AerSale Corporation (NASDAQ:ASLE) Q3 2023 Earnings Call Transcript

AerSale Corporation (NASDAQ:ASLE) Q3 2023 Earnings Call Transcript November 8, 2023

AerSale Corporation misses on earnings expectations. Reported EPS is $0.03 EPS, expectations were $0.21.

Operator: Good day, and welcome to the AerSale, Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [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.

Jackie Carlon: Good afternoon. I’d like to welcome everyone to AerSale’s third 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, 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 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, Jackie. 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 third quarter results improved notably over the second quarter and the prior year. In total, we reported sales of $92.5 million, an increase of 81% against third quarter 2022 sales of $51 million. This increase was largely the result of flight equipment sales in the period, which included $38.9 million of engine sales. Sequentially, sales increased as we were able to monetize the strong levels of feedstock acquired over the past 12 months, which included both engine and aircraft flight equipment sales during the period.

While we are pleased to see the increased volume, third quarter results trailed our internal forecast expectations as several additional flight equipment sales slated for the third quarter are now expected to close in the fourth quarter. As we do each quarter, I would like to remind investors that our quarterly results tend to be lumpy because of the timing of flight equipment sales. Therefore, assessing full year time periods and feedstock acquisition rates are both better analytical tools to our performance than year-over-year or sequential revenue patterns. Turning to profitability. Adjusted EBITDA in the third quarter was $1.9 million, compared to a loss of $0.5 million in the year-ago period. The improvement in EBITDA performance was the result of higher flight equipment sales during the period and better USM volume.

At the segment level and beginning with Asset Management, third quarter sales were $65.1 million compared to just $20.6 million in the prior quarter — in the prior year’s quarter. Higher sales compared to 2022 reflected the monetization of feedstock acquisitions with the growth stemming from increased flight equipment and USM part sales, partially offset by lower revenues from our leasing portfolio. In the current year, we sold 7 engines and 1 P2F converted 757 aircraft during the period compared with 2 engines and no aircraft in the prior year. In addition to the flight equipment sales delivered in the third quarter, there are two aircraft, a highly modified 737-800 and a P2F converted 757 aircraft we expected to deliver in the third quarter that are now expected to be delivered in the fourth quarter.

Looking forward, with the aircraft and engines planned for delivery in the fourth quarter, we anticipate a solid finish to the year for flight equipment sales with an additional 18 in the pipeline expected to close before year-end. Turning to an update on the cargo market. Conditions continue to be unfavorable as higher interest rates and lower air cargo demand create a dramatically different backdrop than what we experienced during and immediately following the pandemic when consumer demand for physical goods peaked. To date, we’ve sold 8 aircraft under our 757 P2F conversion program and currently have an additional 10 aircraft in inventory waiting for delivery or conversion. Consistent with our communication last quarter, given the current end market conditions, we anticipate these will take longer to place than originally forecasted at the start of the year, and expect a higher mix of aircraft will be leased instead of sold.

In our USM parts business, airframe and engine parts sales nearly doubled compared to the prior year, which is the direct result of the success of our feedstock acquisition program converting to sales. Year-to-date, we’ve closed on approximately 130 million of feedstock with a total of 200 million acquired or under contract. This compares to the first 9 months of 2022, which included just 34 million of feedstock. Elevated feedstock levels drove higher sales in the third quarter, which is expected to continue in the fourth quarter and into 2024. Finally, in our leasing portfolio, we had no aircraft and 7 engines on lease during the period compared to 1 aircraft and 17 engines in the year ago period. Because we’re continuously monitoring the best and highest use of our flight equipment, we opportunistically sold some of these assets, which provided a higher return profile than continuing to lease.

In our TechOps segment, we reported sales of $27.4 million compared to $30.4 million in the third quarter of 2022. Lower sales resulted from fewer aircraft and storage and the completion of several large customer programs at our aerostructures and landing gear facilities. This work at our landing gear shop has since been replaced by a larger long-term program with a major U.S airline that began in the fourth quarter. At our aerostructure shop, we’re onboarding new customers to fill the additional capacity made available after moving into our new building, which is almost triple the size of our current facility. Turning to Engineered Solutions, we’re near the conclusion of the FAA approval process of our enhanced flight vision system AerAware.

At this time, all tests have been completed and we’re working through documentation, review and completion of final checklist items in anticipation of issuance of the STC by the FAA. In addition, in late October, we announced that we received FAA approval for a 50% visual advantage over the naked eye, which will make AerAware the first and only product available with this level of visual advantage. We’re proud of this award, as it validates the primary benefit of AerAware, offering a compelling value proposition to our customers, as the system enhances safety, lowers operating costs by minimizing weather related delays and fuel consumption and provides associated environmental benefits by lowering carbon emissions. Turning to capital allocation, we have a healthy, almost unlevered balance sheet enabling continued funding of our acquisition programs to sustain business growth.

To date, we have acquired roughly 130 million of feedstock and ended the quarter with approximately 175 million of liquidity consisting of cash on our balance sheet and remaining revolver capacity. Further as we continue to monetize the feedstock already acquired, we anticipate an increase in free cash flow generation net of any additional feedstock purchases. In conclusion, our third quarter results have shown significant improvement over the previous quarter and the same period last year. Our growing feedstock availability is driving better quarterly performance and flight equipment sales. Given the success of our feedstock acquisition program in 2023, resulting in the significant volume of inventory we currently have available to convert to sales.

We anticipate this trend to continue into the foreseeable future. We anticipate a strong fourth quarter as we finished the year with flight equipment sales expected to continue their positive momentum. I would like to thank our employees for their dedication to AerSale and their efforts in delivering on our commitments to all 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 third quarter financial performance and end with our updated guidance for 2023. Our third quarter revenue was $92.5 million, which included $44.8 million in flight equipment sales, consisting of 7 engines and a P2F converted Boeing 757 aircraft. Revenue in the third quarter of 2022 was $51 million and included $2.7 million of flight equipment sales consisting of only 2 engines and no aircraft. 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. Third quarter Asset Management revenue rose to $65.1 million because of the increase in flight equipment sales I just mentioned.

USM part sales were up from the year ago quarter because of higher demand and availability of feedstock, which was partially offset by lower revenue from leasing. TechOps revenue was down 9.8% to $27.4 million in the third quarter from $30.4 million in the third quarter of 2022. Our TechOps business was adversely impacted by fewer customer aircraft and storage as compared to prior periods and weaker contributions from our aerostructures and landing gear facilities. This was partially offset by greater revenue associated with increased on airport MRO capacity dedicated to customer aircraft, which was enabled by outsourcing the P2F conversions of our 757 aircraft. Third quarter gross margin was 25.4% compared to 30.4% in the third quarter of 2022, primarily driven by the mix of flight equipment sales.

Selling, general, administrative expenses were $25.4 million in the third quarter of 2023, which included $3.2 million of noncash equity based compensation expenses. Selling, general, administrative expenses were $24 million in the third quarter of 2022 and included $4.4 million of noncash equity based compensation expenses. The increase in selling, general and administrative expenses were primarily driven by higher costs related to AerAware development and facility expansions. Third quarter loss from operations was $1.9 million and $8.5 million in the third quarter of 2022. Net loss was $0.1 million in the third quarter, compared to $9 million in the third quarter of 2022. Adjusted for noncash equity based compensation mark-to-market adjustment to the private warrant liability, facility relocation costs, inventory reserves and secondary issuance costs, adjusted net income was $0.9 million in the third quarter of 2023.

Adjusted for the same items, the third quarter of ’22 had an adjusted net loss of $1.9 million. Third quarter diluted earnings per share was 0 compared to diluted loss per share of $0.17 in the third quarter of 2022. Excluding the adjustments mentioned above, third quarter adjusted diluted earnings per share was $0.02 compared to adjusted diluted loss per share of $0.03 for the third quarter of 2022. Adjusted EBITDA was $1.9 million in the third quarter of 2023 compared to a loss of $0.5 million in the prior year period. The growth in adjusted EBITDA was a result of higher USM sales and a greater number of flight equipment sales. Next, in terms of our cash flow metrics, cash used in operating activities was $168.1 million, resulting from a gross investment of over $200 million in newly acquired feedstock and make ready costs to prepare inventory for sale, which should drive our revenue and earnings going forward.

We ended the quarter with a substantial balance sheet with $174.6 million of liquidity, consisting of $3.2 million in cash and available capacity of $171.4 million on our $180 million revolving credit facility, which can be expanded to $200 million. Finally, moving to our updated guidance for 2023. We now expect to generate revenue of $400 million to $420 million and adjusted EBITDA of $40 million to $45 million in 2023. Our revenue and adjusted EBITDA guidance reflects current expectations for our core business, and flight equipment sales slated for delivery before year-end. The exact timing of these flight equipment sales can vary by days or weeks based on a variety of factors. Therefore, because of the amount of asset sales that are planned to close by the end of the year, with limited time remaining to do so some of those could roll into the first quarter of 2024.

We are pleased with the recovery in our sales in the third quarter, which was driven by the broad success of our feedstock acquisition program. And we remain confident that our purpose built model and excellent execution capabilities will enable us to drive and generate long-term value for all of our stakeholders. With that operator, we are ready to take questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Bert Subin from Stifel. Please go ahead.

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

Nicolas Finazzo: Good afternoon, Bert.

Bert Subin: Martin, you just — hey, Nick. Martin, you just said you could see some rollover into the first quarter. I know visibility has been sort of challenging this year. And that’s led to some timing delays. Can you just give us I guess some commentary on what your visibility is in the fourth quarter? Have you sold any of those, I guess, through today in the quarter. And as we think about 2024, you’ve had about $65 million of sales slippage just based on your guidance update, which seems to be mostly on the whole asset side. Can you give us any way to think about how that gets, or at least how you’re thinking about that showing up in ’24?

Martin Garmendia: Yes. So as far as overall guidance at this point, we actually have anticipated delivery schedule. So that gives us better visibility into the potential flight equipment sales that we have scheduled for the remainder of the year. As we did know, there’s a lot of different factors including the customer and their ability to deliver or to take possession of those assets, which is why we make the comment that potentially some of those assets could move into the fourth quarter. However, right now, they all have contractual agreements to end and to close this year, and we’re moving forward to get those closed, kind of overall. On a positive note, these contracts — these assets are under overall agreement. So if we’re not able to close those in the current year, we do expect to those to close in the first quarter of 2024.

Bert Subin: Okay. And then just on the, I guess, on the ’24 side of that, or I guess, just to clarify, can you say I guess, how many of the 757 you have under contract. And then, in terms of sort of teeing up expectations for ’24, just where things stand. Just because there’s been so much movement in the timing of asset sales.

Martin Garmendia: Yes. As of right now, we have 1 757, it’s under contract to be sold in the current year. And then we have the remaining 757s that are still being marketed for potential lease or sale.

Bert Subin: Okay. And then just as a follow-up, it seems like positive commentary on the AerAware front. I know people seem like they’re probably biting their nails, trying to figure out when that’s going to happen. It seems like when you got through the final tests, and to August, it was going to be — expected to be a pretty quick process. Can you just walk us through what’s happened over the last 6 or so weeks. And I guess what your best visibility is into what happens between now and hopefully an STC being granted.

Nicolas Finazzo: So what typically happens is, as you’re going through the whole process of obtaining an STC in anticipation of doing flight testing, you submit reports to the FAA, all the testing that you’ve done, how you — how the flight testing is going to demonstrate that the product that you’re trying to certify complies with whatever the rules are. So you’ve got a number of reports. And if I recall, I think we submitted over 50 reports to the FAA for their review and ultimate approval. Typically, that is all finished by the time you start your flight testing, but that did not occur in our case. It took the FAA because of the complexity of this certification. It took the FAA many, many days to return documents to us, in some cases, as much as 6 months to get documents back to us because there was — there wasn’t certainty as to what type of test we would do.

That would be — that would satisfy the FAA. So a lot of back and forth with the FAA on the type of testing that dragged on slightly past completion of flight testing, but not much, because by — within — shortly within several weeks after completion of flight testing, the balance of testing that we had to do was completed satisfactorily. And now we’re just in the documentation phase now. And the documentation phase, it’s every document is reviewed, every word is looked at. If [indiscernible] doesn’t like the way you described something in a sense that I should review it, we will go back, we’ll fix it, send it back to them, they have to review it again and it’s just taken incredibly long. There’s a lot of people involved at the FAA, a lot.

And, again, because of the complexity of this, and the stage that we’re at now, and what we’ve been working at since I don’t know in the last 5, 6 weeks or more, is just see documentation completion, and an editing that the FAA gives us and says, look, we need you to fix this. And it’s minor stuff, but it’s just time consuming. And there’s really very little for us to do now, except finish up the few documents that they’ve asked us to revise or waiting on their comments on our revisions. And then it’s a summary, you get a summary and say, look, here’s everything you asked us to do, here’s everything we did, here’s all the reports that you guys — that we’ve submitted to you that you’ve now approved and that’s it. There’s nothing left at that point for us to do.

The last — very last thing we do is the summary report. And we’re not there yet. But we’re — and we are not there yet because we don’t have all the comments back from the FAA and all the documents that we’ve submitted. But we’re substantially there. There are very few documents compared to the overall amount of documents that are outstanding. And that’s — and I see every day including today. I see more and more reports are coming back as signed off.

Bert Subin: Thanks, Nick, and thanks, Martin. Appreciate the time.

Nicolas Finazzo: You’re welcome.

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

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

Nicolas Finazzo: Hi, Ken.

Kenneth Herbert: Hey, Nick, maybe just wanted to follow-up on the asset — the asset sales. If I understood correctly, you’ve committed to $200 million. I think you’ve done $130 million of that year-to-date in terms of deploying capital. Do you expect much upside to that $200 million as we get into the end of the year, and maybe you could just comment on sort of where you’re seeing the opportunities and how’s the pricing environment out there for the feedstock?

Nicolas Finazzo: So we do anticipate to grow that $200 million in the balance of the year. It hasn’t really changed much. The type of feedstock that we’re acquiring requires a lot of work. It continues to be I think, it favors us because we have the capability to extract value out of flight equipment that needs a lot of work versus others that are more financial buyers, that they don’t have that capacity, they just — they could buy an aircraft on lease, but buying an aircraft off lease with two engines that need to be repaired, heavy checks, et cetera, that they don’t have the capability to do that, they have to farm [ph] it out, their costs are higher. So that — so the opportunity to continue buying feedstock of the type we’ve seen all year remains.

And even though this was a little bit counter to this, but even though the OEMs with the geared turbofan problem and even still, how long it’s taken to get all these maxes delivered, even though that is keeping the older flight equipment in service and depriving us of a big [indiscernible] of flight equipment — technology flight equipment that we expect it to see by now, it will come and it will come when the OEMs catch up. But in the interim, we’re still getting the kind of stuff that fits our business model that we can extract value out of. So I don’t see any change in that. We, as we — as we’re thinking about, we just finished the Board meeting as we’re thinking about our acquisitions into ’24. At this point, I don’t see any change over what we’ve seen thus far in 2023.