AerSale Corporation (NASDAQ:ASLE) Q2 2023 Earnings Call Transcript

AerSale Corporation (NASDAQ:ASLE) Q2 2023 Earnings Call Transcript August 8, 2023

AerSale Corporation misses on earnings expectations. Reported EPS is $-0.05229 EPS, expectations were $0.09.

Operator: And welcome to the AerSale, Inc.’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kristen Gallagher. Thank you, ma’am. You may begin.

Kristen Gallagher: Good afternoon. I’d like to welcome everyone to AerSale’s second quarter 2023 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, 2022, filed with the securities and Exchange Commission on March 7th, 2023, 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 of the AerSale website at ir.aersale.com.

With that, I’ll turn the call over to Nick Finazzo.

Nicolas Finazzo: Thank you, Kristen. Good afternoon and thank you for joining our call today. I’ll begin with a brief overview of the quarter and provide operational updates before turning the call over to Martin to review the numbers in greater detail. Our consolidated second quarter results were behind our internal expectations, resulting primarily from current soft demand in the cargo market for our P2F converted 757 aircraft and extended repair times for used serviceable material, which you’ll hear me refer to as USM. Total sales in the second quarter were $69.3 million, compared to the prior year of $139.6 million. This quarter included flight equipment sales of $13.3 million, compared to $92.5 million in the prior year.

Aside from reduced flight equipment sales, revenue across most of the company’s business units continued to grow, supported by a strong commercial environment and demand for our products and services. I would remind investors that the year-ago comparable period included record-high company revenue from the sale of multiple aircraft. As we have noted on each and every earnings call, flight equipment sales are an important component of our end-to-end solution, but do create meaningful quarterly volatility in sales and profitability. Further, we allocate feedstock to the business unit that can achieve the highest risk adjusted rates of return, whether that be through whole assets, leases or USM parts. Therefore, the sales channel can produce often the additional volatility quarter-to-quarter.

With that being said, I’m pleased to report that our acquisition of feedstock through the first half of 2023 has remained robust and on track with our expectations having acquired or been awarded over $200 million of feedstock, compared to just $50 million in 2022. we’ve been using our balance sheet to acquire this favorably priced feedstock and the level of inventory on hand to fuel future profitability now stands at over $300 million, a record high. This is an important leading indicator of our future performance, giving us confidence that the second quarter of 2023 should be the low point of this recent cycle. Turning to profitability. adjusted EBITDA in the second quarter of 2023 was a loss of $540,000, compared to a gain of $41.1 million in the prior-year period.

The lower adjusted EBITDA margin observed in the period resulted from fewer aircraft sales, coupled with the expense of maintaining the strength of our multi-dimensional, fully-integrated infrastructure at a high readiness level to support future growth. At the segment level and beginning with asset management, second quarter sales were $37.1 million, compared to $114.5 million in the prior-year period, resulting from lower flight equipment sales and no aircraft on lease. In the current quarter, we sold a total of four engines and no aircraft, compared to three engines and three aircrafts in the second quarter of 2022. Q2 of 2022 included two high value P2F converted 757s and one 747 freighter, which set a company record for a single aircraft sale in terms of both revenue and total net dollar margin.

We’ve continued to work through P2F conversions of our 757s and our revised 2023 outlook calls for three sales and three leases by year-end, compared to our prior forecast, which included the sale of six P2F converted 757s and three leases. This reduction to our full-year outlook is the result of a significant softening in the cargo market following the pandemic surge experienced over the past few years. Cargo operators currently suffering from reduced demand and an associated lack of liquidity has tempered the sale of our P2F converted 757s and will likely result in a heavier mix of leases versus sales in the near term. Together, these factors led us to reduce our full-year estimates for flight equipment sales on the 757 program. While this changes our forecast for 2023, it is important to underscore that we still see ample opportunity to monetize this inventory through alternative sales channels at target margins consistent with those channels.

in our USM parts business, airframe and engine parts sales both grew compared to the prior year, reflecting our heavy investment in USM being repaired regardless of the extended repair cycle times. The ability to use our balance sheet to offset supply chains delays is now paying off. as over the past six months to nine months, the steady stream of USM flowing through the repair process is now yielding ready, high demand USM, which in many cases has been presold while still in the repair cycle. In the second quarter of 2023, we had no aircraft leasing revenue as we fully wound down our aircraft lease portfolio in response to market dynamics. In the prior year, we had $2.1 million of revenue from aircraft on lease, primarily related to a 737 and 747 freighter that have since been sold.

Comparing the sales mix of our products over time, we’ll yield varying results as we’re agnostic to the type of monetization strategy we utilize in our asset management business. We steadfastly seek to maximize return on investment on feedstock through the highest return in current market conditions between USM parts, leasing or the sale of whole assets. Turning to our TechOps segment. we reported second quarter 2023 sales of $32.3 million, which was up 28.7%, compared to second quarter 2022 sales of $25.1 million. Higher sales resulted from strong demand for services at all our MROs, with additional on-airport MRO capacity at our Goodyear, Arizona facility, made available by outsourcing the 757 P2F program, together with increased utilization at all facilities.

As mentioned earlier, we’re seeing a favorable overall operating backdrop and we anticipate a meaningful step-up in operating tempo as our investment in feedstock works its way through the broader system. Turning to engineered solutions. We continue to work towards final FAA approval of our enhanced flight vision system, AerAware. If you recall, during our last quarter’s earning call, final certification of the system will follow the completion of five sets of flight tests proving different aspects of the system’s performance and reliability. Although we successfully passed the first four, several imaging issues were identified that required minor modifications to both software and setup procedures to ensure the images projected onto our head-wearable displays, aligned within the limits prescribed by the FAA.

Identifying these issues and fine-tuning the system is part of the certification process, and the reason for extensive flight testing. I am pleased to report that we’ve made all the minor adjustments and modifications identified during flight testing, resulting in improved performance of the system and our readiness to demonstrate these adjustments to the FAA. Earlier this week, the FAA notified us that they have accepted these modifications and requested an in-person demonstration of the changes we made. This demonstration has tentatively been scheduled for the weeks commencing August 14th or 20th, subject to final paperwork and weather. Immediately, following the demonstration, the fifth and final set of flight tests will commence and is expected to take approximately one week to complete.

Assuming the successful completion of the final flight tests, the FAA typically issues an STC within 30 days. Turning to capital allocation. we remain in excellent financial condition to continue to fund our feedstock program and sustain business growth. In addition to over $200 million in feedstock closed under contract or LOI year-to-date, we ended the quarter with $34.6 million in cash and an undrawn $180 million revolver, which was recently upsized and expandable to $200 million, providing us with total current liquidity of $215 million. Further, as we begin to monetize the feedstock already acquired and coming available post repair, this will enable further expansion of our acquisition strategy. Besides the acquisition of feedstock, we’ve been very active in pursuing M&A opportunities.

While it’s too soon to share any specifics, we’re targeting capability enhancing acquisitions that either complement our end-to-end solution, enhance our footprint, or increase our capabilities for engineered solutions. As is the case with feedstock acquisitions, we’re extremely disciplined in our approach and we’ll not overpay for an asset that has little post-closing synergy. To conclude, despite the disappointing short-term financial results and its impact on 2023’s full-year outlook, the fundamentals of our multi-dimensional and fully-integrated business model bestows AerSale with a unique and unmatched platform to achieve significant growth in sales and profitability in the backdrop of a favorable and improving aftermarket. we’re encouraged by the pace of our asset acquisition program, which combined with the near-term approval of AerAware, should mark the second quarter as the low point in our future results.

We’ve navigated through some pretty turbulent headwinds so far this year, but the investments we’ve been making have provided us with a tailwind as we move into the second half of the year and into 2024. I would like to thank all our employees for their dedication to AerSale and for their efforts in delivering on our commitments to all our stakeholders. Now, I’ll turn the call over to Martin for a closer look at the numbers. Martin?

Martin Garmendia: Thanks, Nick. I will start with an overview of our second quarter financial performance and end with our updated guidance for 2023. Our second quarter revenue was $69.3 million, which included $13.3 million of flight equipment sales comprised of only four engines and no aircraft. Revenue in the second quarter of 2022 was $139.6 million, and it included $92.5 million of flight equipment sales consisting of three aircrafts and three engines, out of which two aircrafts were AerSale converted Boeing 757 freighter aircraft and the other a Boeing 747 freighter. Excluding whole engine and aircraft flight equipment, our base revenue continued to generate significant underlying growth. As we have pointed out during multiple earnings calls, flight equipment sales may significantly vary from quarter to quarter, and we believe monitoring our progress based on asset purchases and sales over the long term is a more appropriate measure of progress.

Second quarter asset management revenue dropped 67.6% to $37.1 million, because of the significant variation in year-over-year flight equipment sales noted above. Outside of flight equipment sales, USM parts sales improved from the year-ago quarter as demand and availability of feedstock expanded while aircraft leasing revenue fell due to a planned reduction in the number of aircrafts in the leasing portfolio. TechOps revenue was up 28.7% to $32.3 million in the second quarter from $25.1 million in the second quarter of 2022. Our TechOps business benefited from additional capacity dedicated to customer aircraft at our Goodyear on-airport MRO facility, as well as an increase in sales from our component MROs. As we have mentioned previously, the transition to third-party providers to perform the remaining 757 P2F conversions at the beginning of the fourth quarter of 2022, opened up capacity at our Goodyear facility.

This transition has helped generate revenue and growth from expanding third-party services at our Goodyear MRO. second quarter gross margin was 29.1%, compared to 39.4% in the second quarter of 2022, which was mainly the outcome of a sales mix that consisted of fewer high margin flight equipment sales. Selling, general and administrative expenses were $27.1 million in the second quarter of 2023, which included $3 million of non-cash equity-based compensation expenses. Selling, general and administrative expenses were $23.5 million in the second quarter of ’22 and included $3.9 million of non-cash equity-based compensation expenses. Second quarter loss from operations was $7 million, while income from operations was $31.5 million in the second quarter of 2022.

Net loss was $2.7 million in the second quarter compared to net income of $26.5 million in the second quarter of 2022. Adjusted for non-cash equity-based compensation, mark-to-market adjustment to the private warrant liability, facility relocation cost and secondary issuance cost, second quarter adjusted net loss was $591,000. Our adjusted net income was $31.7 million for the second quarter of 2022. Second quarter diluted loss per share was $0.08, compared to diluted earnings per share of $0.47 in the second quarter of 2022. Excluding the adjustments mentioned above, second quarter adjusted diluted loss per share was $0.03, compared to adjusted diluted earnings per share of $0.56 for the second quarter of 2022. Our adjusted EBITDA was a loss of $540,000 in the second quarter of ’23, compared to a gain of $41.1 million in the prior-year period.

The decline in adjusted EBITDA was largely a consequence of lower flight equipment sales, which had strong margins. Next, in terms of our cash flow metrics, cash used in operating activities was $129.2 million as a result of a gross investment of over $200 million in feedstock that will fuel growth opportunities going forward. We ended the quarter with $34.6 million of cash and an undrawn revolver credit facility, which we have recently renewed for a five-year period and upsized to $180 million with the ability to expand up to $200 million. This additional capacity, as well as more attractive advance and financing rates, will help us to continue to fuel our growth. Finally, moving to our updated guidance for 2023, we now expect to generate revenue of $400 million to $440 million and adjusted EBITDA of $40 million to $55 million in 2023.

This updated guidance takes into account softer freight market demand that is anticipated to delay our previous estimates of the delivery and sale of our 757 P2F converted aircraft. This guidance for 2023 does not include any potential sales of AerAware, as the product is in its final stages of approval and will be updated once the SEC is issued, and AerSale can assess initial order and delivery schedules. Looking ahead, the long-term underlying fundamentals of our business remain robust. We are well positioned to capitalize on organic and inorganic opportunities, and generate strong returns for our internal and external stakeholders going forward. with that operator, we are ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Ken Herbert with RBC Capital Markets. Please go ahead.

Kenneth Herbert: Hey. Good afternoon, Nick and Martin.

Nicolas Finazzo: Good afternoon, Ken.

Martin Garmendia: Good afternoon, Ken.

Kenneth Herbert: Hey, Nick. maybe, just to start off, as you look at the EBITDA guidance now for the full year, it still implies, obviously, a pretty substantial step-up sequentially into the second half. As we’re sort of almost halfway through August here, can you just talk about the cadence we should expect maybe for the EBITDA in third to fourth quarter and sort of anything you could say around asset activity here into the third quarter to help with confidence on the EBITDA?

Martin Garmendia: You want to answer that? Do you want me to answer?

Nicolas Finazzo: Yes, I’ll start. I think we can say as we already have two 757s that are under contract that we’ll be closing one in Q3 and Q4. In addition to that, we have several whole asset deals that are also already under contract. We noted that we are starting to see a pickup in the availability of USM material. In fact, of that material, already 25 — approximately $25 million of that material has already been presold. So that is giving us confidence on the strength of the second half. We still have a significant amount of additional inventory that’s being flowed through and being made available for sale. So, with that notion, with the almost $200 million — the over $200 million of feedstock that we have right now, and based on the opportunities we’re seeing in the commercial market, that’s giving us the confidence that we will be increasing and that the second quarter will be the low point.

And then we’ll start going back to a more normal trajectory for the second half of the year.

Kenneth Herbert: Okay, that’s helpful. And if I could just on error, where it sounds like the FAA is comfortable with the proposed changes. It sounds like the demonstration flight should happen here in a couple of weeks. You’re still confident, it sounds like in a sort of STC this year. But just considering some of the challenges we’ve had on this program. maybe, Nick, if you can just walk through sort of how you’d characterize risk now on timing associated with AerAware, sort of relative to where we were coming out of the first quarter.

Nicolas Finazzo: Well, as we’ve discussed and I’ve mentioned during prior earnings calls, as the more we fly the airplane, the more little things pop up, some of which are actual issues and some of which are questions. should it be displayed this way? Should it be this color? And so all throughout the process, we’ve made minor tweaks to the system to get it to basically make the FAA happier that it is displaying the way they want it to display. And even recently, one of the display issues that we saw was within limits, but the FAA didn’t like it and they asked us to make it better and we found a way to make it better. And then unfortunately, that took a couple of months to get to that point. and we are to that point now. Every single item that’s been identified by the FAA is, guys, can you change this?

Can you make this better? We’ve done. The last two issues, we’ve done, we showed them in the lab that they worked. We actually did flight testing to verify ourselves that whatever adjustment the FAA wanted us to make complies with their request and is within the limits that the FAA prescribes. So, we’ve done that all internally. Now, the FAA is ready. They’re ready to start flying. They wanted to start flying on Tuesday of this week, but there’s a lot of paperwork that we’ve got to give the FAA to catch up to that. So, it is possible we’ll start flying on next week. But if we don’t have all the paperwork that we need to the FAA in time, it’ll push back another week. But our expectation at this point based on they’re pushing us now, hey guys, we’re ready to fly.