AerSale Corporation (ASLE) Q1 2022 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the AerSale Corporation First Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Kristen Gallagher, the HR Director. Please go ahead.

Good afternoon. I'd like to welcome everyone to AerSale's First Quarter 2022 Earnings Call. Conducting the call today are Nick Finazzo, Chief Executive Officer; and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws including statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2021, and filed with the Securities and Exchange Commission on March 15, 2022, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investors section on the AerSale website at ir.aersale.com. With that, I'll turn the call over to Nick Finazzo.

Thank you, Kristen. Good afternoon, everyone, and thank you for listening in today. I'll begin with a brief overview of the quarter, followed by operational updates and progress we're making on our key objectives. I'll then turn the call over to Martin for a detailed review of our first quarter financial results. In the first quarter of 2022, we built on the strong momentum we had exiting 2021. Revenue in the quarter was $122.8 million, up 110% compared to the prior year. Higher revenue was driven by the success of our 757 passenger-to-freighter conversion program, the sale of a 737 that was utilized for AerAware testing and the recovery in commercial aerospace. These gains versus the prior year were partially offset by reduced sales in our MRO business as we reallocated resources in our Goodyear facility to support the 757 freighter conversion program as we have detailed in past quarters. Turning to profitability. We reported strong revenue of $22.9 million of operating profit during the period, which compares to $12.7 million in the prior year. Adjusted EBITDA during the quarter was $29.9 million or 24.4% of total sales, setting another single-quarter record compared to $16.5 million or 28.3% of sales in the prior year. Higher adjusted EBITDA resulted from the strength of our 757 program coupled with an improving commercial aviation environment. Turning to segment specifics and beginning with asset management. In the first quarter, we sold $51.9 million of flight equipment that included 6 aircraft and 4 engines in the quarter. I do want to take a moment to reiterate to investors that flight equipment sales like the 757 program are a very important part of our business and overall strategy. It is critical to our competitive advantage to fully use our end-to-end solution to acquire and ultimately direct these assets to get the highest return on investment, whether it be as whole flight equipment, leases, or feedstock to our customers. That being said, these large flight equipment sales can be lumpy and should be assessed by both the feedstock going into them and the long-term performance of these programs. I am pleased to report that we retain sufficient aircraft to continue feeding our 757 freighter conversion program through 2023, giving us good visibility in our current guidance period that Martin will elaborate on further during his remarks. Beyond the 757 program, our feedstock pipeline has markedly improved over the past several quarters. and our current pipeline of flight equipment acquisition opportunities is the strongest we have seen since 2015, which was the end of the previous aviation down cycle caused by the Great Recession. These are generally smaller packages of less than 10 aircraft or engines and include platforms such as the A320, A330, A340, Boeing 737, 757, 767 and 777. We view this change in the market backdrop as a significant positive tailwind for our medium-term outlook as it will allow us to leverage the approximately $322 million of cash and available revolver capacity to increase our feedstock and aircraft available for sale or lease. Within our used serviceable material or USM parts business, airframe and engine parts sales were notably higher than the prior year as we are starting to benefit from the recent feedstock acquisitions that we made and increased demand from the commercial aviation recovery. As we look out beyond the next couple of quarters, we anticipate feedstock will improve further as we are able to execute on the broadening asset availability in the market. During the first quarter, our leasing revenue increased due to higher engine utilization as well as additional engines on lease compared to the prior year. Leasing revenues also included recognition of deposits related to the 2 aircraft leases that were terminated due to the sanctions against Russia that we discussed last quarter. Currently, we have 2 cargo aircraft on lease and 17 engines -- excuse me, 29 engines. We were able to redeploy some engines quickly, which has led to upside to our forecast following the lease terminations with airlines serving Russia. Further, we have recovered all of our flight equipment, with the exception of 1 engine. And we continue to work with the lessee and our insurance companies to recover any potential losses associated with the detention of this engine. In our TechOps segment, total sales were $48.3 million compared to $29.2 million in the prior year. Higher sales were entirely attributable to the initial AerAware 737 test aircraft that was sold during the period for $23.9 million. This was partially offset by a decline in third-party sales as we continued the strategic reallocation of resources to intercompany activities in support of the 757 freighter conversion program. Airline demand during the quarter remained strong and in excess of our capacity during the first quarter, particularly as we continue to allocate MRO resources to our 757 conversion program. This strategic initiative was instrumental in delivering record results last year and through the first quarter of 2022. Looking forward, we have been successful in identifying several additional MRO partners to perform 757 freighter conversions, which will allow us to free up MRO capacity while maintaining overall 757 program profitability. This is a meaningful development as it will allow us to service commercial airline MRO demand and further grow our business beyond its existing capacity. Moving to Engineered Solutions. We have continued work on product development and obtaining FAA approval of AerAware, which is our advanced technology enhanced flight vision system, incorporating a military-style head-wearable display that allows pilots to see through poor weather conditions. We have developed it in partnership with Universal, a subsidiary of Elbit Systems. Our partner has indicated a completion date of software upgrades late this quarter, at which point, we will be positioned for final FAA flight testing and STC certification. Before turning the call over to Martin, I would like to touch a bit on the macro environment. On the commercial side, the market continues to firm, particularly for domestic air travel, where anticipated volume will be at or near pre-pandemic levels over the summer. On the international side, passenger demand is still down but steadily improving. This favorable backdrop creates steady demand across AerSale's integrated business model, which we anticipate will drive further improvement throughout the balance of the year and into 2023. The freighter market also remains critically undersupplied, both from the lasting effects of the shift in consumer habits to e-commerce, and lower system capacity from reduced freight tonnage on commercial aircraft. We have continued to invest in this end market, and our 757 conversion program is secured through at least 2023. Lastly, AerSale is at its strongest against the backdrop of plentiful feedstock and attractive pricing. We have spoken for some time regarding the eventual rising tide of asset availability as airline operators assess their post-pandemic fleets. We believe we're in the early stages of this environment, and there has been a notable shift in the number of deals our team has identified during the first quarter. In the long term, AerSale is excellently positioned. We operate a purpose-built, fully integrated, multidimensional, adaptive aviation -- aftermarket aviation model that includes part procurement, flight equipment sales and leasing, MRO, FAA certifications and aircraft storage and decommissioning. Our unique model enables us to closely monitor the market, capitalize on opportunities in advance of our peers, and drive internal and external value to all of our stakeholders. At this time, I'll turn the call over to Martin for a closer look at the numbers. Martin?

Thanks, Nick. I will start with an overview of our first quarter financial performance and end with our guidance for 2022. Our first quarter revenue was $122.8 million, which included $75.9 million of flight equipment sales. Revenue in the first quarter of 2021 was $58.4 million and included $13.8 million of flight equipment sales. As a reminder, our business may fluctuate from quarter-to-quarter and year-to-year based on flight equipment sales, and therefore, it is important to monitor our progress on asset purchases and sales over the long term. First quarter Asset Management Solutions, or AMS, revenue, increased to $74.5 million from $29.3 million in the first quarter of 2022, primarily on account of the flight equipment sales mentioned before. Consumption of Used Serviceable Material, or USM parts, for maintenance was higher as airlines accelerated the pace of returning aircraft into operation. In addition, leasing revenue was higher on the back of stronger volume and utilization from our leased assets. Within our USM business, we anticipate an increasingly favorable market for feedstock availability against the backdrop of growing demand for airframe and engine part sales as airline demand expands. In addition, demand for passenger-to-freighter conversions is expected to increase and we are well on our way to monetize the remaining Boeing 757 aircraft in 2022 and 2023. First quarter revenue from TechOps was $48.3 million compared to $29.2 million in the first quarter of 2021 as a result of the monetization from the flight equipment sale of an AerAware-dedicated Boeing 737. This increase was offset in part by lower revenue from MRO activities within TechOps. During our third and fourth quarter earnings calls, we mentioned that we are reallocating resources away from third-party work to support the cargo conversion line for our 757 aircraft at our Goodyear facility. This process continued through the first quarter, leading to lower revenue. However, this reallocation has been pivotal in our ability to generate higher margins from the sale of 3 757 cargo conversions since the beginning of 2021, with an additional 3 conversions expected to be completed and sold in the remainder of 2022. MRO activities at our Roswell facility was also lower due to a decrease in aircraft stored in our facilities as customers reactivate aircraft. We believe that the commercial market recovery will gain further traction, and our MRO facility should continue to benefit from return to service revenues. First quarter gross margin was 38% compared to 33.9% in the first quarter of 2021, with the improvement largely due to a greater mix of high-margin flight equipment sales. Selling, general and administrative expenses were $23.8 million in the first quarter compared to $6.9 million in the first quarter of 2021, primarily from higher payroll expenses on account of higher wages and the hiring of additional workers. We received $6.4 million in payroll support program proceeds during the first quarter of 2021 and did not receive any corresponding proceeds in the first quarter of 2022. We also incurred $3.8 million of noncash equity-based compensation expenses in the first quarter compared to $0.1 million in the first quarter of 2021. Income from operations was $22.9 million in the first quarter versus $12.9 million in the first quarter of 2021. Net income was $17.2 million in the first quarter compared to $10 million in the first quarter of 2021. Adjusted for noncash equity-based compensation and mark-to-market adjustments related to our private warrants, adjusted net income was $22.2 million in the first quarter and $10.3 million in the first quarter of 2021. Diluted earnings per share was $0.32 for the first quarter compared to $0.23 in the first quarter of 2021. Adjusted for noncash equity-based compensation and mark-to-market adjustments related to our private warrants, diluted earnings per share was $0.41 for the first quarter of 2022 compared to $0.24 in the first quarter of 2021. First quarter adjusted EBITDA was $29.9 million or 24.4% of revenue, while adjusted EBITDA in the corresponding year-ago period was $16.5 million or 28.3% of sales. The improvement is largely attributable to higher revenues. In addition, adjusted EBITDA for the first quarter of 2021 reflected the benefit from $6.4 million in Payroll Support Program proceeds, for which, there were no corresponding proceeds in the first quarter of '22. Cash flow provided by operating activities was $43 million in the first quarter compared to $14 million of cash flow used in operating activities in the first quarter of 2021. The main driver of increased cash generation was stronger operating income and timing of inventory purchases. At quarter end, AerSale had approximately $171.7 million of cash on its balance sheet and an undrawn revolver of $150 million. Finally, moving to our guidance for 2022 and summary. As a result of strong first quarter performance and a supportive outlook for the year, we are reaffirming our guidance calling for revenue of $420 million to $450 million and adjusted EBITDA of $80 million to $90 million in 2022. In providing this guidance, we are mindful that recent geopolitical events related to the Russian invasion of Ukraine may impact the global commercial aerospace industry. That said, we have not specifically adjusted our outlook for those factors beyond the identifiable impacts to our business related to assets leased to air carriers serving the Russian market which were terminated in the first quarter and the loss of AerSafe contracts with Russian operators. Furthermore, our outlook is based on an improvement in the AMS segment, ongoing demand for on-airport MRO services, accelerating demand in cargo and e-commerce markets and continued request for passenger-to-freighter conversions and other TechOps products and services. We also continue to make progress on the FAA certification of our innovative AerAware product. We are progressing towards certification, but labor constraints have impacted the timely completion of software. While we remain confident that certification will be completed in 2022, we have only included modest AerAware sales in our guidance to account for the ramp-up phase to commercialize this product once the supplemental type certificate for AerAware is issued to AerSale by the FAA. Finally, the ongoing and continued monetization of the Boeing 757 fleet acquisition is expected to be the predominant driver of the AMS segment. We expect to sell the remaining Boeing 757s as converted freighters in 2022 and 2023 as a result of strong demand for cargo-converted aircraft. In summary, we have proven our best-in-class execution and flexibility as a company throughout the pandemic and through the recovery. We remain committed to stakeholder value and will continue to direct capital to the highest-ROI opportunities for the company. As the market backdrop turns progressively more favorable, we believe we are well positioned to drive value for our customers and shareholders and execute to our long-term strategy. With that, operator, we are ready to take some questions.

[Operator Instructions]. The first question comes from Gautam Khanna with Cowen.

Yes. Just two questions. First, I was wondering if you could talk a little bit more about the USM availability improving. And maybe you could talk about what you have bids out on, or at least the aggregate value that you're pursuing? And then secondly, if you could talk a little more about AerAware timing given all the changes at the FAA. Is that -- if the personnel changes impact the timing of it, in your view.

Okay. Just writing your questions down so I get them in order. Okay. USM availability improving. So last year, as we looked at acquisitions, even though the acquisitions were for USM parts that we believe would not -- that we couldn't necessarily sell in the next 90 days, we made acquisitions of feedstock knowing that, a, it was going to be a while before the USM business recovered; and b, that the lead times to have the USM parts repaired by third parties was prolonged. So the acquisitions we made in the last 2 quarters of last year are starting to show results now in the second quarter of this year. And we've been continually buying feedstock at prices that make sense. On the assumption that we are going to have prolonged intervals for repair and overhaul of that material, and that the -- as the market recovers, that those assets will become available for us, that USM parts will become available for us to sell in the coming quarters. So what we're benefiting from now is the acquisitions we made in the last 2 quarters of last year, and that continues. The size of the acquisition of USM or feedstock to feed the USM business, we feel we're on track to purchase in excess of $100 million of feedstock this year. And we expect that, that will continue to rise. Previously, I've described this as an incoming tide, and it's definitely an incoming tide at this point. Water is getting deeper, more stuff is coming in. AerSale is well positioned to monetize feedstock, whether it be as whole aircraft, whole engines or at the piece part level and make a decision whether to return aircraft to service as whole aircraft, put them on lease, put them into a cargo conversion program or break them down into all of their component pieces and sell them into the aftermarket as USM. So feel very optimistic and confident that the USM availability is increasing as we expected it would, and the timing feels like it's -- we're at the very early stages of rapidly rising tide, which we expect over the next 12 to 24 months will peak. We'll be in a flood tide to the next -- our opinion, in the next 12 to 24 months. Regarding AerAware certification. As we are getting closer to completing all of the tasks that are necessary to get AerAware certified, we have increasing confidence in our ability to complete this project in the near term compared to the last year or 2, where things outside of our control kept pushing this out. COVID, manpower, the lack of FAA attention to it because everybody from the FAA was pretty much working from home instead of in the office. Those issues are now resolving themselves, not all of them, but quite a few. FAA is now back in the office. They're working from the office. Hopefully, that's not going to change. We are substantially finished with software validation by -- which we're not doing, but our partner, Universal Avionics; is very close to finishing. We have our own avionics engineer on site overseeing that. So we have good visibility and confidence that we're nearing the end of that process. We've got favorable response from the FAA and all the documentation we've submitted. So all of this feels like we're coming to the end of this process, and that we believe as soon as Universal finishes all the things they need to do to validate the software, that we will be able to do our flight equipment -- our flight -- finish our flight testing. And that will immediately lead to the FAA considering us for certification. So last step is software validation, then flight testing and final report submission to the FAA, and we expect relatively quickly after we do that, that the FAA will issue a certificate -- a supplemental type certificate. Now when could that be? Assuming we finish all of the validation of our software and flight testing, let's say, validation of software at the end of this quarter, second quarter, flight testing hopefully early in the third quarter. On that basis, again, there are factors outside of our control, but on that basis, we would anticipate FAA approval by the end of the second -- the end of the third quarter.

And do you know how many hours you need to accrue for the flight testing to be adequate?

No. That will be up to the FAA. Our expectation from feedback that we've gotten from the FAA is that based on approximately 200 hours of flying that we've already done with our own FAA designated engineers, that, that will not be a typical 50 to 100 hours of flight testing, that, that will be reduced to something less than 25 hours. So it's something we can do in a couple of days. Remember, we're coming into summer. We got to chase -- we have to chase the weather. So it could be weather dependent because the FAA is to want to see how the system works in bad weather.

[Operator Instructions]. The next question comes from Ken Herbert with RBC.

Nick, just a quick question on the MRO business. I know obviously, you're diverting resources to support your own 757 work. But as you think about your third-party MRO work, are you getting any sense that your customers are looking to defer or even push out any expected work coming out of the summer? I guess I'm just trying to get a sense as to concern about demand in the back half of the year and the guidance assumptions considering a lot of -- obviously, a lot of the concerns we've heard about recently on the pace of the recovery.

Well, from what I recall with our -- based on our last conversation with the President of our heavy MRO group, that were booked up all the way through the end of the year. And so -- and that's going to help by -- when we finish our conversion #6, that capacity will be freed up. I think we're going to be finished by July. Be finished by July on our conversion #6. And then the next 6 to 10 conversions will be done by third-party MROs, that's going to free up, again, capacity for us to service our existing airline customers. I don't think -- we have no problem filling up that capacity, and we expect to be booked all the way through the end of the year. At the rate things are going, as time progresses, we'll continue to stay booked up. I don't think -- we don't see any change in MRO demand for the foreseeable future. We think we're going to be at capacity even with the freed up labor and facilities that we've had by doing the 757 conversion work at a third party.

Okay. That's helpful. And if I could, on the 757 work and more broadly, the passenger-to-freighter, the conversion outlook. You sound very confident in this market sustaining what -- to what extent would risk -- would we see any maybe softening of the passenger-to-freighter demand as international belly capacity, on pass-through aircraft, continues to come back? And are -- you sound very optimistic near term on the cargo markets. But are there anything, if we go out a couple of years, that are maybe causing concern? Or you could see the potential headwinds to the growth on the cargo side?

Well, I mean, I think that, that's going to happen when there is a substantial recovery on the international wide-body market. However, if you look at the 757 in particular, that's a long-range airplane, but it's not a long-range international airplane. It's serving longer routes within a continent or between countries that are maybe not more than 5 hours apart, whereas the long-range wide-body aircraft can serve markets that are of duration 10, 12 hours of flight time. So even with the international market substantially recovering, which in our opinion, that's not going to happen. We don't see that happening until late '23 at best and probably into '24, potentially not even fully recovering to pre-COVID levels until '25. Again, that's our view of the market. All that's going to do is going to minimize demand for wide-body freighters such as the 767, but we don't think it will affect the 757 because that serves a different market. That's why we're optimistic on the demand for the 757 program that we're working on. We see a similar demand on the narrowbody side for the 737 NG cargo conversions. That demand will stay strong, and the recovery of the wide-body international market won't affect that either. So it's the booming e-commerce market that's -- and the complete change in consumer habits. By buying things online as a result of the pandemic and just as a smart way to buy. I think that all those consumer habits are really going to keep the freight market strong, in our opinion. That's why we're making a bet on this freighter conversion program, and we have the confidence that we do that it will continue to be strong.

As there are no further questions, this does conclude the question-and-answer session. I would like to turn the conference back over to Nick Finazzo for any closing remarks.

Okay. Everyone, again, thank you for listening to our call today and for your interest in AerSale. We just completed another record quarter. We're off to a great start in 2022, and we expect that to continue through the balance of the year. So we're feeling good. Again, thank you for listening today, and I hope everyone has a good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.