AerSale Corp Q4 FY2021 Earnings Call

Greetings and welcome to the AerSale Corporation's Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Ms. Kristen Gallagher, Director of Human Resources. Thank you, ma'am. You may begin.

Good afternoon. I’d like to welcome everyone to AerSale’s fourth quarter and full year 2021 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 facts 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 can 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 and quarterly report on Form 10-Q filed with the Securities and Exchange Commission 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 metrics can be found in the earnings presentation materials made available on the Investor's section of the AerSale website.

Thank you, Kristen. Good afternoon to everyone on the line and thank you for joining our call today. I’ll begin with a brief overview of the quarter and full year, followed by operational updates and the progress we're making on our key objectives. I’ll then turn the call over to Martin to review the numbers. We finished the year strong with total fourth quarter revenue of $116.8 million, which more than doubled the prior year period of $49.4 million. Strength in the quarter was largely related to progress on our 757 freighter conversion program along with other flight equipment sales, which collectively accounted for $73.1 million of our fourth quarter sales. We also benefited from an improving commercial aerospace market as airlines continue to recover from pandemic lows. These gains versus the prior year were partially offset by a decrease in sales in our TechOps segment as we reallocated resources in our Goodyear facility to support the 757 freighter conversion program. I will elaborate more on this strategy in a moment. We also reported strong profitability during the quarter with an operating profit of $19.8 million compared to a $26,000 loss in the prior year. Adjusted EBITDA during the quarter was $28.6 million or 24.5% of total sales and set a single quarter company record. Higher profitability resulted from the strength of our 757 cargo conversion program coupled with an improving operating environment. Our full year 2021 results also set a single year record for financial performance with total sales of $340.4 million, an increase of more than 60% year-over-year. Adjusted EBITDA for the full year was $89.3 million, an increase of 72% year-over-year. We are proud that we demonstrated exceptional growth and performance in our first year as a public company, exceeding the commitments we've made to investors in our SPAC transaction in 2020. This truly sets AerSale apart from most other companies that went public by combining with a SPAC and speaks to the underlying power of our purpose-built end-to-end model. Before getting into segment level details, I'd like to make a couple of comments regarding the Russian invasion of Ukraine. As is most of the global community, we are shocked and deeply saddened by these events and are supportive of actions taken to end the violence. To that end, we're fully compliant with the sanctions, which have impacted our ability to lease flight equipment or supply parts to airlines flying into Russia, which I will detail throughout my remarks. We expect its effect to be limited to less than 5% of our preliminary 2022 consolidated sales budget. Turning to segment specifics and beginning with asset management. In the fourth quarter, we sold $73.1 million of flight equipment that included three aircraft and four engines. I want to reiterate that flight equipment sales such as the 757 program are an important part of our business, feedstock 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 their best and highest use to earn the greatest return on investment, whether it be as whole flight equipment, leases or feedstock to our customers. 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 feedstock aircraft and conversion slots to continue expanding our 757 freighter conversion program through 2023 and giving us good visibility in our current guidance period that Martin will elaborate on further in his remarks. Within our used serviceable material or USM Parts business, airframe and engine parts sales were at or higher than prior year levels as airline demand improved. Although feedstock availability has steadily increased over the year, we remain highly disciplined and only execute on those opportunities where our multidimensional integrated business model allows us to achieve outsized returns on these acquisitions compared to our peers. During the fourth quarter of this year, 2021, our leasing revenue increased compared to the prior year period due to strong utilization of our leased assets. Additionally, regarding the recent war in Ukraine, sanctions against Russia have created minimal exposure that will impact our lease programs in 2022. In total, we had two airplanes and two engines on lease to global airlines that operated these assets in Russia. As mandated by the sanctions, we terminated the leases for these assets. Our lessees have been very cooperative and we were able to regain control of these assets quickly except for one engine, which we expect to regain control of imminently. The unplanned forced termination of these leases will create a modest headwind to our 2022 performance as these assets will not be actively generating revenue until we are able to secure a new lessee or identify other ways to monetize these assets throughout our system. The remaining two aircraft we have on lease are performing as required under their leases. We will continue hunting for asset purchases and expect attractive opportunities in 2022 as airlines assess their fleets following a more normalized service level. In our TechOps segment, total third-party sales were down 27.5% to $23.2 million. As I mentioned a few moments ago, lower sales were entirely the result of our strategic reallocation of resources to intercompany activities in support of the 757 freighter conversion program. Demand for MRO activities from airlines remains strong, but our analysis indicates that we can generate higher returns through supporting the 757 program in the short term. This also presents us with a strong offsetting growth opportunity as this program winds down later this year as it will free up hanger space and labor to work on customer aircraft. Moving to Engineered Solutions, we continue to see incremental demand for our existing AirSafe product STCs, which include the 737 Classic and MG, the 757, which received FAA approval last month, 767 and 777 and the Airbus A318, A319, A320 and A321 family of aircraft. AerSale serves as a fuel tank flammability reduction, otherwise known as the FTFR alternative to a nitrogen inerting system installed by Boeing and Airbus in new aircraft. AerSale consists of a military specification reticulated polyurethane foam system that achieves the technical requirements mandated by the FDF. In addition to the requirements of the FDF, an airworthiness directive has been issued, which mandates separation of the fuel quantity indication system in an aircraft’s center fuel tank, which for the 757 has a mandatory compliance date of May 2022. We have also continued our work on product development and FAA approval of AerAware, our advanced technology enhanced flight vision system, incorporating a military style head wearable display that allows pilots to see through poor weather conditions. We are progressing towards certification with the updated development timelines, suggesting that this work should be completed by early May 2022. We continue to believe FAA approval will be granted in 2022 but have only included modest revenue from sales this year 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. We remain enthusiastic about the market potential for AerAware and continue to see this product as the largest market opportunity in our history and a potential to transform our business. We expect AerAware's enhanced flight vision technology to become the desired technology on commercial aircraft with its ability to improve safety, offer an attractive return on investment to airlines, and reduce the carbon footprint of flight operations by minimizing flight delays caused by poor weather conditions, airport diversions and airport traffic congestion. In our view, it's not a matter of if the FAA will grant us an STC for AerAware or if the market will ultimately embrace the safety and flight enhancement features it offers that we believe are unparalleled to any other solution in the industry. It's just a matter of when. Before turning the call over to Martin, I would like to touch a bit on the macro environment. We're gaining confidence the worst of the pandemic-related disruptions are behind us, and a more steady and prolonged recovery is poised to emerge in 2022 and beyond. Governments around the world are rapidly lifting restrictions and consumers are eager to begin traveling after more than two years of restrictions. This benefits AerSale as airlines recommission parked aircraft and higher systems capacity increases the need for MRO. There are also continued opportunities in the freighter markets, and we're seeing an increase in aircraft reactivations and aircraft made available for sale. We're on track to monetize our Boeing 757 investment through 2022 and 2023. Over the long term, AerSale is perfectly positioned. We operate a purpose-built, fully integrated, multidimensional, adaptive 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 our stakeholders. This model led to our record results in 2021 and issuance of 2022 guidance that demonstrates growth off that base. We stand ready to capitalize on all market opportunities and are further supported by a strong balance sheet with over $130 million in cash as of year-end, no debt and $150 million undrawn revolver. This allows us to deploy capital quickly for both asset acquisition and potential M&A opportunities.

Thanks, Nick. I will start with an overview of our fourth quarter financial performance and end with our guidance for 2022. Our fourth quarter revenue was $116.8 million, which included $73.1 million of flight equipment sales. Revenue in the fourth quarter of 2020 was $49.4 million and did not include any flight equipment sales. As a reminder, our business may fluctuate from quarter-to-quarter and year-to-year based on flight equipment sales. Therefore, it is important to monitor our progress on asset purchases and sales over the long term. Fourth quarter Asset Management Solutions, or AMS revenue increased to $93.6 million from $17.4 million in the fourth quarter of 2020, mainly due to the flight equipment sales mentioned previously. Consumption of USM parts for maintenance improved through the quarter as airlines returned aircraft into operation against the backdrop of an upswing in air travel. We remain on track to monetize the remaining 15 Boeing 757 aircraft through 2022 and 2023, with the majority of them being monetized in 2022. Fourth quarter revenue from TechOps was $23.2 million, compared to $32 million in the fourth quarter of 2020. During our third quarter earnings call, we mentioned that we were reallocating resources away from third-party work to support our cargo conversion line for our 757 aircraft at our Goodyear facility. This process continued through the fourth quarter leading to lower revenue. However, this reallocation allowed us to realize higher margins from the sale of three 757 cargo conversions in 2021. Going forward, we expect to benefit from a pickup in MRO volume due to the ongoing recommissioning of commercial aircraft and greater demand for USM parts consumption for overhaul activity. Fourth quarter gross margin was 37.8% compared to 26.6% in the fourth quarter of 2020. The improvement was largely due to a greater mix of high-margin flight equipment sales. Selling, general and administrative expenses were $24.4 million in the fourth quarter compared to $15 million in the fourth quarter of 2020, mainly on account of higher payroll expenses. We did not receive any proceeds from the payroll support program in the fourth quarters of 2021 and 2020. In addition, we incurred $3.8 million of noncash stock-based compensation in the fourth quarter compared to $1 million in the fourth quarter of 2020. Income from operations was $19.8 million in the fourth quarter of 2021 compared to a loss from operations of $26,000 in the fourth quarter of 2020. Net income was $11.2 million in the fourth quarter compared to $0.3 million in the fourth quarter of 2020. Adjusted for noncash stock-based compensation, inventory write-offs, unrealized loss on investment and mark-to-market adjustments to the warrant liability, adjusted net income was $22.3 million. Diluted earnings per share was $0.21 for the fourth quarter and is not comparable to the fourth quarter of 2020 due to the public listing of AerSale on December 23rd, 2020. Excluding the impacts of the non-cash items noted above adjusted diluted earnings per share was $0.32 for the fourth quarter of 2021. Fourth quarter adjusted EBITDA was $28.6 million or 24.5% of revenue, while adjusted EBITDA in the corresponding period in 2020, was $3 million or 6.1% of revenue, higher revenue and favorable sales mix comprising of a larger portion of higher margin flight equipment sales drove the improvements in adjusted EBITDA. Cash Flow provided by operating activities was $79.1 million in 2021, compared to $12.2 million of cash flow used in operating activities in 2020. The main driver of increased cash generation during the year was stronger overall operating income and an increase in deposits related to 2022 flight equipment sales. At year end, AerSale had approximately $130.2 million of cash on its balance sheet and that undrawn revolver of $150 million. With our strong financial profile and debt-free balance sheet, we are ready to execute on potential asset acquisitions and M&A opportunities going forward. Finally, moving to our guidance for 2022 and summary. As Nick mentioned, we have several identifiable items that will be impacted by the current war in Ukraine and including these headwinds, we are issuing our guidance for $420 million to $450 million in revenue, and $80 million to $90 million in adjusted EBITDA. In providing this guidance, we are also mindful that as these events develop, they may impact the global commercial aerospace industry and related macro environment, including and not limited to supply chain disruptions, expanding sanctions, and an impact on flight activity due to higher fuel prices. Given the recency of these events, and the unpredictability of how their impact may ultimately unfold, we have not specifically taken into account these factors in providing this guidance beyond taking into consideration the identifiable impacts of which we are already aware of. Further, this guidance is based on an improvement in the company's AMS segment, ongoing demand for its on-airport MRO services, accelerating demand in cargo and E-commerce markets and increased requests for passenger to freighter conversions and other TechOps products and services. The ongoing and continued monetization of the Boeing 757 fleet acquisition is expected to be the predominant driver of the AMS segment. AerSale expects to sell the majority of the remaining Boeing 757 aircraft in 2022 as a result of strong demand for cargo converted aircraft. As Nick noted, we have only included modest AerAware sales this year to account for the ramp-up phase to commercialize this product, once a Supplemental Type Certificate for AerAware has been issued. In summary, our internal adjustments and superior execution over the last year against the backdrop of the pandemic have yielded success. In addition to being more resilient, we are also now on a stronger operational and financial footing. We have thrived in this challenging commercial aviation market with a diversity of our revenue sources creating a counter-cyclical hedge. We look forward to continuing to generate internal and external stakeholder value as we seek to achieve our goals over the next few years.

At this time we'll be conducting a question-and-answer session. Our first question comes to line of Gautam Khanna with Cowen. You may proceed with your question.

Thank you very much, guys. Hey, I was wondering if you could elaborate on the Russian exposure. So that 5% or less, is that in the sales guide? Is that already reflected? Or is that potentially incrementally negative to it?

No. We have already removed anything that was specific that we knew. So we removed the impact of the leases and some AerSale kits that has been removed out of our guidance. We have not removed any impacts to the microenvironment that could happen from continuing escalation of the Russia event.

Okay, got it. And then on AerAware if you could just elaborate on what the timeline is, you mentioned Q2, sort of what the remaining items are, in terms of getting the product certified, and then what you'd expect thereafter with respect to orders and the like?

So we continue to wait for software validation by our partner. That process is proceeding as expected; it’s taking longer than usual due to its complexity, but it is progressing steadily. We believe all identified issues with the software have been resolved, and we are completing the validation. Our partner has indicated that this should be finalized by early May. We aim to conduct our test flight in the meantime, as testing the aircraft is necessary for the FAA to issue the supplemental type certificate. We think testing and validation can occur simultaneously, so we won’t have to wait for validation to finish before starting test flights. Once the test flights are complete, we will submit our final report, including test data, to the FAA. If validation is completed by early May, we expect to conduct test flights and report in May, hopefully sooner rather than later. If everything is done in May, we will submit everything to the FAA, and then we will be in a waiting period. We will have fulfilled all necessary requirements for FAA certification, and it will just be a matter of waiting for the FAA to allocate resources for the certification process. At this point, we cannot predict how long that will take; it typically takes about 30 to 60 days unless something causes a delay. The FAA has taken longer in recent years, mostly due to staff working remotely, which has limited face-to-face interactions. We hope this is improving as more staff return to the office, and we remain optimistic that the FAA will focus on this matter so we can finalize certification within a few months after submitting our documentation.

Okay, and you did make a comment about aerospace and sort of the May timeline I'm just curious what happens after May, so once that – does that open up new markets potentially or I'm just curious how the May date matters on aerospace?

On the May compliance deadline for the 757 aircraft, all passenger planes must have a system in place for fuel quantity indication separation by that date. AerSale is compliant and has received certification for this requirement. By May, all active aircraft in passenger service need to have this system installed, although this requirement may vary by jurisdiction. As planes move from areas without such regulations to those with them, it may increase demand for AerSale products. We have made sales to airlines operating in Russia, but current sanctions prevent us from selling these systems there. We are seeking approval from OFAC to sell these systems as safety items, but we cannot predict if that approval will be granted. If it is not approved, those sales will be postponed until the aircraft leave Russia. While aircraft are indeed leaving Russia, many will not have the kits installed, and the next operators will likely need them, creating future sales opportunities. As mentioned earlier, we’ve removed projections for the sales that were planned for airlines operating in Russia from our budget, meaning they are not included in our forecasts for the rest of the year. This does not rule out sales; it simply indicates we have taken them out of our projections for now, and we currently have no visibility on that situation.

Got it. And just one last one on the 757 monetization. You mentioned the bulk of them will be done this year, that main 15 of the 15. Any sense for kind of how those phase through the year? And how much are you thinking the 12, or 13 of them get monetized this year? Or is it 8%, just over half. I know you said the majority of the bulk of it. I'm just curious, timing and magnitude this year, just so we can…

We currently have three aircraft undergoing conversion. One is nearly finished, and we expect to deliver it to a lessee and sell it to a leasing company within the next 30 days. The two other aircraft conversions will follow in the second and third quarters. We also have two planes committed to a Chinese operator, which will handle their own conversions. This will be the last two aircraft we deliver to them, bringing the total delivered this year to ten, with five remaining. We have committed to Precision for six additional cargo conversions, which may take place in China or at another domestic facility. We have reserved all available cargo conversion kits for Precision through 2023, and we are counting on acquiring at least one more airplane, with an option to increase to ten. Our expectation is to sell the remaining airplanes as converted freighters in 2023, as conversions will start with a third party in the last quarter of this year, continuing into 2023, and potentially extending to 2024 if we reach ten.

Great. Thank you very much.

You're welcome, Gautam.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Nicholas Finazzo for closing remarks.

Okay. As always, thank you for listening to this call today and for your interest in AerSale. We're very pleased with our progress to date and excited about the future. Have a good evening, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and do the rest of your day.