AerSale Corporation

Greetings. Welcome to the Airtel second 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, Kristen Gallagher. Thank you. You may begin.

Good morning, I'd like to welcome everyone to air sales second 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 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, 2020, filed with the Securities and Exchange Commission on March 16, 2021, 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 investor section of the AirSale website at ir.airsail.com. With that, I'll turn the call over to Nick Finazzo.

Thanks, Kristen. Good morning to everyone on the line, and thank you for joining our call today. I'll begin with a brief overview of the quarter, followed by operational updates and progress we're making on our major strategic priorities. I'll then turn the call over to Martin for a closer look at the numbers. For those of you who are new to AirSail, We operate a purpose-built, fully integrated, multi-dimensional, adaptive business model serving the commercial aviation aftermarket 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 equipment purchases, and deliver a higher overall value to our customers as we touch nearly every aspect of the aircraft maintenance cycle. Before reviewing our results, I'd like to remind investors of a few important things to consider. 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 a cornerstone of our success and account for large transactions at irregular periods 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. That being said, our performance in the second quarter of 2021 was strong, driven by improving commercial aerospace activity as airlines recommissioned parked aircraft, coupled with solid execution, against our strategic Boeing 757 program. Our second quarter revenue was 91.9 million, which included 42.7 million of flight equipment sales, mostly related to our 757 program. In the prior year, our revenue was 45.4 million, with 3.1 million of flight equipment sales. Our overall business, excluding flight equipment sales, also grew at a robust 17% compared to the prior year, driven by the recommissioning of commercial aircraft as airline traffic begins to recover from the lows of the pandemic. Adjusted EBITDA in the second quarter of 2021 was 30.4 million, or 33% of sales, compared to 12.9 million, or 28% of sales, in the second quarter of 2020. higher profit and margins were driven by higher volume, a favorable sales mix, and cost efficiency measures previously implemented. We also recognized $8.4 million in payroll support programs in the second quarter, compared to $6.3 million in the second quarter of 2020. As a reminder, these support programs incur offsetting costs related to program eligibility and we therefore do not adjust them out of our numbers. These results are modestly ahead of our expectations and position us well to deliver on the full-year guidance we have provided to all of our stakeholders. Turning to the specifics by segment and beginning with asset management, during the quarter, we sold 42.7 million of flight equipment, consisting of three aircraft, one airframe, and two engines. In our USM business, both airframe and engine parts sales ran well ahead of prior year levels as we were able to monetize strategic assets held as airlines recommissioned parked aircraft. Turning to leasing, and similar to last quarter, our leasing revenue was down compared to the prior year as a result of three Boeing 747 passenger aircraft leases that expired at the end of 2020. With the conclusion of these leases, We evaluated the condition of the assets and inducted a portion of the engines to our lease pool, with the remaining assets scheduled to be parted out as USM to fully monetize the investment. This reduces our aircraft lease fleet to just four aircraft, two passenger and two freighter, all of which have been performing well. Regarding our tech ops business, total sales remain a highlight of our performance. and continue to accelerate as the commercial recovery materializes. Demand for aircraft MRO is very strong, and we're running at full capacity relative to current workforce levels. To the extent we're able to attract and hire additional mechanics, we have the infrastructure to expand our throughput, but hiring in these roles has been strained given system-wide demand. We expect our facilities to remain at our current labor capacity through the balance of the year and visible forecast period. Even as some aircraft have been recommissioned, requests for air sales on airport MRO services have far exceeded capacity throughout the pandemic. Turning to engineered solutions. During the quarter, we saw stronger interest in our AirSafe product as airlines learned they can utilize this solution to comply with both current and upcoming regulatory requirements. AirSail holds a Supplemental Type Certificate, or STC, issued by the FAA and other foreign regulators for AirSafe. AirSafe was developed by our engineering team to initially address the Fuel Tank Flammability Reduction Rule, abbreviated as the FTFR. Our product serves as an FTFR alternative to the OEM nitrogen system installed in Boeing and Airbus aircraft. AirSafe incorporates a mil-spec reticulated polyurethane foam system designed to achieve the technical requirements of the FTFR. In addition to the FTFR mandate, an airworthiness directive has been issued for the Boeing 757, which requires separation of the fuel quantity indication system in the center fuel tank and has a mandatory compliance date of May 2022. We're working on adding the 757 to the list of aircraft already approved to install AirSafe, which includes Boeing 737 Classics and NGs, 767s, and 777s, as well as the Airbus family of A318, 19, 20, and 21 aircraft. AirSafe is a cost-effective solution for this new regulatory requirement, enabling operators to avoid an expensive rewiring procedure that would otherwise involve substantial aircraft downtime. We expect this will result in a resurgence of demand for AirSafe that will peak in the coming quarters as we approach the May 2022 compliance deadline for the 757 and continue through 2026 as compliance will be required for other aircraft on which we hold air safe STCs. Next, I would like to discuss our strategic investments and priorities, beginning with our engineered solutions product, AeroWare, an advanced technology enhanced vision system incorporating a military style head wearable display, allowing pilots to see through the weather. We continue to work closely with our partners, potential customers, and the FAA to bring our AeroWare product to market. We're scheduled to perform a second round FAA flight testing next week and are making progress toward an STC award. As is commonly the case with FAA approved equipment, especially considering AeroWare is the introduction of novel advanced technology to commercial aviation, final certification has been a longer than expected process. However, the feedback remains very positive from both the regulators and potential customers. Importantly for investors, while we have limited visibility on the timing of final FAA approval, the addressable market for this advanced technology represents the greatest opportunity for a single product in air sales history. Ultimately, we believe enhanced vision technology will become ubiquitous on commercial aircraft. as it greatly improves safety and presents a very attractive return on investment for airlines by reducing schedule delays due to weather and alleviating airport traffic congestion. Turning to the market outlook for strategic aircraft investments, conditions remain tight. Importantly, the limited availability of attractively priced flight equipment is driven by airlines working to bring back capacity online amid their own labor supply constraints. This is typical in a cycle as we see robust demand for MRO services and operators await system stability before divesting of unneeded aircraft. Several factors keep us optimistic that there will be a strong buying opportunity as this process evolves. First, recall that aircraft storage facilities are still at near capacity levels. and the number of out of service passenger aircraft remains high. Second, the recommissioning of Boeing 737 MAX aircraft has placed an additional strain on the MRO supply chain, which will take time to ease. Once airlines have operating stability, we anticipate a flood of attractive asset packages to come on the market. We're supported by a healthy balance sheet, a strong cash position, and an undrawn $150 million revolver to make these investments at the appropriate time. In the interim, a strategic advantage for AirSail is that with our fully integrated multi-dimensional adaptive business model, we participate in virtually all aspects of the aircraft service supply chain. This enables AirSail to be patient throughout the cycle and organically grow the business built on the strength of our platform. In summary, air sale is performing well, and we're on pace to deliver on our full-year guidance. Currently and through the balance of the year, our business is expected to be driven by robust tech ops demand in MRO, aircraft storage, and the sales of air safe. Our asset management business is on track, driven by our 757 conversion program, and demand is robust for used serviceable materials. although feedstock supply opportunities remain limited. As we look to the end of 2021 and into 2022, we're energized by the opportunities in front of us to deploy capital for asset acquisitions and to begin delivering our Arrowware product. At this time, I'll hand it over to Martin for a look at the numbers before taking questions. Martin?