AerSale Corporation (NASDAQ:ASLE) Q4 2022 Earnings Call Transcript

AerSale Corporation (NASDAQ:ASLE) Q4 2022 Earnings Call Transcript March 6, 2023

Operator: Greetings. Welcome to the AerSale Corporation Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Jackie Carlon. You may begin.

Jackie Carlon: Good afternoon. I’d like to welcome everyone to AerSale’s fourth quarter and full-year 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 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 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, SEC, on March 7, 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 metrics 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.

Nick Finazzo: Thank you, Jackie. Good afternoon and thank you for joining our call today. I’ll begin with a brief overview of the quarter and year and provide operational updates before turning the call over to Martin to review the numbers in greater detail. By nearly every measure 2022 was an excellent year for AerSale. We reported record company revenue and made significant progress in the FAA certification of our enhanced flight vision system AerAware and its subsequent commercialization. Strong operating results were driven by broad market success and strategic execution on our 757 passenger to freighter, which you’ll hear me refer to as P2F conversion program, which was well timed with elevated demand for freighter aircraft.

Our solid financial performance was only achievable due to our unique end-to-end solution, which enabled us to secure the necessary aircraft and perform the conversions in a timely manner to have these aircraft customer ready. The year was also supported by a strengthening commercial recovery, which kept our on-airport MRO facilities at capacity all year and drove demand for our used serviceable material, which you’ll hear me refer to as USM part sales business. Taken together, these factors led to a year-over-year increase in full-year revenue of 20% to $408.5 million. GAAP earnings per diluted share was $0.83 with adjusted EBITDA of $87.4 million, compared to the prior year GAAP earnings per diluted share of $0.76 with adjusted EBITDA of $89.3 million.

Higher margins in the prior year were almost entirely attributable to CARES Act proceeds of $14.8 million, which were not excluded from our adjusted EBITDA numbers. As such, our underlying business performed at a similar margin level relative to revenue when considering CARES Act funding. As we do every quarter, we believe it’s important to remind investors that our financial results are typically uneven quarter-to-quarter and we advise investors to analyze our performance over a full-year based on the patterns of expected feedstock availability and whole asset sales. The pacing of our revenue in 2022 is no exception to this as the timing of flight equipment sales created a record first-half followed by a lower third quarter. In the fourth quarter, our results included significant flight equipment sales.

But to a lesser degree than the prior year period. As a result, our fourth quarter revenue in 2022 was $95.1 million, including $51.4 million of whole asset sales, compared to $116.8 in the prior year period, which included $73.1 million of whole asset sales. Fourth quarter earnings per diluted share was $0.17 with adjusted EBITDA of $17.7 million, compared to the prior year period earnings per diluted share of $0.21 with adjusted EBITDA of $28.6 million. Turning to segment performance and beginning with our asset management segment. In the fourth quarter, sales were $67.9 million, compared to $93.6 million in the same period in the prior year as a result of lower whole asset sales during the period. A reduction in aircraft and engine leasing in the quarter also contributed to the decline partially offset by higher sales of USM material during the period.

In the fourth quarter of 2022, we sold six engines and three aircraft, which included one 757 P2F converted aircraft. This compares to the prior year period in which we sold three aircraft and four engines, which included two 757 P2F converted aircraft. The decrease in revenues is due to the decrease in 757 P2F aircraft sales, which command a higher sales price. Looking to the year ahead, we expect another busy year for our 757 P2F conversion program. As Martin will detail in our guidance, we have subcontracted for an additional 12 conversions from multiple providers of which nine are expected to be completed in 2023 and three in 2024. Due to contractual delays by one of our conversion providers the delivery of these aircraft will be more heavily skewed toward the second-half of the year.

In our USM parts business, airframe and engine parts sales were both up, compared to the prior year period, mostly as a result of an improving commercial backdrop. As we look out beyond the next couple of quarters, we expect to continue on this growth trajectory as feedstock availability improves. Overall, in our leasing portfolio, revenue was down compared to the prior year period, mostly as a result of fewer aircraft on lease during the period. Lower aircraft leases were from aircraft that came off lease during the year that we were able to either resell or part out at more attractive economics, which again speaks to our ability to maximize asset return on investment regardless of the discrete sales channel conditions. These moves focused our leasing activity to short-term engine leasing where we’re able to continue to achieve more attractive high margins.

In our tech ops segment, sales increased by 20.8%, driven by greater on-airport MRO availability as we were able to free up capacity by subcontracting 757 P2F conversions to third-party providers. This allowed us to benefit from increased demand for on-airport MRO services. In addition, our landing gear and component MROs improved as a result of increased demand from passenger airlines. Turning to an update on AerAware, I’m pleased to report that we began FAA certification flight testing in February and so far, have successfully completed two of five stages of flight testing. The third and fourth set of flight tests are scheduled in March with a final set scheduled in April, subject to FAA staffing and weather. That notwithstanding we’re now in the red zone with the FAA on achieving our supplemental type certificate, which you’ll hear me refer to as STC, which will allow us to begin commercialization of this STC product.

Next, I’d like to touch on capital allocation and our plans in 2023 and beyond. We ended the year in an excellent financial position with more than $147 million in cash on our balance sheet and an undrawn $150 million revolving credit facility. We intend to deploy this capital to the highest risk adjusted returns available to our shareholders, which in our case generally falls within two categories. Aircraft feedstock acquisitions and capability enhancements. 2022 was a challenging year regarding the availability of properly priced aircraft feedstock. This was not a result of an absence of deals as we bid on over $1 billion of flight equipment during the year. We won over $50 million of properly priced flight equipment in 2022, despite our disciplined approach to asset acquisition requiring a strong risk adjusted ROI.

However, when we announced our initial 2022 guidance, we had expected to win over $200 million in properly priced deals, which would have made a positive contribution to our second-half of 2022 financial results and would have carried into 2023. That notwithstanding, I am pleased to report a substantial improvement at the start of 2023 and through February, we have already been awarded $107 million more than double the feedstock deals we were able to close during all of 2022. This success has been across all the narrow and wide body aircraft and engines we typically invest in. The improving backdrop of properly priced asset availability sets us up well into the second-half of €˜23 and into 2024 and could represent a significant upside to our current financial outlook if we’re able to maintain this level of buying throughout the balance of the year.

As I noted earlier, our facilities are busy and near capacity across the AerSale system. We have an opportunity to expand our total capacity, footprints and capabilities through MRO facility expansion to drive further growth. This effort is already underway and while it is too early to detail all the specifics, I can share that we have added a third on-airport MRO facility in Millington, Tennessee to increase capacity on narrow body aircraft, which is expected to come fully online by the first quarter of 2024. This 100,000 square foot hanger in Millington is just 20 miles from our expanded USM distribution hub in Memphis. We’re also adding pneumatic capabilities at our Miami based accessories MRO, which we expect to be online in the second-half of 2023.

We look forward to sharing the outcome of these additional efforts, as well as new opportunities in the coming quarters. In summary, I’m extremely pleased with our financial performance in 2022, despite the challenging market for feedstock acquisition. We delivered multiple company records throughout the year, executed strategically well on our 757 P2F conversion program and crossed meaningful milestones in obtaining our STC for AerAware. We hit the upper range of our adjusted EBITDA guidance, despite diminished feedstock acquisitions and no AerAware sales. As we look to the year ahead and as Martin will detail in our guidance, we expect 2023 to demonstrate another year of growth for AerSale, driven by continued progress on our 757 P2F conversion program and a supportive commercial aerospace recovery.

In the second-half and into 2024, we’re positioned to benefit from increased feedstock availability, the commercialization of AerAware and facility expansion opportunities. I would like to thank all of our employees for their dedication to AerSale and for their commitment to our stakeholders. We look forward to providing incremental updates throughout the year. With that, I’ll turn the call over to Martin.

Martin Garmendia: I will start with an overview of our fourth quarter financial performance and end with our guidance for 2023. Our fourth quarter revenue was $95.1 million, which included $51.4 million of flight equipment sales. Revenue in the fourth quarter of 2021 was $116.8 million and included $73.1 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $43.7 million in the fourth quarter of 2022 and 2021. In addition, as we mentioned on our last earnings call, the delivery of one 757 P2F convert aircraft, which was initially anticipated to close during the third quarter of 2022, was delivered at the beginning of the fourth quarter. As we have noted on multiple earnings calls and press releases, our business may and often does fluctuate from quarter-to-quarter based on the timing of flight equipment sales.

We believe that investors and analysts should monitor our progress based on asset purchases and sales over the long-term. Fourth quarter asset management revenue decreased 27.4% to $67.9 million, largely due to lower flight equipment sales. Leasing revenue for the fourth quarter declined as a result of the planned reduction in the number of aircraft in our leasing portfolio as we determined market conditions would not support our historical return on investment for these assets. Fourth quarter USM parts sales were similar to levels seen in the fourth quarter of 2021. technical operations or tech ops revenue was $27.2 million in the fourth quarter, which was an improvement of 17.2%, compared to the fourth quarter of 2021. Tech ops benefited from better performance from landing gear activities and Goodyear on-airport MRO services.

Revenue growth from our Goodyear facility within tech ops was offset by lower revenue at our Roswell facility due to fewer customer aircraft in storage, as compared to prior periods. Fourth quarter of 2022 gross margin was 36%, compared to 37.8% in the fourth quarter of 2021, mainly on account of the sales mix, flight equipment sales, which generally have higher margins were lower in the fourth quarter of 20 22. Fourth quarter selling, general and administrative expenses were $25.1 million with higher payroll expenses, including $4.5 million of non-cash equity-based compensation. Selling, general and administrative expenses were $24.4 million in the fourth quarter of 2021, of which $3.8 million were non-cash equity-based compensation expenses.

Income from operations was $9.1 million in the fourth quarter, compared to $19.8 million in the fourth quarter of 2021. Income tax expense was $4.1 million in the fourth quarter versus $2.9 million in the fourth quarter of 2021. Fourth quarter net income was $9.2 million, compared to $11.2 million in the fourth quarter of 2021. Adjusted for non-cash equity-based compensation, inventory write down, mark-to-market adjustment to the private warrant liability, gain on an aircraft insurance claim and secondary offering and facility relocation costs, fourth quarter adjusted net income was $12.3 million versus $22.3 million in the fourth quarter of 2021. Fourth quarter diluted earnings per share was $0.17 and $0.21 dollars in the fourth quarter of 2021.

Adjusted for non-cash equity-based compensation, inventory write downs mark-to-market adjustment to the private warrant liability, gain on an aircraft insurance claim and secondary offering and facility relocation costs, fourth quarter adjusted diluted earnings per share was $0.23 versus $0.41 for the fourth quarter of 2021. Fourth quarter adjusted EBITDA was $17.7 million and $28.6 million in the fourth quarter of 2021. Adjusted EBITDA and related margins were adversely impacted by lower flight equipment sales, which generally have higher margins. AerSale did not receive any payroll support program proceeds during the fourth quarter of 2021 or 2022. Cash used in operating activities was $0.1 million, primarily due to the application of $18 million in customer deposits associated with the sale of a 747-freighter aircraft that closed during the year, for which the sale proceeds are reflected under investment activities.

In addition, we continue to invest in advanced vendor payments of $13.3 million, primarily associated with the 757 P2F conversion program. We also invested an additional 37.6 million to increase inventory available for sale. AerSale ended the year with $147.2 million of cash, as well as an undrawn $150 million credit facility. Finally, moving to our guidance for 2023 and summary. We expect to generate revenue of $460 million to $490 million and adjusted EBITDA of $70 million to $80 million in 2023. Revenue growth for the year is driven by improvements in USM, Engineered Solutions and Components MRO as the company benefits from an increasing demand for passenger air travel. Margin levels are expected to see some pressure in 2023, primarily as a result of 757 deliveries generating lower margins.

Combined with higher SG&A costs related to an increase in payroll, which includes higher executive compensation amounts as a result of the CARES Act limitations expiring on April 1, 2023. In addition, the company is investing $2 million in research and development costs in order to continue to create innovative products that will impact future years. This guidance reflects AerSale’s expected whole asset sales during the year and anticipated volume in our ongoing operations. As noted earlier, due to delays in the 757 P2F conversion program and lower feedstock acquisitions in 2022, we expect revenue and adjusted EBITDA to be weaker in the first-half of the year and increasing during the second-half as the company benefits from increased feedstock and 757 P2F deliveries.

Our guidance for 2023 does not include any potential sales of AerAware as the product is in its final stages of FAA approval. We will provide an update once the SEC is issued and we have initial orders. Further, we have not assumed the rate of feedstock acquisitions will continue as we have seen during the first two months of 2023. And if it does, it could represent upside to our 2023 guidance. In summary, aside from the variability in the timing of flight equipment sales, our business has continued to gain strong traction and the underlying momentum remains on a robust growth trajectory. With a strong balance sheet and liquidity, we are well positioned to capitalize on increasing feedstock availability, as well as other internal and external opportunities in order to continue generating high returns for our stakeholders going forward.

With that, operator, we are ready to take questions.

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Bert Subin with Stifel. Please proceed with your question.

Bert Subin: Hey, good afternoon and then thank you for the time.

Nick Finazzo: Hey, good afternoon, Bart.

Bert Subin: Hey, good afternoon. So, I just had maybe a question on 4Q to start. On your last earnings call, which was on November, you’re anticipating sales just if I look at the guidance about $30 million higher at the midpoint for the quarter, you just sort of walked us through maybe what drove that discrepancy just because it seems pretty large and maybe how you are still able to outpace the midpoint of EBITDA guidance, despite those contemplated sales?

Nick Finazzo: Yes, I’m a little confused when you say we had projected for the quarter to have another $30 million in sales, what specifically you’re referring to?

Bert Subin: So, you had $420 million to $450 million for your guidance, right?

Nick Finazzo: Correct.

Bert Subin: And came in below that. So, I’m just sort of wondering what drove that discrepancy, were you expecting higher flight equipment sales and things slipped into €˜23? Or was there something unexpected that happened?

Nick Finazzo: Yes, I mean, I would say we were projecting, we were hopeful to have more whole asset sales happening in the overall fourth quarter. Fortunately for us, we were able to generate strong margins off the equipment we were able to sell that’s what we offset that overall revenue shortfall.

Bert Subin: Okay. And maybe just on the AerAware side of things, based on sort of the commentary you have in the call and in the release, it sounds like, you know, if everything went as sort of as well as it could based on the scheduling right now. You could in theory have an STC granted in May. If that were to happen, if that schedule were to play out, I mean, do you think it’s conceivable by July or sometime in that timeframe you could be earning sales again if that were to play out as in that sort of best-case scenario?

Nick Finazzo: Well, I think it’s possible, but it’s really impossible to predict. It’s possible as we have kits in stock, but it’s impossible to predict when we would get our first — until we get this FCC approved and we have a first order, we’re not going to speculate on when we might have sales, we did not put any sales in our guidance, not that we don’t think that that’s possible. We think that is possible, but we think it’s maybe a little irresponsible to be projecting sales of AerAware before we even have the STC or an initial order.

Bert Subin: Yes, that makes sense. And just a final question, Nick, maybe this is more just like a high-level question on the industry. If we look at aviation aftermarket demand, it’s been pretty robust and it looks like it’s — that strength is not really slowing. Could you give us maybe just some thoughts around what inning you think we are with regards to the cycle? Having seen a lot of these cycles play out? And sort of how you’re thinking about positioning the company to capitalize on that demand? Sounds like USM is maybe easing a little bit, but still expected just to remain in a challenge. What’s the best way for AerSale to capitalize on, sort of, the way the market is today?

Nick Finazzo: Well, I don’t think there’s ever enough good USM to supply the market with the USM requirements. Now that was certainly an exception during the peak of COVID, because you had hit so many airplanes parked and not flying and there was almost no demand for USM. Now as the narrow body market has substantially recovered and we’re well underway for a same recovery on the wide body side. The demand for USM is picking up. And again, what we’re starting to see is there’s just not enough good USM to service the requirements, because aircraft are flying, consuming USM, engines that have been — airlines have cannibalized engines that are on parked aircraft to keep the airplanes flying. The — those engines now have been depleted or quite a few engines have been depleted of their useful life, well, of their overhaul time.