in 2025, about 16% to 17% EBITDA margins for the business. Now that was pre-TCI, which we acquired back in April and pre-Kellstrom that we acquired in December. Both of those businesses are margin dilutive in the near term. So the expectation is with these synergies that are expected to gain in the short term that we're going to start seeing those businesses go up to 15-plus percent on a blended basis, get back to the margins that we're showing pre-acquisition.

Right. Okay. And while we're at it and talking to the treasurer, talk -- maybe the 2 of you guys can maybe tag team this one, but the capital structure kind of where you are with liquidity, leverage, that kind of...

Yes. I think we said publicly, we want to be kind of in the 3 to 3.5x leverage. If you look on a pro forma basis, for Kellstrom, at Q3, we're a little over 3x leverage, and we have said publicly, we expect to generate free cash flow in the fourth quarter. And then obviously, with the recent announcement that will have an impact on leverage as well. But I think we're kind of comfortable in that 3 or so times.

Yes. And to remind everybody, the recent announcement you're referring to is the sale...

The sale of the fleet business.

Right. Is it $200-and-some-odd million?

Yes, $230 million -- up to $230 million. $140 million cash proceeds at close, a $25 million seller note and then an earn-out up to $65 million.

Okay. Okay. Great. At this point, I'm going to turn to the floor and see if there aren't any questions because I don't want to neglect anybody. It's hard to see up here, but I don't see any -- wait, we got one hand raised here. So just wait for the mic. She's coming right behind you.

Is your -- is the labor for -- is this skilled labor? Or are you in performing sort of critical maintenance or repair functions? And then I'm curious if that leads to any liability for you guys?

Yes. I mean we don't have liability concerns. Obviously, we hold just deep and strong product liability insurance. There's no like open claims, and it's not something that we're not really doing the full engine repair or more on the accessory side. We do have technical labor. When you look at FAA 145 repair shops, there's a lot of regulations around those in terms of technical talent. We've got a number of areas in which we grow technical talent, and we take them right out of the technical training schools. We build our own apprenticeship programs and then get them certified and kind of keep them inside the business where it's growing. And then we've got -- when you take someone who's out of the training schools in a more of a low-tech environment, we've got internal plans on how we can offer them internal promotions to go to more high-tech areas, which give them more opportunities for professional growth. And also our biggest internal people goal this year is retention on nonregrettable losses. We've really focused -- culture is a big part of our business. And in the last 5 years, we really shaped the right team and just making sure that we don't lose anybody. But yes, there is an element of technical talent in there.

Did you just come up with a -- did you say nonregrettable?

I don't want any -- what did I say? I don't know what I said, but I don't want a regrettable -- I can't remember [indiscernible].

Yes. I've got a few remaining questions I want to go through. Maybe we'll start with the Trump transition of the new administration. I think I have 3 questions, but starting with that one. Just your view on risks and opportunities for your business with the new administration in town, things that you have heard that are on the policy platform that either you're excited about or you're kind of dreading?

Yes. I mean from our perspective, we're not -- a lot of the defense and other related impacts don't impact our business because we're in a commercial and business and aviation environment. It's -- the environment has a level of regulation today. I don't see the FAA regulation, forget staffing and some of the other chatter that's out there. I don't personally see the regulation shifting much. I think the level of oversight, I anticipate it remaining very similar. So I don't really see a big impact there. I think our biggest conversation on the risk side always remains around tariffs. We built some near-term plans to mitigate tariff impact if there are near-term tariffs on how we can kind of work 3, 6, 9 months, if needed, and kind of how we work around it to not have a direct impact to our end user customers because that's just be transparent about it. Assuming the tariffs are there, the products can get made, they can get -- they can be brought to the right geographic location, it's just who is going to pay for it. And we do have the ability with no contracts to end users to push that cost down. The question, the bigger risk comes in, what does that mean economically? Are planes still going to -- is the market going to change? And is the demand profile going to change? That's actually, to me, kind of the bigger question. From an opportunity set, I think that we saw a very strong business and general aviation market and kind of not a tremendous amount of regulation around that market through the last 2 administrations. So I don't really see a big impact there. So I think for us, as long as the economic conditions remain the same, I think that is a big driver of both the commercial and the business in general aviation market. As the general economic environment can shift upwards or downwards, that's, I think, the bigger driver of what's going to happen in the market.

But on the tariff side of it, is it that you are -- some of the parts that you are working with have been produced overseas or that they're made here, you got to get them to the geographies where they're going to?

No. I mean I think people would be quite surprised to see the amount of parts that are -- at least part of them that are not made in the U.S. And the -- I understand that there's conversations about how do you bring that back? That's not a 1-year or a 2-year or a 3-year conversation. I mean there's significant multiyear investments that have been made in teams and facilities and infrastructure and equipment that it is not something that can be near-term changed. So the product itself and getting it from Mexico back to the U.S. and dealing with the inbound tariff, I think, are the biggest risks. So we are sitting on significant inventory. We have a healthy balance sheet, but we have a healthy balance sheet of inventory in preparation for some of these impacts. We have some near-term workarounds with some of our suppliers on how we can manage through it. But if it's a long-term tariff and there's no exemption around it, it will have an impact.

Okay. Great. We've got 3 minutes left. One more survey of the floor. Okay. I don't see any questions. So I'm going to ask my last 2 questions. The first one is one that we're asking every company that's here at the conference, not just aerospace and defense companies, but all industrial companies that are here this week. And that is, if you wouldn't mind just kind of a pining on what you view to be the top 2 or 3 innovations or structural changes that are going on in your industry and the company itself? How do you see that playing out over the next 5 years?

Yes. I think for us, I think the 2 biggest things, I think one of them is the biggest OEM and how that impacts the market. So what -- how does Boeing recover? And I wouldn't call it innovation, I would call it just -- it's -- we all need them to be successful. And how does that recovery happen and then what are the tangential impacts of the market? Is it a new Boeing? Or is it just an improved Boeing? And then what is the trickle-down effect to every one of us in the market. To me, that's the big unknown. I think there's a lot of expectations that it's just going to be the same but better and more improved and that's okay. Or is there a level of uncertainty around that? And then how do you plan to create opportunities around that uncertainty or that change either way? So to me, that's kind of the biggest picture kind of micro aerospace kind of industry to focus. I think the bigger -- from a bigger macro non-aerospace side, it's the impact of AI. And we are parts and services business. There's data all over the place. And there is so much -- there's been such an inability to manage supply chain, manage forecasting and manage data with hundreds of thousands of parts that are out there. So how can AI come into play to improve the dynamics of a market that's been relatively inefficient for the 25 years that I've been in the industry and what -- and how do then we play in that space. To me, that's the exciting and interesting element of it.

Yes. Okay. And we've got 55 seconds left. I'll leave you with the last word.

All right, the last word.

Yes, yes. Well, I guess it will be 45 seconds by the time I showed up. Just the investment thesis and the overall -- the elevator pitch to investors on what you're excited about?

Yes. I mean we're part of an aftermarket that has a tremendous runway ahead in terms of robust growth. And we're a very small piece, 1%, 2% of a very, very large pie. And we're really proud of the transformation that the business has gone through from a multi-segment industrial business to an aerospace-only focused business that will be this year. And I'm very confident that we've got the data over the last 5 years to prove what we can do in terms of above-market revenue growth and margin expansion. And that's while being distracted on the divestitures and building the platform. So we're really excited for kind of this next chapter and our ability to go scale the business and to see what's ahead.

Awesome. Thanks, everybody, in the room. Appreciate you attending and thanks team.

Thank you.

Yes, I appreciate it. That was great. First time here. Thank you.