AerSale Corporation (NASDAQ:ASLE) Q1 2024 Earnings Call Transcript

AerSale Corporation (NASDAQ:ASLE) Q1 2024 Earnings Call Transcript May 11, 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 the AerSale First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jackie Carlon, Vice President of Marketing and Communications. Please go ahead.

Jacqueline Carlon: Good afternoon. I’d like to welcome everyone to AerSale’s first quarter 2024 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 law, 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 on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission, SEC, on March 8, 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 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.

Nicolas Finazzo: Thank you, Jackie. Good afternoon, and thank you for joining our call today. I’ll begin with a recap of the quarter and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. We’re off to a good start in 2024, driven by stronger feedstock acquisitions in the back half of 2023. This facilitated whole asset sales and increased USM volume and was supported by continued strength in our TechOps segment as commercial MRO demand remains robust. This translated to first quarter revenue of $90.5 million, which was up $15.7 million from the first quarter of 2023 and also led to stronger profitability as adjusted EBITDA grew 80% year-over-year to $9 million. As we remind investors every quarter due to the nature of our business and the impact of whole asset sales, our revenue levels tend to be volatile quarter-to-quarter, and we believe our business is best assessed based on aggregate performance over a longer period of time with a focus on MRO activity, feedstock levels and our unique business model that enables us to extract significant value from our inventory.

At the segment level and beginning with Asset Management, first quarter sales were $59.3 million, which increased 22.4% year-over-year. Stronger revenue in the first quarter of 2024 stemmed from higher flight equipment sales of $38.6 million compared to $27.7 million in the year ago period. Excluding whole asset sales in a period, segment level sales were relatively flat as lower leasing revenue offset gains in USM volume. In the quarter, we sold one aircraft and four engines compared to two aircraft and one engine in the year ago period. Commercial demand remains strong and is particularly elevated for USM. Airline traffic and capacity continued to operate above pre-pandemic levels, which is a strong indicator for our business. That being said, the supply side remains challenging, given OEM production and delivery delays, which substantially limit our ability to acquire feedstock.

Regardless, our primary competitive advantage is in our purpose-built end-to-end solution, which enables us to drive asset value from feedstock across various segments of the supply chain. As asset availability improves, we’re ready to move decisively on acquisitions. To date, we’ve acquired $31 million of feedstock and have an additional $52 million under LOI. In our USM parts business, we continue to realize the benefits of better feedstock acquisitions in the second half of 2023, specifically in engine USM, which grew more than 30% year-over-year. In the cargo market, the environment continues to be under pressure as we saw during 2023 as the strong demand that carried through the pandemic unwinds and cargo shipping normalizes. We expect these conditions to persist for some time, but did see incrementally positive movements in quoting activity and customer interest in our 757 freighters in the first quarter.

As of quarter end, we have one converted 757 available for sale with six more that will complete the conversion process through the remainder of this year. Finally, in our leasing portfolio. Full year sales declined by approximately 45% as we had fewer assets under lease during the period and no aircraft on lease in the first quarter of 2024 compared to one aircraft in the prior year that was subsequently sold. We expect to see an increase in leasing activity as more engines become available and placed on lease this year resulting from increased feedstock availability. Turning to our TechOps segment. Our MRO facilities were busy during the quarter. Sales improved across all of our facilities with additional growth from the sale of components by our off-airport MRO shops, which includes landing gear, thrust reversers and other complex assemblies.

As a result, segment sales were $31.3 million compared to $29.8 million in the year ago period. We anticipate continued strength throughout the forecast period because of a supportive end market. As we look to increase our MRO business beyond the current run rate, we see growth opportunities on component MRO, heavy MRO and aerostructures. In our Goodyear heavy MRO, we’re realigning our operations to create additional facility capacity for heavy maintenance activities, coupled with a significant initiative to increase the availability of trained mechanics. We’ve been actively recruiting and training new employees for our on-airport heavy MROs, which has been assisted by awards of over $2 million in state and federal training grants this year.

We also expect to commence operations at our on-airport heavy MRO facility in Millington, Tennessee in the third quarter and anticipate this facility to be a positive contributor in the latter half of 2024 and beyond. In our component MROs, we’re winning new contracts that are generating recurring and predictable revenue, utilizing existing facility capacity to significantly grow these business units. Next, I’d like to provide an update on our Engineered Solutions business, beginning with AerAware. In the first quarter, we continued our go-to-market efforts, and all five of the written proposals we made remain outstanding and under consideration since we reported these in March. We continue engagement with these customers. And notably, we’ve had incrementally positive discussions with several as it relates to the safety enhancements that AerAware provides.

Across the airline system, the pandemic led to early retirements of commercial pilots and experience levels have decreased as new pilots are brought online. AerAware can enhance safety under these circumstances and has been a focus area with potential launch customers beyond the ROI associated with decreased diversions and ground stops. This has led some discussions to expand well beyond the original scope. All of the proposals remain under review, but we consider this enhanced focus on the safety profile of the AerAware system to be a meaningfully positive note to our overall market acceptance of this product. Besides the existing proposals we’ve made, we’re engaged with three new operators who have expressed a requirement for their 737s. As word spreads throughout the industry, there is also interest in other aircraft models, including the A320, wide bodies and regional aircraft.

Concurrently with our go-to-market strategy, in April, we successfully demonstrated our AerAware ground and flight training program to the FAA, which included classroom and flight training of six airline and four FAA pilots. Once our AerAware training program is published by the FAA, it will be the first and only FAA validated training program, covering operation of a 737, incorporating an enhanced flight vision system. Although FAA validation of this training program was not a requirement of our STC, it will assist in the adoption process for airlines that install AerAware in their fleets. Besides AerAware, we’ve increased our marketing efforts for AerSafe, our STC product covering field tank flammability. Operators that do not have an existing system to prevent fuel tank explosions must provide a means to mitigate a potential electrical short in the wiring of an aircraft’s fuel quantity indication system from causing a catastrophe.

Installation of AerSafe complies with this requirement with regulatory compliance deadlines for different aircraft types running through 2026. We expect increasing sales of AerSafe throughout the balance of this year and into 2026 with sustainment sales lasting the life of a given airframe. AerSafe is approved for the Boeing 727, 737, 757, 767 and 777 and the Airbus A320 family of aircraft. In closing, we’re off to a good start in 2024 and end market demand remains strong. Our team is working hard to maximize the ROI on feedstock we’ve acquired, and we continue to evaluate additional opportunities amid a challenging supply environment. Meanwhile, we’re working diligently to advance conversations with potential customers for our Engineered Solutions products.

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. Now I’ll turn the call over to Martin for a closer look at the numbers. Martin?

Martin Garmendia: Thanks, Nick. First quarter revenue was $90.5 million, which included $38.6 million of flight equipment sales comprising of one aircraft and four engines. Our revenue in the first quarter of 2023 was $78.3 million and included $27.7 million of flight equipment sales, consisting of two aircraft and one engine. Excluding flight equipment, the company continues to demonstrate underlying growth as our base revenue increased to $51.9 million from $50.6 million in the prior year. As we have pointed out in the past, flight equipment sales fluctuate significantly from quarter-to-quarter, and we believe monitoring our progress based on asset purchases and sales over the long term is more appropriate. First quarter gross margin was 31.8% compared to 31.2% in the first quarter of 2023, largely due to the sales mix in the first quarter, which included additional higher-margin flight equipment sales.

Selling, general and administrative expenses were $24.1 million in the first quarter of 2024, which included $800,000 of noncash equity-based compensation expenses. Selling, general and administrative expenses were $25.2 million in the first quarter of 2023 and included $2.7 million of noncash equity-based compensation expenses. First quarter 2020 income from operations was $4.7 million, while loss from operations was $800,000 in the first quarter of 2023. Net income was $6.3 million in the first quarter compared to $5,000 in the first quarter of 2023. Adjusted for noncash equity-based compensation, mark-to-market adjustment to the private warrant liability and facility relocation costs, first quarter adjusted net income was $5.5 million, while adjusted net income was $3.3 million in the first quarter of 2023.

First quarter diluted earnings per share was $0.12 compared to zero earnings in the first quarter of 2023. Excluding the adjustments mentioned, first quarter adjusted diluted earnings per share was $0.11 compared to $0.07 for the first quarter of 2023. Our adjusted EBITDA was $9 million in the first quarter of 2024 compared to $5 million in the prior year. The increase in adjusted EBITDA was primarily due to the increase in flight equipment sales. Cash used in operating activities was $21.5 million, primarily as a result of cash deployed to increase inventory availability. As we look to the balance of the year, we expect to see continued demand in our TechOps segment driven by a healthy commercial backdrop and several contract wins that will allow us to benefit from our available capacity.

We also remain focused on monetizing the inventory we have on hand from a stronger feedstock environment in 2023. While the current supply side for feedstock remains challenged, we have a healthy pipeline of deals recently completed or in process to drive volume through 2024 and into early 2025. We continue to make progress on our go-to-market with AerAware and anticipate AerSafe will be supportive to our results as the year progresses. With that, operator, we are ready to take questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Gautam Khanna from TD Cowen. Please go ahead.

Gautam Khanna: Hi, good afternoon, guys.

Nicolas Finazzo: Good afternoon, Gautam.

Gautam Khanna: I had a couple of questions. First off, I was wondering if you could comment on whether you see any used equipment monetizations in the second quarter? And what your visibility is for that in general for the remainder of the year? And if you could just update us on like the 757s in particular as part of the answer.

Nicolas Finazzo: We have no pending sales or transactions involving the 757s for the second quarter. And as far as other equipment sales, I mean, we are selling other — we are selling engines. I mean, that’s typical for us.

Martin Garmendia: Yes, Gautam. We’re seeing a very supportive overall market. We are definitely already in negotiations for several engine sales that we’ve acquired overall in the overall portfolio. So we expect to see continued growth in whole asset opportunities in Q2. And again, we’re also working on opportunities in Q3 and Q4. We’re also starting to monetize inventory through the USM line. So we saw some modest increases in the USM sales in Q1, and we expect that to continue through Q2 and then start getting even better through the latter part of the year.

Gautam Khanna: Okay. That’s helpful. And just curious on the AerAware product and the customer consideration of it. Is it — like it worked with the hoped for a launch customer, while it was being developed, what do you think is sort of a hesitation on the side of customers pulling the trigger? And maybe do you think it’s a function of price? Is it a function of ability to train, like what is sort of the sticking point?

Nicolas Finazzo: Well, I would characterized it — yes, I don’t think we had a sticking point. I just think it’s a process. It’s very complicated. It involves multiple facets of the airline from pilot training, FAA, finance, operations, planning, engineering. And if you look across the industry today, the things that are going on are very distracting to pretty much everybody we’re talking to, it’s certainly all the domestic airlines that we’re talking to, which, on the one hand, is a little frustrating. But on the other, I think that the safety aspect of our system could be a catalyst to get a number of these domestic airlines that are focused on things that they can do to improve safety, to accelerate the process of getting — of organizing all their people together at the same time to take advantage of a system that will actually enhance their safety and potentially avoid some of the issues that airlines are having today.

Gautam Khanna: Have your pricing expectations for the product changed just given what you’ve learned over the last several months? Or do you still think it’s going to confer the level of unit price and gross margins you guys have spoken about in the past?

Nicolas Finazzo: So we previously — 2.5 years ago, we previously stated that our list price for our system was about — a total of about $770,000. That included our portion, which was about $300,000 in Elbit, which is about 370. We — our list price today is $1,495,000 I think. And obviously, that’s for both Elbit’s portion or Universal’s portion and AerSale’s portion. Now the — obviously, we feel that if we get a launch order, that will — and we get a multiple aircraft order, we can discount that price. So we we’ve got room there. As I’ve mentioned previously, our cost in the system is still in line with our original expectations. So we’re optimistic that we can deliver this product at a price that the airlines will find attractive. And we don’t think there’s a competitive system out there that’s, a, they’re available today that does what our system does and when they become available, we believe they’re going to be much higher priced than the system we have.

Gautam Khanna: Okay. That’s helpful. I appreciate. I’ll get back in the queue. Thank you.

Nicolas Finazzo: Thanks, Gautam.

Operator: The next question comes from Ken Herbert from RBC Capital Markets. Please go ahead.

Kenneth Herbert: Hi, good afternoon, Nick and Martin.

Nicolas Finazzo: Good afternoon.

Kenneth Herbert: Hi, Nick. Maybe just wanted to first start on AerAware. You’ve indicated that you’re waiting for some of the manuals and the training documentation to be published by the FAA, do you have any update on timing on that? Or can you give us any more expectations around sort of how that maybe could play out over the next few months?

Nicolas Finazzo: Yes. Actually, that’s very — it’s a very short end process. So we finished the demonstration, which included, again, ground school training for 10 pilots and the flight training, we were going to do — that’s 5=five sets of crews. I think we ended up doing four and then they were satisfied that we passed. And so the process is the FAA reviews that whole, our flight training manuals, the whole process, the ground school training, and they recommend basically, they — it’s called validation. They recommend validation of our system. And verbally, we’ve been told our system meets the requirements, and they’re going to send it for publication. I don’t know if it’s been published yet, and I’m not exactly sure where it gets published, but it gets published.

Then there’s a comment period for anybody who wants to make a comment about the publication of the validation of our system and then it just automatically becomes validated. So I think that will likely occur within the next 30 days.

Kenneth Herbert: Great. And then do you see — beyond that, do you see any other sort of significant roadblocks to a potential initial order? Or is there anything else that the airlines could be waiting for?

Nicolas Finazzo: I don’t think the airlines waited for that. That was something — we always told them that we were going to work on. More — larger airlines could have done that on their own. We just made it easier for them. Smaller airlines, it’s more difficult. That’s actually why we did it, spend the money to do it. So impediments to getting this system in across the board, everyone we’re talking to is how are we going to implement it into our simulators and how long is that going to take? Okay, we’ve got your FAA validated flight training program subject to publication. The — lots of questions across a number of airlines on the safety aspect of the system. And again, I think that, that’s a little bit being — there’s a — the catalyst here is, what’s just going on in the industry and the heightened amount of attention the industry is getting from things candidly that happen every day and have been happening every day for a long time as they’re just getting a heightened level of security due to a few events.

So everybody is focused on that and that — we’ve had customers — potential customers, one of the three that I mentioned earlier and new customers actually came to us because they heard about the system, and they’re interested in the safety aspect. So I don’t think there’s any impediments to moving forward other than the process of getting it installed in the system and they’re getting it installed in their simulators and integrating it into their flight manuals, flight training manuals and figuring out when and how long it’s going to take for the system to get up and running. Price has not been an issue in our discussions at this point.

Kenneth Herbert: Okay, great. Very helpful. And I guess that was just my final question. With what looks like almost basically a doubling in your list price, so to speak, at that higher price, does that — how much of that drops down to your gross margins? And how much of that reflects just maybe higher costs than you envisioned when you first started to talk about this to bring the system to market?

Nicolas Finazzo: Our customers would love to know that information. So I’m sorry I can’t. I can’t answer that.

Kenneth Herbert: All right, Nick. Appreciate that. All right, thanks. I’ll get back in the queue.

Nicolas Finazzo: You’re welcome.

Operator: The next question comes from Bert Subin from Stifel. Please go ahead.

Bert Subin: Hi, good afternoon. I appreciate the questions.

Nicolas Finazzo: Hi, Bert.

Bert Subin: Hi, Nick. Maybe just to start out, I guess, if we go back three months, you guys stopped providing guidance. It seems like you’re sort of off to a good start here in 2024, and you’re acquiring feedstock maybe the less than you’d like, but you’re acquiring it. And it sounds like you’re starting to get a handle on sort of monetizing a good portion of the inventory outside of the 757s. So with that in mind, I guess, would you agree that maybe relative to three months ago, your visibility is improving? And is there anything in terms of forward-thinking commentary you can provide about how to think about the rest of the year? I

Martin Garmendia: I think our — definitely our — it’s an overall improving. We feel strong on the inventory position that we have. We have $350 million of inventory. We have another $50 million of feedstock. So that’s definitely giving us some support on kind of the forward projections. We still have the variability and timing of flight equipment sales and whole asset between whole assets, USM or leasing. So we’re still trying to kind of have a better grasp on that kind of overall. We’re also very optimistic on what we’re seeing in the TechOps side of the business. We have a lot of capacity that we’re starting to utilize at our component MROs, our aerostructures, landing gear facilities. We’re getting new contracts that are starting to give us more of a backlog of work.

And once that becomes more established, we’ll have a greater visibility into that overall unit we have initiatives to increase our heavy MROs by adding additional labor and also kind of reconfiguring some of the facilities to have more assets flow through those facilities. So we feel really good on the overall dynamics. I think this year, we’re starting to capture all of that and get that better visibility. So we expect to definitely have improvements. As far as providing guidance, we probably won’t return to that until the business kind of grows. We see more establishment in some of these new aspects and frankly, whole assets becomes a smaller part of the overall business.

Bert Subin: Got it. Oaky. On the — I guess the other piece of that inventory that the freighter side [indiscernible] posted their earnings call yesterday and called out sort of the weakness in freighters as a result of what they are seeing in belly capacity. How does that make you think about those assets, is it still just sort of a wait and monetize those as cargo rebounds or have you started to think about other alternatives?

Nicolas Finazzo: So once we made the investments in the airframes to convert them to freighter and basically take them, do heavy checks in landing gear etc that there really is no better options for those airframes at that point than to wait it out and put them in the freighter market. Now to mitigate the delay associated to when the freighter market returns and again 757 is a niche freighter, we are looking at placing the engines off those airplanes which is in very, very high demand; putting those engines on lease with different carriers. The risk that we face with that is we put the engines on lease and then for whatever reason we can’t get them back in the time that we need then it would impair our ability to put the aircraft out.

So we are doing a little bit of a balancing act because we have seven airplanes that will be available this year. We feel we can take that risk with some of the later deliveries until we see we get let’s say we get three or four delivered than if we have aircraft engines on lease we should have sufficient time to pull them back to accommodate any future requirements.

Martin Garmendia: If I could add, what we’re seeing right now in kind of some of the increase that we’re receiving, market information that we have, providing estimated values on the 757. We have a good book value position on those assets. And definitely, at this point, we can afford to wait for the highest use or the highest monetization strategy, which we deploy in those as passenger freighter assets into the cargo market either through lease or through sale.

Bert Subin: Got it. Oaky. I’ve got one final and then just a clarification. But I guess, for my last question here, Nick, just as you think over time, you’ve been in this business a long time, and you’ve seen a lot of different cycles. And it seems like right now, the aftermarket cycle is really looking favorable and sort of a consensus expectation of extending out. As you think about that in the context of your USM business, that’s maybe not performed as well, just broadly across the industry because it’s tough to get feedstock and that feedstock gets priced at a higher rate. Where do you think we are in the USM cycle? Do you think that is countercyclical and gets better and aftermarket starts to weaken because of retirement. So like what do you expect out of that business over the next few years?

Nicolas Finazzo: I think the USM availability will continue to be constrained because we’re seeing so few aircraft today that things that — like what do we want? A320, 737s. We’re not seeing any 767s reaching the retirement age where they’re being parted out. We have acquired some 747s for their engine value that’s wide body, and that is primarily those engines will feed 767 freighters and passenger aircraft. But we’re not seeing — unless an airline is retiring a fleet of aircraft, like, as an example, we’re buying — we’re buying four 747s now. We closed on the first one. We don’t — I don’t expect to see any significant improvement in the availability of aircraft for — that will eventually become USM parts unless, and I’ve said this multiple times over the last several quarters, unless the flight equipment is so run down that you need to do everything to it.

Landing gear overhaul, IP overhaul, airframe overhaul, engine overhaul. And then what we’re finding is we’re buying an aircraft with multiple of those problems or just an airframe or just an engine that needs to be fixed. What we’re doing with that is we’re — because we’re buying in volume, all of these things and because of our ability to extract value in multiple ways, we cobbled together engines and airframe using the best engines and aircraft, using the best pieces from the inventory that we — from the feedstock that we acquire. So that’s our advantage, and that’s why we’re able to continue to buy in a very, very competitive market. Candidly, when we — it’s, by the way, and it’s not that we’re not bidding, we’re bidding. But we’re very careful on our bidding.

I think we bid on — I think we bid on over $500 million worth of feedstock in the last quarter. And we closed on $15 million of it roughly under a 3% win rate. Typically, our win rate is about 10%. So that tells you how competitive the market is. Just because it’s competitive doesn’t mean that the people are winning those deals are going to make sense out of it. You’re buying it because you need the material, you’re an engine shop or you’re an airline and you’re keeping a piece of flight equipment. Okay, that’s different. You’re not buying that for resale, you’re buying that for your own consumption. But if you’re buying it for resale and you don’t have the ability to extract value in multiple ways, I think it’s — I think you’re severely challenged on acquiring feedstock.

So it’s a complicated answer to your question, which is how do I foresee the feedstock market and the USM market in the coming years? What I foresee is it will continue to be challenged for people who can’t extract the kind of value out of it, we can. It will be diminished from normal because it’s an overcompetitive market. I don’t even think it’s a rational market. I think it’s irrationally over competitive. What’s going to change? When the new airplanes catch up and the A320 engine problems are solved and more of the new aircraft will get delivered — this isn’t new information, I’ve said this multiple times before — we will see a bow-wave of flight equipment, all kind of stuff come into being. And we’ll be positioned to pounce on that and have the infrastructure to, again, figure out how to extract value out of all the pieces.