VSE Corporation (VSEC) Earnings Call Transcript & Summary

We're very pleased to have the CEO of VSE Corporation. John, thank you for being with us today.

Thanks for having us.

For us, we've described VSE as an aerospace compounder with a long M&A runway. And I feel like you've been delivering on that thesis faster than we ever expected. We've got this recent PAG deal, should expand revenue quite significantly. I wanted to dig into that a bit more, but I think a great place to start is maybe just giving an overview, anybody that's new to the story, how did you find PAG? What is the asset and what's so compelling about it?

Sure. Yes. I mean I appreciate the way you described the business. I hope that we can live up to that standard for you. I've been with this business for about 6 years, came in here with a very kind of strong belief in where there are gaps in the aviation aftermarket. And you think about when something breaks, you have a new part, a used part or a repair, and you need that some level of service to support any of those 3. And where I think one of the bigger gaps is that they don't really come together in many -- for many of our peers and competitors out there. There's new parts suppliers, use part suppliers and repair suppliers. So what we've built over the last 5, 6 years is a platform that we believe supports large OEMs, helps them monetize their aftermarket and support the large group of end users. And where we saw PAG add a lot of value is that when you look at the repair capabilities, and the number of different types of aircraft and engine type. They had just a really unique group of bespoke capabilities and how they bring parts and services together very much aligns with the model that we've been driving. So when I thought about what is the right scalable asset for us, this was the asset. And we've been working on this asset longer than other deals that we actually closed well prior because we were trying to get ahead of a process knowing how transformational this deal could be.

Yes. And we're definitely going to dig into that a bit more. But I think that one of the important points that in my conversations with investors, sometimes goes underappreciated, is that, this isn't the first time you're doing this, right?

No.

You help build KLX into one of the largest MROs of the time, before it was ultimately sold to BA when it was part of B/E Aerospace, I think just because it was part of a larger company, maybe people don't recall the details of that journey. Can you just walk us through that and how important that experience is in setting up VSEC today?

Sure. I mean that business was a consumables and expendables business. So you don't have a lot of intellectual property. You had a lot of competition and you're trying to build the roll-up to support a global aftermarket and we supported OEMs as well. And -- but it was really -- that was an M&A compounder and a roll-up strategy. Almost solely, the organic growth kind of came second to M&A. But what we did when we sold that to Boeing, it was sold on 1 ERP system still had strongest margins in the industry and our strongest level of end-user service. So when you think about what we're building here at VSE, it's very different in terms of the products and services, but some of the core capabilities of culture, half of my executive team are people that have worked with in the past and I knew that can deliver on the strength of what we were going to build here. But the model in which, and we think it's a huge differentiator when we look at acquisition assets and what we can do with them, we don't just need to buy an A asset or make it an A+ asset or raise prices or do something like that. We can take a part of business, put it back in a different way where we can really find those kind of diamonds in the rough in those gems as we integrate. And it supports the end user customers, it's supporting employees with greater opportunities. And from a shareholder perspective, we're able to really drive once these synergies come to play. I mean, most of the deals we've done are actually single-digit multiple deals compared to how the shares are trading today.

And maybe you could just elaborate a little bit on, VSEC is not just purely a repeat of KLX.

Correct, correct.

That's really great background that you had that experience with KLX, but it is different. There is more of a focus on higher IP, other avenues of growth. Maybe you could just expand on that.

Yes. I mean the KLX business was about 60% OEM direct, about 40% aftermarket. This business is 100% aftermarket focused. There are more services, and there's a lot more complexity. And I'd say, from a technological perspective, the parts are a lot more complex. And then from an intellectual property perspective, there's IP that we don't own, where we're supporting the IP of our OEMs. But really, about 2 years ago, we started our journey of where intellectual property is now part of our model and a huge part of our growth pillar. So we've got our distribution businesses in new parts and used parts. Post PAG, we'll have kind of 6 MRO segments kind of centers of excellence and capability sets under those. And we'll have 3 groups of IP-related revenue streams. One of them is what we call OEM solutions. We're buying the IP from our large OEMs when this end-of-life products or something that they've just done making and we'll actually contract manufacture and manage the totality of the aftermarket and own the IP. The second is where we're doing some reverse engineering and alternative sourcing of products, and we own the IP for the product. And the third is what's called DER repair, where we're using either a different type of process or used parts or PMA parts inside of the repair capability. And again, we own the IP on the repair. So we're just, I'd say, at the forefront of where IP will be a larger focus of the business as we move forward.

Great. I think it's a fantastic overview. Obviously, unusual to have an executive have so much breadth and depth of experience and doing it again. Can we just go back to VSE core, let's say, and dig into the basic organic growth algorithm that you see. Revenue growth, margin expansion on top of it. How do you think of the core business before M&A?

Sure. I mean if you look at our business today, I kind of break it into 4 buckets. I look at commercial Engines, commercial non Engines, business and general Aviation engines, business and general Aviation non-engine. At the highest end, you're seeing the commercial engine market growing low double digits to mid-double digits. I think followed by the business in general Aviation engine market, high single digits to about 10%. And then the component markets just slightly less than that. And probably the slowest growth is your rotorcraft business in general Aviation non engine, more in that 5%, 6% range. So -- and ironically, our business that you can almost say it's a 1/4 of each, just round numbers. I start there kind of where the macro trends are for us, we build the strategy internally that M&A in that compounder is really critical to the strategy. But 99% of my team is not focused on that. They're incentivized only off of organic growth, they are focused only on organic growth and margin expansion. And it's really how do you build the model regardless of where growth is or isn't that you're going to continue to outpace your peers. So we're building things out 3 years out in terms of kind of market share opportunities. And I think what's unique about our model is the rough numbers, the total aftermarket, let's say, $150 billion. $50 billion is people like myself and my competitors in the services market supporting kind of that 1/3 of the market. The other $100 billion is the large OEMs or mid-tier OEMs going direct to the end users. Where our model is different is we're attacking both sides of the table. Most of my wins are actually coming from that $100 billion OEM-direct model because our model is unique. We're supporting these OEMs on protecting their IP, managing their aftermarket and their end users stronger than they can do and helping them monetize it, that they're coming to us when they're struggling with problems. And rather than something going through a competitive bid, we're winning more market share kind of direct from those OEMs. And it's allowed us over the 5 years, to be in a position where we've had greater than an organic -- greater than market growth organically. I think on the organic side, I look back at the 3 years, roughly around 15%?

Yes.

We go in the business about 30% CAGR in the last 3 years, about half organic, half inorganic.

Yes. And it does seem like some of the tailwinds that you're describing that have lifted organic growth to above normal rates continue into 2026.

Correct. Yes, I look at '26 and '27 right now about the same. I don't look that much further out. The data starts, I hate assumptions, data starts to have too many assumptions in it and not as much like real shop visit data that I can kind of tie to a real model.

Yes. And is B/GA always going to be a bit of a discount to commercial aftermarket? Or is there a world where they converge?

I think today, it's a discount. I think you're -- but for us, what we like about it is it gives us an opportunity to build something different. We don't look at the markets the same. We look at the commercial markets as higher growth and -- but yet there's a bigger competitive landscape. And we look at the business in general aviation market Think about the number of aircraft in that market from a piper to a King Air to a Lear 45 to Robinson helicopter, I mean things that fit in those markets to Gulfstream. And we really look at an engine type by engine and platform by platform strategy there. And we think it allows us to build a greater moat around our competition. Again, that IP play comes in a little bit stronger there. So even though the market growth is slightly lower, we think the margin opportunities and to create more annuity-like revenue streams that we think can happen more in the business and general Aviation space. But I would look at the next 2 to 3 years, I don't -- I still see it as a discount slightly to a commercial work.

So more of the same of what we've seen.

Yes.

Got it. And then on the margin side of the algorithm, you've talked about getting to 20% adjusted EBITDA margins. Can you just elaborate on the bridge there, what it takes?

Yes. I mean if I look back 6 years ago, we were at about 11.5% segment margins, a single-digit company-wide margin. Our earnings are next week, but we've given preliminary guidance range when we announced our acquisition, so we have company-wide margins well north of 15% now, which is something that was our first target. How do we get consolidated margins there. We feel very comfortable with our models, both in terms of our organic growth and our synergy model with PAG to put us in a position of about 20% margins. We haven't given a perfect time line, but I'd say end of '27 going into '28.

And when you think about what the business could attain in the fullness of time, could we even get above 20% margins? Or is that a cap?

No, absolutely. I mean we'll do an Investor Day, Michael and I are working on dates probably in third quarter, and we'll talk. I know that it's going to be the first question. So we'll be ready -- it's not going to be a grow and plateau at some point. I joke with my team, you get a month to plateau and then you got to focus on the next area of growth. I look at that thing is as a milestone, almost kind of like a marathon, and I think that 20% is a great milestone. And I think through how do then you build a path, let's say, to 25%. But we haven't the model around it. What I would tell you is for us to get from 20% to 22%, 23%, it's all about how fast I could grow that intellectual those intellectual property revenue streams. That's really what's going to drive the pace of, I'd say, the margin expansion above 20%.

Yes. I had a question about the preliminary numbers, but with earnings around the corner, we'll pass on that. Can we just talk about the financial picture from a free cash flow and balance sheet perspective. What are the normalized ways to think about that? If we're in a world where we're hitting the organic growth that you're talking about, margins are expanding to 20% in the fullness of time, maybe even beyond that, how cash generative is this business? And what is the right leverage ratio for the business?

Yes. I mean I think I'll talk about leverage ratios first. We've given pretty much a wide range with earnings next week, we'll announce like leverage year-end finished with the 1x to it. We obviously did a very material acquisition. And by the time that closes and we've got first quarter is our heaviest cash usage quarter I don't ever see us having a positive free cash flow in the first quarter. It's just a tough 1x the way our markets work. but leverage will be somewhere between 2.5x and 3x post deal closing. And then you'll see leverage improve from there. But we've given a pretty wide range on leverage from 2x to 3.5x because we're very comfortable going up to 3.5x to do a deal, and then we think we can delever pretty quickly. I think when you look at the free cash flow profile of the business, your question was well stated because I think when you think about growing and scaling a business, that was essentially very distribution heavy initially. It was hard to get free cash flow positive, period. And when you're growing at -- I've talked about the last 3 years a growth first couple of years of growth were 40% CAGR, and it's all distribution and inventory focus. It was very hard to get that free cash flow generation positive. You can expect positive free cash flow in the targets we've given as a...

Yes.

So I don't want to...

So when you're taking a look at 2024, we used about $52 million of free cash flow. As John just mentioned, we expect to be cash flow positive for 2025. We're targeting about 30% to 35% EBITDA conversion from a free cash flow perspective on a go-forward basis.

And I'd say expect on a quarterly basis, we expect the first quarter to never look pretty and then to improve from there. It's just the mechanics of the way our markets work.

Yes. And that free cash flow ramp that you're describing, I mean that's just the normal working capital that a distribution business needs as it grows. So that's...

It does. And I think that we'll always focus on optimizing inventories. But at the end of the day, these are chains that are never going to get fully corrected, I don't think in my career, and you want to be in a position where service levels are strong. The PAG acquisition just has a natural benefit to it because what it does is today, our business is 60% distribution, 40% MRO. Post-PAG, it flips and we're 60% MRO, 40% distribution. The free cash flow conversion is far stronger on the MRO side of the business. So you're going to see a 2027 clean year free cash flow model looking much stronger on a percentage of sales than you do with our legacy numbers.

Yes. I think we've waited long enough. I want to dig into PAG. You mentioned how the business mix flips. Can you just talk for the audience kind of the strengths of an MRO business versus the strength of distribution. And more importantly, when you put them together, what new advantages are created.

Sure. Yes. I think that -- what I love what PAG did is they built many centers of excellence. So whether you're talking about a Rolls-Royce 250 engine, where they do the full engine repair, you're talking about avionics, their avionics capabilities can touch the oldest of cargo carriers to 787, A350, cockpit displays to Gulfstream navigation systems that are next gen. So the scope of work that they do across their different sectors, they've looked at it much more in this bespoke MRO category. And then what they have done that I think is really unique is the only parts they carry are parts where they're doing repairs. So their distribution and their exchanges and their used material, it's very much tied to repair. So it's not -- again, driving a really tight strategy with these disparate businesses. I actually love how they did that. And by the way, it drives higher margin. It drives stronger free cash flow. So the fundamentals of the business when you dive underneath look better than some of these legacy disparate kind of MRO shops that I've seen in the past. What I also think is valuable about bringing parts and services together is they're driving the MRO activity because they have the product. So example, if you know the Apple store around the corner, has a used phone that they can swap out and it's going to take 2 weeks to fix your phone, you're going to go there over somebody else who might be $10 cheaper, but you have no phone for a couple of weeks. So the way they've connected the exchanges to the MRO shops, I think, is second to none in the industry. And I think it's driving superior margins. But -- and equally or more important, it depends they're driving this customer connectivity and this kind of annuity relationship with these customers because these customers are no longer holding inventory, and they're coming to them directly to get the exchange and then to get the repair.

Yes.

And I think there's a lot of synergies we can bring together when we bring the businesses together.

Do you generally think of an MRO business as better or distribution business is better?

It's funny because we have investors that we have 3 today who just like trying -- everyone's trying to figure out my margin profile in each. I wouldn't say in totality, I think of one is better than the other. Obviously, when you peel the onion, I have some very high-margin distribution. I have some very high-margin MRO businesses. And sometimes we have no loss leaders in our business. It's not the way that we operate. All of our businesses are driven. We drive granular, very detailed mini P&Ls and everything has a profit to them. So I would tell you that the more competitive areas where there's a lot of OEM influence tend to be lower margin, both on distribution and on MRO, and you see it on heavy engine work or on full aircraft work as well. but I don't necessarily think one fundamentally is better than the other. I think the only fundamental improvement you get from MRO is on the free cash flow.

Yes. And in terms of volatility through the cycle, maybe as somebody who's lived through these businesses, lived through multiple cycles. Maybe you can talk about the typical how they behave through a cycle, but also what you're doing to perhaps protect the businesses and make them even more stable.

Yes. I tend to be more like cynical or concerned than most on the cycles. And I'm concerned about the cycles because I'm a believer that all the data that you see is built off of too many assumptions. We were talking earlier about that and I get concerned that what could happen if retirements pick up. And so I build a plan every year organically as if the market is not going to grow. That's the way we build it. And what's going to happen if there's no growth, and I tell you, you still have to grow somewhere between 5% and 10%. Where are you gaining market share? Where can you find ways to support your OEM partners? Remember, you've got $100 billion of work that they're doing today that maybe it's not necessarily -- it's share gain, it's outsourcing to you. Where in these different cycles, can you find opportunities to grow through those cycles. Most of the time, you hear and there was some chatter last week about destocking and distribution. We tend to have a very different philosophy on that because we hold inventory very tight. Because our delivery performance is so strong and our customers know to rely on us, and we're selling highly technical, very expensive products. We try not to like let people build stock in the market. We tell them, look, we'll always have it. We'll manage through it. Inventory, supply chain issues are happening, and we're going to share across the industry, but we do that also so that we can manage through downturns and not have a destocking model. It also gives us a little bit more pricing power when we can utilize it, people aren't sitting on legacy inventory at lower margins and those types of things. So that's another benefit to our stocking model that it makes it -- it gives us a little bit of protection. I think that with regard to MRO, there's 2 or 3 kind of groups of products. There's break fix, something that breaks that it needs to be fixed. There's things that time out, regardless of they're being used. So during COVID, there's still things coming into our shop because of time. And then there's things that are takeoff and landing based. And very candidly, you do see different cycles through -- depends on use. We try to drive a balance within our shops to drive somewhat of consistency through cycles. I look at the cycle is more of I can't control that. What I can control is what new work can I bring in during a downturn? How do I sit with an OEM partner and say, "Hey, if a downturn is happening, you have to reduce cost. So maybe some of this end-of-life product, I can take on for you. I can find ways to create a financial opportunity for you and build a different platform for me." That's -- so we look at it more that way than trying to just control the end user demand.

Yes. That makes sense. I wanted to just spend an extra second on supply chain.

Sure.

Obviously, the business that you're building is embedded in the supply chain. Throughout the day, we've heard different data points about supply chain. In the morning, for example, we had Textron talking about challenges in managing the biz jet supply chain and some hiccups there. I wanted to just take the temperature. How does the supply chain broadly look from your perspective? What are you doing to kind of facilitate things? And when we hear some of the larger players talk about hiccups in the supply chain, are you seeing something similar? How would you assess it?

Yes. I mean, I've been in the industry since '99. The supply chain never really works? Like it's like this -- so it just never has been that efficient in that and actually really worked. So do I see it working today? No. But I don't think -- I do think it's improved. I mean I was sharing earlier today with someone. I mean there is the head of after-mar -- I mean aftermarket and then the head of supply chain, 1 of the Tier 1 OEM that last year, the 3 of us would get on a call every Friday and allocate bearings because they're -- I'm supporting their end users. So we're in it together. It's like who should get them. Someone is going to get stuck. Either a part is not going to get made out of production or some end user is not going to get their engine or whatever else out of the repair shop. That's how tight we were on some of the supply chain. I think a lot of that is better that we're not seeing shutdowns on the repair side or on the production side. At the end of the day, though, you're dealing with everyone uses the same supply chain. You've got commercial business aviation, defense, space, rotorcraft, aftermarket OE. And as one is coming up and the other ones -- no one's declining, right? People may be flattening out a bit. That supply chain just feels a different level of constraint. And it's like a whack-a-mole, 1 thing goes up and goes down. Our job is how do we proactively predict where we think because this market is going to grow faster than that market, what supply chain is going to be impacted? How do I get in early and procure -- or how do I find alternative sourcing opportunities. So we've been using -- that's where the DER repair comes in. We're using some used serviceable material and repairs. We're looking at PMA parts for more noncritical parts where our OEMs are not upset about it because we're solving supply chain issues for them. But I'd say it's better, but I don't ever see where the Nirvana -- I look at the bright light. I don't see the bright light at the end of the tunnel there.

I wanted to follow up on PMA a bit. Sometimes I'm asked the question by an investor looking at the stock and they're always looking kind of -- trying to compare what you might become. Is this going to be the next TransDigm? Is this going to be in the next Heico. You've used the phrase PMA a few times. Maybe you could explain to the audience what that is to the extent that people are still playing catch up a little bit and talk about the long-term vision for PMA.

Yes. I mean I think with regards to who we're going to be when we grow up, I think the one big difference compared to the companies you mentioned is they are outstanding businesses that are groups of 30, 40, 50 different individual businesses. We will be -- we've got a logo internally, our on VSE logo. Our goal is to support the market caps first. And what that means is simplification and us being a 1 branded company and trying to have a single invoice and single system and single focus is going to drive what we believe is the strongest differentiation. And then it's talking about the quality of the services, how fast we can get those services done and then where we see gaps in those services. And it's not just an economic model. It's really the economics do work, but they come second because we're driving of what's going to support our end users and our OEMs the right way. We started this business all about supporting OEMs and when you think about supporting OEMs and think it through your Tier 1 OEMs, a Honeywell, a Pratt, Collins, they spend a lot of R&D to get their proprietary parts and proprietary content and they don't want someone knocking it off. So PMA was never, which is a reverse engineered product, that's a generic version of one of those parts. It was never really a part of our initial design. What's happening over time is, because no one sees the light at the end of the tunnel for supply chain, how do we support end users for our OEMs when -- if an OEM needs 1,000 parts for production and I need 100 for the aftermarket, and they're only going to get 1,000 from the manufacturer. We're 100 short no matter what. So where I'm trying to come up with alternative solutions is, is there a different repair module I can use? Can I use used parts as engines or another part expires and test them and get them up and running. Or can I use a reverse engineered or a PMA part? And that's really the impetus of it. So I'm doing it in a much more, for lack of a better word, OEM-friendly way and aligned with those OEMs to solve back to your supply chain comment, to solve supply chain issues rather than just to go head to head and compete with them. So it's a slightly different model, but the return is I'm solving issues and then for me and the business on a beneficial level, there's more intellectual property, which obviously drives higher margins over time.

Yes, that makes sense. So it's really a result of how tight the backdrop is, a lot of these products in that way, you're helping OEMs while pursuing...

Exactly.

Which isn't always the case. No, that's fantastic. If we could just circle back to PAG. I get asked the question about the TAM for the company. And when you're doing M&A, when you're involved in distribution when you're involved in MRO and incrementally kind of building out some PMA lines of business as well, the TAM could be enormous, right? How do you help people think about the overall growth opportunity over years?

Yes. I mean I look at back to like the experiences I've had, my last business was very, very tight in what we did. So we were buying a lot of -- buying up our competition. We were consolidating a market. Creating the global leader in what we did. But it was a tight niche market in what we did. And I didn't want to have that stress when I got here. So I tried to build a little bit more of a broader platform. On the flip side, A few people have tried to build the aerospace aftermarket one-stop shop, and it has failed in my opinion, miserably. I'm certain that those people who have it in their model will tell you otherwise. But delivery performance doesn't work. These -- every part in this industry has a story and those stories and the complexity around them are important. And you start to lose that, it just becomes a part number in a system. And I think that, that is not what's in the best interest of our OEM partners or our end users. So here, the way I look at it is, it's a collection of quality repair capabilities and a collection of quality OEM-centric product that have -- where we can add value in the market. And that's supporting commercial, business and general aviation rotorcraft. And we barely started on defense. Our -- my business today is 1% defense. With our PAG acquisition will be just about 5% defense. So we see the opportunity geographically, still very domestic in nature. I think we'll have about 60-plus locations in terms of MRO facilities and probably 55 of them are in the U.S. So a great opportunity to grow geographically. The second is we think there's a really strong opportunity in the defense sector over time for us to grow. But on the commercial and the business in general aviation, you'll see us focus more platform by platform because specifically, you look at business and general aviation. You look at PT6, you look at a King Air. You look at Lear 45, how do you dive into that platform? And again, aligned with your OEM partner where they want the help and they need the help to support, and if you start thinking about the number of platforms out there, it just starts to keep this strategy tight but create this extremely large addressable market. When I look at our near-term pipeline and not everything is actionable, but I've got 35 to 40 M&A targets in my secret phone list that I won't share with my team. But like on deals that I'm courting and deals that I'm working, which are capability adds. And as you build up this platform strategy, I think all that's going to come out is more and more opportunity. This capability set, we can grow organically. This one might be faster inorganically, and I think you're going to continue to see that growth. So I've never publicly said you can expect, let's say, the market is going to grow 8%, I'm going to grow 10%, and I'm going to grow 10% in organic and do you expect a 20% CAGR over 3 years. But I've also, on the flip side, said with shareholders you're trying to build out a 3-year plan. That's -- in my mind, that's kind of how I think about it is we're going to outpace organic growth, and there's plenty of inorganic opportunities for us to keep layering in of all shapes and sizes.

Yes. I want to follow up on the pipeline. But before we do, just finishing up with -- you do have this $15 million synergy number out there. You've talked about at Investor Day. Obviously, you don't want to steal the thunder and it might be too early to really kind of like think about all of the layers of upside. But it does seem like that $15 million number in light of everything we've discussed maybe a bit conservative.

I'm laughing because this is -- we've had a great day, outstanding group of meetings with very knowledgeable investors and every single one of them said my number's too low on synergies. So yes, so I think you're aligned with kind of investor feedback. In all transparency, we shared mostly cost synergies and a few of the products that we know they're buying from us today where there's some margin opportunity. I like to -- what I say, I like to make sure I can do. We have delivered -- we have done 3 acquisitions in the last 18 months. We have taken an 11% EBITDA margin business to north of 16%. We have taken a 13% EBITDA margin business to north of 16%. That business, we also grew almost 30% in the first year that we own the asset. And I want to make sure that I continue that trajectory of really sharing tangible synergies. So what's not included in all the sales synergies and some of the supply chain opportunities above and beyond. Now could they be double what I shared? Absolutely. I want to get a little bit more meat on the bones and just make sure that I feel confident in the data that I share and then how fast we can execute on it.

Yes, that makes sense. It is a very large deal and just to explore the risk or get people comfortable with the risk of integration. Maybe you can just talk about your integration playbook.

Sure. Yes. I mean I'd say it's probably one of the core differentiators in what we do compared to our peers. We actually integrate assets. I was e-mailing with the CEO at PAG this morning. We're going through site by site, like our like sites and what systems we're on. MRO systems, it's like 5 of them that are out there. We've bought businesses with everyone, so we know how to integrate them and know where the system complexities lie. Some of them we choose not to integrate because the risks may not outweigh the benefits. As I did a lot of this diligence myself early on because this was a deal that we went to market on before it hit market. We tried to get ahead of a process. So we had a lot of early access, and I was working it kind of personally. And because of that, I kind of built out the integration strategy. So we will integrate in like 6, like 7 different business units. So expect us to integrate 1 business unit at a time. So really, it's like derisking the integration because you can take 20 MRO facilities and integrate 1 at a time, you're not turning a light switch with a big SAP conversion that you hear about from large companies and then everything goes down. We can integrate a $20 million business to start then the $50 million business and so on and so forth. So what we typically do in the first 90 days is watch how they operate, see how things run, see if there's areas from a controls or whatever risk perspective that we want to integrate faster for those, figure out where we think the biggest synergies are and we usually expedite those integrations. But you'll see us integrate more in smaller chunks over time to derisk the integration. Of all the things I'm worried about, I would tell you that's not where my biggest thing that keeps me up at night. I want to understand the market and the market growth opportunities, but I feel really good about the strategy and our ability to execute on the integration.

Yes. And another part of integration is deal structure at the outset. Sometimes there are earn-outs or other incentives. Do you -- can you talk a little bit about the structure and how maybe that just drives success here?

Sure. I mean the earn-out -- I'm not a big earn-out fan. I must never do them. In a deal, we do have an earn-out with this deal for 2026. I would tell you that we're not at 99% aligned, we're 100% aligned. I would love to pay the earn-out. The earn-out is they're going to drive the earnings greater than I modeled 26 individual P&Ls for 2024, 2025 and '26, -- our 20 -- my numbers and their numbers thankfully for '24 and '25 are very close. '26 they think they're going to do a little better than I think they're going to do, great. I'm happy to pay them for it. We talk about that 20% margin opportunity. It will drive all of the positive opportunities faster for us. if they can achieve that. So the CEO will stay on board at least through year-end running the business, which is essentially we would do even if there's not an earn-out. We like to make sure and validate everything we saw in diligence. Get every ducks in a row in January 1 will kick off real integration. It doesn't mean synergies won't come sooner. We'll work on synergy plans very quickly. But the actual tactical integration work will start in early '27.

So if those incentives work as intended. It seems like we may even be at a point later this year where we're already exceeding expectations deal just because the core operations of PAG were strong.

Yes. I would love to sit at an Investor Day and tell you I'm going to hit 20% margins as a consolidated basis whenever Michael, let me say. I mean in a faster pace. And that -- if they earn that earn out, I will tell you that will happen because that earn-out is not happening in a low margin. It's happening at a margin that's accretive to our existing margin profile.

Okay. I wanted to talk about the pipeline. This is actually just one of a string of deals that you're executing. It's I believe it's the largest one so far. It seems like there is a deep pipeline behind this. Plug us into how you're thinking about the M&A engine over multiple years. And I don't know, is there a way to think about what the business could be a few years down the line?

Yes. I mean I think when I look at the pipeline of assets out there, of quality assets and ones that I think that we can be additive to, it's really exciting because I looked at this business is like chapters. The first chapter when I got here, it was a little messy or a lot messy. It was cleaning things up. It was validating as like a value proposition ahead of my head that's slightly different than what my peers have in the market and making sure that these OEMs really kind of connected to it. And then it was divesting of non-core stuff. The second chapter was all about, okay, how do we now take what we've done and go outpace the market organically, do these smaller deals, $100 million, $200 million deals and drive margins up and synergies up. And the results speak for themselves. It's not just the words, right? And now it's -- let's put some scale on this. And I think that, as I'm starting to do it already, and I'm like not even a month in, you're already seeing kind of what the future framework could be and where the gaps are. And the gaps are good because it creates both organic and inorganic pipeline opportunities. Combined, the PAG and VSE asset will provide a greater organic and inorganic total addressable market than we would individually. I'm looking at things differently than I would have in the past in terms of MRO capabilities. They will look at things differently in terms of distribution capabilities. The pipeline of intellectual property-focused deals is different than what I would have done in the past. And then on the organic side, again, we haven't shared the sales synergy data. But as I get my arms around it, I think there's some really big and interesting and unique opportunity of what we can do together. We're already talking about kind of our first joint things we want to do and hopefully, May or June when the deal closes. And they're really exciting. And again, things we couldn't do individually. So I would say expect this next chapter to be, yes, it will be a little "quiet" as we integrate. But I don't need the 3 years to integrate the business to get the M&A pipeline flowing. And we look at $10 million and $20 million deals as well. They're not always these transformational deals on paper, but sometimes these bespoke little deals can help, again, think of that moat that we're trying to create in some of those areas. You fill in a gap where that -- and you're creating even really solidifying that moat. So there's a couple of little ones I've got in my pipeline that are more family-owned businesses, whenever they're ready, I'm ready, no matter what's happening because they'll be so much more additive and accretive than even a larger deal.

Yes. We're knocking on the end here. I want to give you the floor and just any concluding thoughts, any points you want to really leave investors with?

Yes. I mean I think -- I appreciate that. I think that what I would like to leave investors with is, we have built something that's different. When you look at websites and you hear people's pitches, when you think of parts and repair, they all tend to look and feel the same. We have built something that's really unique because we're attacking the entire addressable market that a lot of our peers can't address because we're supporting these Tier 1, 2 and 3 OEMs in a very different and unique way, while we're also servicing the end market. The second thing is that the first couple of years I was pitching here, it's all about like we're going to do this, we're going to do this. We have validated the value proposition and validated our ability to acquire, integrate and drive margins. and just expect that to continue to happen and don't think that the story is by any means ending. It's, in fact, a more exciting part of it. The third thing I would say is, yes, the market has been healthy, and I expect it to remain healthy. But for us, a moderated market still creates a tremendous amount of opportunity and we look at the total addressable organic and inorganic markets as things that are really exciting to -- I don't -- I didn't give you a number when you asked what the future could look like. But there's no reason the business can't keep compounding and doubling. I mean the revenue number is not what excites me. It's more the quality of the revenue and the margin expansion in totality of it. But there's no reason that the revenue can't keep scaling. It's not time to have a little pull with the asset.

Great. And on that point, thank you very much.

Thanks for having us.

That was fantastic. Thank you, everybody, for joining us.

Thank you.