AerSale Corporation

Welcome to the Airsail First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Christina Petrone. Thank you. You may begin.

Good morning. I'd like to welcome everyone to Airtel's first quarter 2021 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 meanings 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. Factors discussed in the risk factors section of the company's annual report on Form 10-K for the year ended December 31, 2020, followed with the Securities and Exchange Commission, SEC, on March 16, 2021, and its other filings with the SEC, including its quarterly report on Form 10-Q for the period ended March 31, 2021 to be filed 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 investor's section of the air sale website at ir.airsale.com. With that, I'll turn the call over to Nick Bonazzo.

Thanks, Christy. Good morning to everyone on the line, and thank you for joining our call today. I'll begin with brief comments about air sale and our strategy. followed by an overview of the quarter, operational updates, and progress on major programs and initiatives. I'll then turn the call over to Martin for a closer look at the numbers. For those of you unfamiliar with AirSail, we operate a purpose-built, fully integrated, multidimensional aftermarket aviation model that includes part procurement, flight equipment sales and leasing, MRO, FAA certifications, and aircraft storage and decommissioning. This allows us to keep a close pulse on the market, identify attractive flight asset purchase opportunities, and deliver a higher overall value to our customers as we touch every part of the aircraft maintenance cycle. Our battle-tested model has proven very effective, even under extreme stress in the industry, as we've demonstrated during the COVID-19 pandemic. As the effects of COVID resulted in the massive reduction of flight capacity by the airlines, our aircraft storage facilities quickly filled up, with decommissioning work and storage maintenance revenue helping to offset much of the decline in routine MRO work and used serviceable material, USM part sales. Further, insight gained from firsthand observation of passenger aircraft coming out of service has allowed us to quickly pivot our efforts to cargo aircraft that remained in high demand throughout the pandemic. This allowed us to identify feedstock opportunities to serve the freighter market specifically through our 24-aircraft Boeing 757 fleet acquisition announced last year and expansion of our passenger-to-freighter conversions being performed at our Goodyear, Arizona MRO. We're currently scheduled to convert five of the aircraft acquired using the industry-preferred Precision Aircrafts Cargo Conversion Kit, with our first completion expected later this month and under contract for sale to a Canadian cargo operator. Conversions two, three, and four are also under LOI and in the lease documentation phase with the US cargo operator. We're in discussions with multiple additional customers for our fifth conversion with scheduled cargo completion in the first quarter of 2022. As we acquire or repair more engines, we have an option with Precision to purchase up to five more cargo conversion kits to modify aircraft 19 through 23 potentially leaving only one of the original 24 aircraft fleet for part out. Our capacity to acquire a large fleet of aircraft, perform cargo conversions, secure coveted precision cargo conversion kits, and find the cargo customers for aircraft converted on spec differentiates us from our peers and provides yet another high margin revenue outlet for the company's flight equipment. As we review our business results, there are a few important things to keep in mind. First, we generally don't focus on quarterly year-over-year analysis to assess our financial performance, which you'll notice throughout our commentary. The rationale for this is simple. Our asset management, acquisition, and flight equipment sale businesses are one of the cornerstones of our success and account for large transactions at irregular times throughout the year. As we discuss our results, we'll make it a point to update our investors on these key transactions for both the current year and prior year periods. More importantly, we believe relevant indicators for our business performance are asset acquisitions and activities, the outlook for flight equipment sales throughout the year, progress on engineered solutions, STC development and contracts, and the underlying performance of our MRO business. With that in mind, we're performing well and as expected in 2021, with first quarter consolidated sales of $58.4 million. Sales in the prior year were 57.1 million. Sales levels in 2021 have been primarily supported by 13.8 million of flight equipment sales, continued demand for aircraft storage maintenance, and strong MRO demand, which was offset by lower leasing from aircraft whose leases expired, combined with lower USM part sales volume, which is still under pandemic-related pressure. Turning to profitability, our first quarter 2021 adjusted EBITDA was 16.5 million or 28.2% of sales compared to 9.4 million or 16.5% of sales in the prior year. Higher adjusted EBITDA margin during this period was attributable to strong cost controls and higher gross margin mix. The period also included 6.4 million of CARES Act proceeds, which did not occur in the prior quarter and are not excluded because we cannot reduce the associated labor cost for the year to remain in compliance with CARES Act grant restrictions. On the specific quarters that include CARES Act proceeds, it does create a lift to margin performance. To dig into the specifics by segment and beginning with asset management, during the quarter, we sold 13.8 million of flight equipment, representing the sale of one Boeing 737-800NG airframe and two Pratt & Whitney PW4000 engines to cargo operators and one Pratt & Whitney PW4000 engine for parts as we took advantage of market dynamics where there was strong interest in purchasing whole engines in support of USM needs. Our aircraft and leasing revenue was down compared to the prior year as a result of three Boeing 747 passenger aircraft leases that expired. We decided not to invest in returning these aircraft to service as we concluded They have a higher value as whole engines, USM airframe, and engine parts. Of the 12 General Electric and Pratt & Whitney engines removed from these three 747s, the serviceable ones have been added to our engine lease pool, and the engines needing extensive repairs and the airframes will become feedstock for our USM parts business as we take advantage of strong demand in this platform from cargo operators. This reduces our fleet aircraft lease fleet to just four aircraft, two passenger and two freighter, all of which have been performing well. This aircraft portfolio reduction is not a coincidence. Over the past several years, we have been anticipating a market downturn and have been strategically reducing our leased aircraft fleet. Unlike pure play aircraft leasing companies post-COVID, we've not had to forgive rent in order to keep the aircraft on lease. As such, all of our flight equipment is generating an acceptable amount of revenue, keeping our balance sheet clean with no debt and plenty of capacity to add more flight equipment assets to our portfolio as the industry recovers. We continue to market for asset purchases and believe that opportunities will become more attractive in the back half of 2021 once airlines are able to resume more normalized service levels and can better assess their fleet requirements. Regarding our 24 aircraft Boeing 757 fleet acquisition program, we made good progress on either the sale or lease of the first 18 aircraft. In the balance of our asset management business, we're seeing an uptick in USM part sales as carriers gear up for a stronger anticipated summer, but overall volume is still down from pre-pandemic levels. We're also challenged in this business by limited feedstock availability at attractive prices. However, we expect this dynamic will become more favorable over the next 18 months. Turning to our tech ops business, total sales in the quarter were quite strong and driven by continued demand at our aircraft storage locations, along with high demand for MRO as airlines begin to recommission aircraft. Aircraft storage maintenance has been a strong offset to lower pandemic-related volume in other parts of our business. We do expect our facilities to remain full, even as some aircraft are recommissioned, as storage demand has far exceeded capacity and an extended recovery will continue to fill any vacancies for some time. Reviewing the product development side with engineered solutions, we produce highly specialized products that comply with regulatory mandates and or enhance the safety of commercial aircraft. We're currently marketing three products, including AirSafe and AirTrac, for which we hold supplemental type certificates, STCs, issued by the FAA. Sale of our existing STCs have netted strong margins, and all of our STC products will serve a customer base of over 16,000 aircraft. Regarding AeroWare, which is expected to have the largest addressable market of any of our STCs, we made substantial progress towards gaining STC approval and completed additional flight tests with a potential launch customer during the period. We continue to work with the FAA, both in reviewing our proprietary engineering data and performing test flights using our Boeing 737-800NG prototype test aircraft. In summary, after our first full quarter as a public company, we're exactly where we anticipated we would be. Our MRO facilities are full, and our diversified portfolio continues to support our business performance in a dynamic operating environment. We remain very enthusiastic about the future and look forward to updating our investors in the coming quarters. Over a year into the pandemic, our employees have shown great flexibility and resiliency. Our strong financial performance is the result of their dedication and the multidimensional and fully integrated business model we spent the last decade building. The diversity of our revenue sources has created a counter-cyclical hedge, enabling AirSail to thrive in a challenging commercial aviation market. I'll be back to answer questions in a few moments, but for now, I'll hand it over to Martin for a look at the numbers.