AerSale Corporation (NASDAQ:ASLE) Q4 2023 Earnings Call Transcript

AerSale Corporation (NASDAQ:ASLE) Q4 2023 Earnings Call Transcript March 7, 2024

AerSale Corporation  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to AerSale, Inc.’s Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to hand the conference over to Kristen Gallagher. You may begin.

Kristen Gallagher: Good afternoon. I’d like to welcome everyone to AerSale Fourth 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, 2023, filed with the Securities and Exchange Commission to be filed on March 8th, 2024, 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 found in the earnings presentation materials made available on the Investor 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 today with a recap of the year and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. The final months of the year deviated meaningfully from our expectations headed into year-end, which entirely stemmed from lower-than-anticipated flight equipment sales in the fourth quarter. If you recall, in the prior quarter, we noted a significant number of flight equipment sales that were slated for delivery in December, which would account for the bulk of our EBITDA for the year. As noted at the time, the schedule of these deliveries is subject to change due to customer acceptance and delivery requirements, which were expected to occur in the fourth quarter.

In total, we had 28.8 million of flight equipment sales that did not close in 2023, that have thus far closed in the first quarter. We expect the remaining sales that did not materialize in 2023 to close in the first half of 2024 or be returned to available inventory for subsequent sale or lease. Importantly, this is common in our business and as a public company, we have had quarters that have demonstrated a significant deviation from our original expectations, both on the upside and the downside. As we have discussed, we operate a purpose-built end-to-end solution which is unique in the industry and gives us a competitive advantage to extract value from assets that our peer group is unable to achieve. This ecosystem allows us to direct assets to the most attractive ROI for our equipment.

And we’re agnostic to the end use, whether it’d be through part sales, aircraft and engine leasing or flight equipment sales. With this complex ecosystem comes a significant fixed cost hurdle that we must clear annually, at which point we begin generating significant EBITDA on each incremental dollar of sales. In the short term, flight equipment sales generate significant revenue and therefore EBITDA drop through, as we have already reached our fixed cost hurdles. In the longer term, to the extent, we deploy more assets to USM, it will have a similar effect on our financials, but over an extended period of time. Following the lessons learned in 2023, we recognized the need to provide investors accurate and insightful inputs to our go-forward performance.

Therefore, we’re discontinuing our practice of numerical full-year guidance but will continue to provide as much qualitative detail as possible about opportunities and outcomes expected over future periods. Our change in guidance policy should not be interpreted as a change in our bullish view about 2024 and future years’ performance, which we are confident we can drive from the diversified AerSale platform. Turning to a summary of full-year results, our sales declined 18.1% to $334.5 million. Lower full-year sales were attributable to lower feedstock acquired in 2022, combined with significantly lower flight equipment sales throughout the year, particularly in the first half of ’23. Excluding flight equipment sales and the sale of a 737 aircraft in TechOps in 2022, which is not expected to recur.

Full-year revenue increased 5.6%, reflective of the strong commercial demand environment we’re operating in. Turning to our profitability for the full year, we reported adjusted EBITDA of $12.3 million compared to $87.4 million in the prior year. The decline in EBITDA year-over-year stemmed from reduced volume in the first half of 2023 due to lower feedstock availability, substantially fewer flight equipment sales during the year, and the absence of stronger margins generated in the prior year related to our 757 P2F conversion program. At the segment level and beginning with asset management, our full-year sales came in at $215.2 million compared to $277.6 million in the prior year. Lower full-year sales almost entirely stemmed from a reduction in total flight equipment sales and fewer aircraft and engines on lease.

Our full-year USM sales partially offset these factors with a 26.1% growth year-over-year, as we benefited from strong demand and improved feedstock in the second half of 2023. For the full year, we sold 17 engines and four aircraft, compared with 15 engines and 12 aircraft in the prior year. Turning to our end markets, commercial demand remains robust, as a result of strong airline traffic and capacity, which has now exceeded pre-pandemic levels. This is a formidable tailwind to our business and provides significant demand for our equipment. Importantly, this is a compelling indicator as we’ve ramped up our asset purchase program in 2023 after a weaker purchasing environment in 2022, that unfavorably impacted our first half of the year. Simply put, with sufficient demand and favorable pricing, our current ability to drive revenue and EBITDA stems from our ability to acquire, service, and deploy equipment back into the market.

In the cargo market, conditions remain challenging. As we’ve reported throughout the year, we have seven remaining 757s that are being converted and continue to actively market these aircraft to potential customers. In our USM parts business, airframe and engine parts sales both grew substantially year-over-year, driven by the success of our feedstock program. For the full year of 2023, we acquired $132 million of feedstock and had an additional $72 million under contract at year-end. The availability of feedstock continues to be negatively impacted by the delay in new OEM production that has forced the operators to retain older equipment for longer than is typical. Despite this environment, we’ve been successful in continuing to acquire feedstock as our purpose-built model was made to extract a maximum value of aircraft in any condition, allowing us to execute on purchases of unserviceable equipment, that requires investment and expertise to monetize.

In addition, the condition of records for these assets have been challenging, as they have not met the robust requirements of the industry for full back-to-birth trace. This is again where our industry know-how and experienced team can add value where others cannot. But it has also delayed the timing of closing on some of these feedstock acquisitions. Finally, in our leasing portfolio, full-year sales declined by approximately 50% as we had fewer assets under lease during the year. We had no aircraft in the lease portfolio in 2023 compared to three aircraft in the prior year that were sold at very favorable prices. In 2024, the company plans to increase of engines available for sale and lease based on engines that we purchased in 2023, as well as from engines that are returning to service after maintenance or repair activities that have been completed.

Turning to our TechOps segment, we reported full-year sales of $119.3 million compared to $130.9 million in the prior year, which included the sale of our 737 AerAware demonstrator aircraft to a government entity for $23.7 million. Excluding this asset sale, segment sales were up roughly 10% year-over-year as a result of strong demand for our MRO services, particularly at our Goodyear facility. Turning to Engineered Solutions and AerAware. I’m very pleased to report that on December 6th, we received our STC from the FAA for AerAware, which marks the conclusion of a multiyear development and flight testing process. With the approval, the FAA also determined that AerAware provided a 50% visual advantage over the naked eye, which will be instrumental in helping our customers assess and model the financial returns for the product.

Importantly, AerAware is now the only Enhanced Flight Vision System that the FAA has approved for this degree of visual advantage. The addressable market for AerAware is substantial, with more than 6,000 737NG aircraft actively flying that would benefit from this product and qualify under the FAA certification. This market includes very large passenger carriers that represent hundreds of units, Boeing business jet operators, as well as cargo and government operators. As we concluded the certification process, we also ramped up our go-to-market activities in an effort to secure a launch order and build an order backlog. We’re in active discussions across these categories. And as we’ve detailed in the past, many of the largest players are already familiar with the product through demonstrations and flight testing.

Further, I’m pleased to announce that as of today’s call, we have written proposals out to five potential launch customers, which span from small to large passenger and cargo carriers. While we expect formal orders to take some time as customers fully assess the benefits and return profile of AerAware, the proposition is clear and compelling that the installation of AerAware will both substantially enhance aircraft safety in suboptimal weather conditions while providing a compelling ROI to customers through reduced delays, diversions, and fuel consumption. In closing, while 2023 was a challenging year that fell short of our expectations, we remain confident in the long-term prospects for our business. Our unique end-to-end solution provides a durable competitive advantage.

The recent FAA certification of AerAware was a major milestone that unlocks a large and exciting growth opportunity. And we have a robust pipeline of potential launch customers actively evaluating the system. By continuing to execute on our strategic priorities, acquiring attractively priced feedstock, maximizing returns across our asset management channels, and driving adoption of AerAware, we are positioned to generate significant long-term value for our shareholders. I want to thank our dedicated employees for their hard work and our investors for their continued support. We look forward to updating you on our progress in the future. Now I’ll turn the call over to Martin for a closer look at the numbers. Martin?

Martin Garmendia: Thanks, Nick. And I will start with an overview of our fourth quarter financial performance, followed by our expectations for the business in 2024. Our fourth quarter revenue was $94.4 million, which included $47.4 million of flight equipment sales. Revenue in the fourth quarter of 2022 was $95.1 million, which included $51.4 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $47 million and $43.7 million in the fourth quarter of 2023 and 2022, respectively, an increase of 7%. As we have discussed 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 4.9% to $64.6 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. Fourth quarter USM part sales improved from the year-ago period by 27% because of higher demand and availability of feedstock. If we exclude flight equipment sales, asset management revenue would have been $17.2 million in the fourth quarter compared to $16.5 million in the prior year period, an increase of 3.6%. Technical Operations or TechOps, revenue was $29.8 million in the fourth quarter, which was an improvement of 9.7% compared to the fourth quarter of 2022. TechOps benefited from better performance from landing gear activities and Roswell on airport MRO activities.

Revenue growth from our Roswell facility within TechOps was offset by lower revenue at our Goodyear facility due to our greater percentage of intercompany work being performed during the quarter. In the fourth quarter of 2023, gross margin was 25.9% compared to 36% in the fourth quarter of 2022, due to a decline in flight equipment sales, which generally have higher margins and were a lower part of the mix in the fourth quarter of ’23. Fourth quarter, selling general and administrative expenses were $25.5 million, of which $3.1 million were from non-cash equity-based compensation expenses compared to $25.1 million in the fourth quarter of 2022, of which $4.5 million were non-cash equity-based compensation expenses. Losses from operation was $1.1 million in the fourth quarter compared to operating income of $9.1 million in the fourth quarter of 2022.

Income tax expense was $2.1 million in the fourth quarter of ’23, compared to $4.1 million in the prior year. Fourth quarter net loss was $2.7 million compared to net income of $9.2 million in the same year period. Adjusted for non-cash equity-based compensation, inventory writedowns mark-to-market adjustment to the private warrant liability, gain on legal settlement, secondary offering, and facility relocation cost. Fourth quarter adjusted net loss was $0.1 million versus adjusted net income of $12.3 million in the fourth quarter of 2022. Fourth quarter diluted loss per share was $0.08 compared to diluted earnings per share of $0.17 in the prior year period. Adjusted for stock-based compensation, inventory writedowns mark to market adjustments to the private warrant, liability, gain on legal settlement, secondary offering, and facility relocation costs.

Fourth quarter adjusted diluted loss per share was $0.02 versus adjusted diluted earnings per share of $0.23 for the fourth quarter of 2022. Fourth quarter adjusted EBITDA was $6 million compared to $17.7 million in the fourth quarter of 2022. Adjusted EBITDA and related margins were adversely impacted by lower flight equipment sales, which generally have higher margins. Cash used in operating activities was $174.2 million, primarily due to inventory investments of $168.6 million. AerSale continued its investment in feedstock opportunities which consumed most of the available cash, as of December 31st, 2023. AerSale ended the year with $136.9 million of liquidity consisting of $5.9 million of cash and available capacity of $131 million on our $180 million revolving credit facility, which can be expanded up to $200 million.

As Nick noted earlier, due to the inherent variability in our asset management segment, specifically as it relates to the timing of flight equipment sales, we have decided to discontinue our practice of providing numerical full-year guidance. We remain confident that the first half of 2023 was a low point and that 2024 will show improved recovery. This confidence is driven by a strong balance sheet that has over $320 million in inventory that will be deployed in support of leasing USM and flight equipment sales in a favorable aftermarket, that has benefited from robust passenger demand and delays in production of new aircraft. In our TechOps segment, we have been awarded several service agreements with airlines and OEMs at our component MROs that will help increase the volume at these shops and will also help us improve operational efficiencies and begin to monetize on the capacity expansion investments we have made.

Our on-airport MROs continue to remain strong, fueled by demand for maintenance work, supporting the robust passenger demand. Lastly, with the STC in hand, we have entered the commercialization phase of AerAware and we are working on securing orders that will provide revenue predictability over many years. In conclusion, excluding flight equipment sales, our business volume increased in 2023 as commercial markets continued their recovery and demand remained robust. We were successful in closing on $131.9 million of feedstock in 2023 and have agreements to acquire an additional $83 million to-date, which marks a sharp recovery from the low volume of acquisitions completed in 2022 that partially contributed to softer 2023 revenues. While we were disappointed more of the flight equipment sales did not close at the end of 2023, it is important to note that all of these assets are still available for sale or lease.

With $28 million of sales that have already closed in 2024, and the rest expected to generate revenue later in the year. Our balance sheet remains healthy with more than $136.9 million of liquidity available to fund our business, and we will continue to direct capital to the highest risk-adjusted returns for our shareholders. And 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 Bert Subin of Stifel. Please go ahead.

Bert Subin: Hey, good afternoon, Nick and Martin. Thanks for the questions.

Nicolas Finazzo: Good afternoon.

Martin Garmendia: Good afternoon, Bert.

Bert Subin: Nick, can maybe start on the delays, I guess, the last three quarters have been sort of things just keep moving to the right. I mean, I think from a lot of your peers, we’re hearing a pretty good story in the aftermarket on demand, sort of seems like an environment where if you have assets, they can be monetized pretty quickly. Can you just talk about what’s happened? Maybe what your visibility is? Does the guidance change, indicate your visibility has become lower? And it seems like you’re still acquiring quite a bit of assets, like how does that play into your view here?

Nicolas Finazzo: Okay, well, I got to break those questions down. As far as delays in the assets that we were expecting to close in the fourth quarter that have shifted. Do you want me to explain that?

Bert Subin: Yeah. I mean, I guess, you’ve seen some consistent shift. So I’m just curious that — and why you’ve seen delays and maybe what happens from here.

Nicolas Finazzo: It’s not one thing, it’s a whole number of factors. Some of the things that we’ve seen that have extended the purchasing and sale time of these assets are the condition of the records that we’re getting from various operators. As we’ve seen from some recent events where there has been fraudulent paperwork produced on records, the scrutiny that goes into these aircraft records is just increasing. It does not necessarily comes from regulatory requirements today, but it comes from just a much higher level of scrutiny, in back-to-birth trace. And what’s good for an airline to operate an airplane and maintain records that’s suitable to the FAA or to their local CAA. Local regulatory agency may not be suitable if we acquire the aircraft and then we’re trying to sell it to somebody else or going to another airline.

So the condition of records has been a mess. Airlines are selling equipment, even leasing companies are selling equipment to us, the records are a mess. It’s taking a lot of time to clean it up. And candidly, nobody has enough resources to clean it up. It’s just very, very, very time-consuming and it’s just gotten worse. So that’s one reason. The other with respect to deliveries as we approach year-end, it’s always tough when you come up on holidays to get everybody focused on what it takes to get a closing. Now, we had our entire team focused on it and made sure that nobody took — nobody went home for the holidays. If there was any possibility that we could get any one of these assets delivered, as we had scheduled to be delivered in the last quarter of the year.

Unfortunately, that doesn’t always — we don’t always get that same level of cooperation when somebody’s buying something. I mean, when they’re selling it, we — everybody focuses on it. But when you’re buying something, you don’t necessarily have the same focus. So I think that a number of the deals that we didn’t close in the last quarter could have closed if we would had better attention from our buyers. I’m not going to necessarily blame them, but it’s important for both parties to execute a transaction. You expect to get cooperation from both parties. That particularly becomes problematic at the end of the year, because despite what everybody says they’ll do, when it comes to Christmas time and New Year’s, nobody wants to work, everybody has things to do.

And again, that’s not an AerSale side. Everybody here did what we needed to do to get things delivered. Other issues such as borescope reports. We do a borescope. Multiple other people do borescope of engines, prior to delivery. Engine is fine. Next guy looks at it, sticks a borescope scope in an area of an engine that is not designed to be looked at, finds something that’s an anomaly, goes back to the OEM. The OEM says, why did you look there, that’s we have no parameters for that. So if you’ve got a problem, then you’re going to have to fix it. And so take an engine that was unserviceable, that was serviceable to everybody, and you look in an area of the engine that there is no manual that tells you what the serviceability limit is, and all of a sudden you’ve got an engine that’s rejected and requires it to go into a shop.

That doesn’t always kill a deal for us. We have replacement engines. So we can offer a replacement engine, but that also requires cooperation from the lessee to — or the buyer to look at the records on a timely basis and to be in a position to accept an alternate asset. So that’s not all of them, but that’s just kind of a little bit of a few examples of the kind of things that caused us to lose some closings at the end of the year that just got pushed out. And it’s just exacerbated at the end of the year. It just — because you just have no recovery time.

Bert Subin: Got it. Okay. I guess, as we think through ’24, sort of limited information out there, but I guess the MRO business you’re expanding, USM is doing very well. I mean, those businesses together should generate something north of $20 million of EBITDA, I would think. And then I guess, you’re still investing in AerAware, so that’s maybe slightly down from that. And you’re already selling some of your whole assets and have a lot for sale. Is there any sort of parameters that you’re not giving guidance but is there any way to think about EBITDA? I mean, you did over $87 million last year and around $12 million ’23. So it’s a big jump in terms of trying to hammer out expectations.