AerSale Corporation

Greetings and welcome to Aercel Corporation's fourth 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. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Kristen Gallagher, Director of Human Resources. Thank you, ma'am.

You may begin. Good afternoon. I'd like to welcome everyone to AirSales' fourth quarter and full year 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 can cause actual results to differ materially from forward-looking statements are discussed in the risk factor section of the company's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission 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 AirSale website at ir.airsale.com. With that, I'll turn the call over to Nick Finazzo.

Thank you, Kristen. Good afternoon to everyone on the line, and thank you for joining our call today. I'll begin with a brief overview of the quarter and full year, followed by operational updates and progress we're making on our key objectives. I'll then turn the call over to Martin to review the numbers. We finished the year strong, with total fourth quarter revenue of $116.8 million, which more than doubled the prior year period of $49.4 million. Strength in the quarter was largely related to progress on our 757 freighter conversion program, along with other flight equipment sales, which collectively accounted for 73.1 million of our fourth quarter sales. We also benefited from an improving commercial aerospace market as airlines continued to recover from pandemic lows. These gains versus the prior year were partially offset by a decrease in sales in our tech segment as we reallocated resources in our Goodyear facility to support the 757 freighter conversion program. I will elaborate more on this strategy in a moment. We also reported strong profitability during the quarter with an operating profit of $19.8 million compared to a $26,000 loss in the prior year. Adjusted EBITDA during the quarter was $28.6 million, or 24.5% of total sales, and set a single quarter company record. Higher profitability resulted from the strength of our 757 cargo conversion program, coupled with an improving operating environment. Our full year 2021 results also set a single year record for financial performance with total sales of 340.4 million and increase of more than 60% year over year. Adjusted EBITDA for the full year was 89.3 million, an increase of 72% year over year. We are proud that we demonstrated exceptional growth and performance in our first year as a public company, exceeding the commitments we made to investors in our SPAC transaction in 2020. This truly sets AirSale apart from most other companies that went public by combining with a SPAC and speaks to the underlying power of our purpose-built end-to-end model. Before getting into segment-level details, I'd like to make a couple of comments regarding the Russian invasion of Ukraine. As is most of the global community, we're shocked and deeply saddened by these events and are supportive of actions taken to end the violence. To that end, we're fully compliant with the sanctions, which have impacted our ability to lease flight equipment or supply parts to airlines flying into Russia, which I will detail throughout my remarks. We expect its effect to be limited to less than 5% of our preliminary 2022 consolidated sales budget. Turning to segment specifics and beginning with asset management, in the fourth quarter, we sold 73.1 million of flight equipment that included three aircraft and four engines. I want to reiterate that flight equipment sales such as the 757 program are an important part of our business feedstock, and overall strategy. It is critical to our competitive advantage to fully use our end-to-end solution to acquire and ultimately direct these assets to their best and highest use to earn the greatest return on investment, whether it be as whole flight equipment, leases, or feedstock to our customers. These large flight equipment sales can be lumpy and should be assessed by both the feedstock going into them and the long-term performance of these programs. I am pleased to report that we retain sufficient feedstock aircraft and conversion slots to continue expanding our 757 freighter conversion program through 2023, giving us good visibility in our current guidance period that Martin will elaborate on further in his remarks. Within our used serviceable material, or USM parts business, airframe and engine part sales were at or higher than prior year levels as airline demand improved. Although feedstock availability has steadily increased over the year, we remain highly disciplined and only execute on those opportunities where our multidimensional integrated business model allows us to achieve outsized returns on these acquisitions compared to our peers. During the fourth quarter of this year, 2021, our leasing revenue increased compared to the prior year period due to strong utilization of our leased assets. Additionally, regarding the recent war in Ukraine, sanctions against Russia have created minimal exposure that will impact our lease programs in 2022. In total, we had two airplanes and two engines on lease to global airlines that operated these assets in Russia. As mandated by the sanctions, we terminated the leases for these assets. Our lessees have been very cooperative and we were able to regain control of these assets quickly, except for one engine, which we expect to regain control of imminently. The unplanned forced termination of these leases will create a modest headwind to our 2022 performance as these assets will not be actively generating revenue until we are able to secure a new lessee or identify other ways to monetize these assets throughout our system. The remaining two aircraft we have on lease are performing as required under their leases. We will continue hunting for asset purchases and expect attractive opportunities in 2022 as airlines assess their fleets following more normalized service levels. In our tech ops segment, total third-party sales were down 27.5% to 23.2% mentioned. As I mentioned a few moments ago, lower sales were entirely the result of our strategic reallocation of resources to intercompany activities in support of the 757 freighter conversion program. Demand for MRO activities from airlines remains strong, but our analysis indicates that we can generate higher returns through supporting the 757 program in the short term. This also presents us with a strong offsetting growth opportunity as this program winds down later this year, as it will free up hangar space and labor to work on customer aircraft. Moving to engineered solutions, we continue to see incremental demand for our existing air safe product STCs, which include the 737 Classic and NG, the 757, which received FA approval last month, 767 and 777, and the Airbus A318, 1920, and 21 family of aircraft. AirSafe serves as a fuel tank flammability reduction, otherwise known as the FTFR alternative, to a nitrogen inerting system installed by Boeing and Airbus in new aircraft. AirSafe consists of a military specification reticulated polyurethane foam system, that achieves the technical requirements mandated by the FTFR. In addition to the requirements of the FTFR, an Airworthiness Directive has been issued, which mandates separation of the fuel quantity indication system in an aircraft center fuel tank, which, for the 757, has a mandatory compliance date of May 2022. We have also continued our work on product development and FAA approval of AirAware. our advanced technology enhanced flight vision system, incorporating a military-style head-wearable display that allows pilots to see through poor weather conditions. We are progressing toward certification with updated development timelines suggesting that this work should be completed by early May 2022. We continue to believe FAA approval will be granted in 2022, but have only included modest airwear sales this year, to account for the ramp-up phase to commercialize this product once the Supplemental Type Certificate for airwear is issued to air sale by the FAA. We remain enthusiastic about the market potential for airwear and continue to see this product as the largest market opportunity in our history and a potential to transform our business. We expect airwear's enhanced flight vision technology to become the desired technology on commercial aircraft, with its ability to improve safety, offer an attractive return on investment to airlines, and reduce the carbon footprint of flight operations by minimizing flight delays caused by poor weather conditions, airport diversions, and airport traffic congestion. In our view, it's not a matter of if the FAA will grant us an STC for airware, or if the market will ultimately embrace the safety and flight enhancement features it offers, that we believe are unparalleled to any other solution in the industry. It's just a matter of when. Before turning the call over to Martin, I would like to touch a bit on the macro environment. We're gaining confidence the worst of the pandemic-related disruptions are behind us, and a more steady and prolonged recovery is poised to emerge in 2022 and beyond. Governments around the world are rapidly lifting restrictions and consumers are eager to begin traveling after more than two years of restrictions. This benefits air sale as airlines recommission parked aircraft and higher systems capacity increases the need for MRO. There are also continued opportunities in the freighter markets, and we're seeing an increase in aircraft reactivations and aircraft made available for sale. We're on track to monetize our Boeing 757 investment through 2022 and 2023. Over the long term, air sale is perfectly positioned. We operate a purpose-built, fully integrated, multidimensional, adaptive aftermarket aviation model that includes part procurement, flight equipment sales and leasing, MRO, FAA certifications, and aircraft storage and decommissioning. Our unique model enables us to closely monitor the market, capitalize on opportunities in advance of our peers, and drive internal and external value to all our stakeholders. This model led to our record results in 2021 and issuance of 2022 guidance that demonstrates growth off that base. We stand ready to capitalize on all market opportunities and are further supported by a strong balance sheet with over $130 million in cash as of year end, no debt, and $150 million undrawn revolver. This allows us to deploy capital quickly for both asset acquisition and potential M&A opportunities. At this time, I will turn the call over to Martin for a closer look at the numbers. Martin?

Thanks, Nick. I will start with an overview of our fourth quarter financial performance and end with our guidance for 2022. Our fourth quarter revenue was $116.8 million, which included $73.1 million of flight equipment sales. Revenue in the fourth quarter of 2020 was $49.4 million and did not include any flight equipment sales. As a reminder, our business may fluctuate from quarter to quarter and year to year based on flight equipment sales, and therefore it is important to monitor our progress on asset purchases and sales over the long term. Fourth quarter asset management solutions, or AMS revenue, increased to $93.6 million from $17.4 million in the fourth quarter of 2020, mainly due to the flight equipment sales mentioned previously. Consumption of USM parts for maintenance improved through the quarter as airlines returned aircraft into operation against the backdrop of an upswing in air travel. We remain on track to monetize the remaining 15 Boeing 757 aircraft through 2022 and 2023, with the majority of them being monetized in 2022. Fourth quarter revenue from tech ops was $23.2 million, compared to $32 million in the fourth quarter of 2020. During our third quarter earnings call, we mentioned that we were reallocating resources away from third-party work to support our cargo conversion line for our 757 aircraft at our Goodyear facility. This process continued through the fourth quarter, leading to lower revenue. This reallocation allowed us to realize higher margins from the sale of three 757 cargo conversions in 2021. Going forward, we expect to benefit from a pickup in MRO volume due to the ongoing recommissioning of commercial aircraft and greater demand for USM parts consumption for overhaul activity. Fourth quarter gross margin was 37.8% compared to 26.6% in the fourth quarter of 2020. The improvement was largely due to a greater mix of high-margin flight equipment sales. Selling general and administrative expenses were $24.4 million in the fourth quarter compared to $15 million in the fourth quarter of 2020, mainly on account of higher payroll expenses. We did not receive any proceeds from the Payroll Support Program in the fourth quarters of 2021 and 2020. In addition, we incurred $3.8 million of non-cash stock-based compensation in the fourth quarter compared to $1 million in the fourth quarter of 2020. Income from operations was $19.8 million in the fourth quarter of 2021 compared to a loss from operations of $26,000 in the fourth quarter of 2020. Net income was $11.2 million in the fourth quarter compared to $0.3 million in the fourth quarter of 2020. Adjusted for non-cash stock-based compensation, inventory write-offs, unrealized loss on investment, and mark-to-market adjustments to the warrant liability, adjusted net income was $22.3 million. Diluted earnings per share was $0.21 for the fourth quarter and is not comparable to the fourth quarter of 2020 due to the public listing of air sale on December 23, 2020. Excluding the impacts of the non-cash items noted above, Adjusted diluted earnings per share was $0.32 for the fourth quarter of 2021. Fourth quarter adjusted EBITDA was $28.6 million or 24.5% of revenue, while adjusted EBITDA in the corresponding period in 2020 was $3 million or 6.1% of revenue. Higher revenue and favorable sales mix comprising of a larger portion of higher margin flight equipment sales drove the improvement in adjusted EBITDA. Cash flow provided by operating activities was $79.1 million in 2021 compared to $12.2 million of cash flow used in operating activities in 2020. The main driver of increased cash generation during the year was stronger overall operating income and increase in deposits related to 2022 flight equipment sales. At year-end, Aerosol had approximately $130.2 million of cash on its balance sheet. and an undrawn revolver of $150 million. With our strong financial profile and debt-free balance sheet, we are ready to execute on potential asset acquisitions and M&A opportunities going forward. Finally, moving to our guidance for 2022 and summary. As Nick mentioned, we have several identifiable items that will be impacted by the current war in Ukraine and including these headwinds, we are issuing our guidance for $420 million to $450 million in revenue and $80 million to $90 million in adjusted EBITDA. In providing this guidance, we are also mindful that as these events develop, it may impact the global commercial aerospace industry and related macroenvironment, including and not limited to supply chain disruptions, expanding sanctions, and an impact on flight activity due to higher fuel prices. Given the recency of these events and the unpredictability of how their impact may ultimately unfold, we have not specifically taken into account these factors in providing this guidance beyond taking into consideration the identifiable impacts of which we are already aware of. Further, this guidance is based on an improvement in the company's AMS segment, ongoing demand for its on-airport MRO services, accelerating demand in cargo and e-commerce markets, and increased requests for passenger-to-freighter conversions and other tech ops products and services. The ongoing and continued monetization of the Boeing 757 fleet acquisition is expected to be the predominant driver of the AMS segment. Aircel expects to sell the majority of the remaining Boeing 757s in 2022 as a result of strong demand for cargo-converted aircraft. As Nick noted, we have only included modest errorware sales this year to account for the ramp-up phase to commercialize this product once the supplemental type certificate for errorware has been issued. In summary, our internal adjustments and superior execution over the last year against the backdrop of the pandemic have yielded success. In addition to being more resilient, we are also now on a stronger operational and financial footing. We have thrived in this challenging commercial aviation market with the diversity of our revenue sources creating a counter-cyclical hedge. We look forward to continuing to generate internal and external stakeholder value as we seek to achieve our goals over the next few years. With that operator, we are ready to take some questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation symbol indicating your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Gautam Khanna with how you may proceed with your question.

Thank you very much, guys. Hey, I was wondering if you could elaborate on the Russian exposure. So that 5% or less, is that in the sales guide? Is that already reflected or is that potentially incrementally negative to it?

No, we have already removed anything that was specific that we knew. So we removed the impact of the leases and of some air safe kits that has been removed out of our guidance. What we have not removed is any impacts to the micro- environment that could happen from the continuing escalation of the Russia event.

Okay, got it. And then on AeroWare, if you could just kind of elaborate on what the timeline is. You mentioned Q2, sort of what the remaining items are in terms of getting the product certified, and then what you'd expect thereafter with respect to orders and the like.

So we can, hi, Gotham, this is Nick. So we continue to wait for software validation by our partner on this. That is proceeding in the ordinary course of business. It's taking long because it's complicated, but it is moving steadily. We believe that all identified issues with the software have been rectified and we're completing validation. The expectation, as we've received from our partner, is that that will be completed in By early May, we will then do our reporting to the FAA. Hopefully, in the interim, we will have done our test flying because in order to get the STC, you've got to test fly the aircraft finally before the FAA will issue the supplemental type certificate. We believe that the test flying and the validation can be done concurrently, so we're not having to wait until we complete the validation before we do the test flying. And once test flying is complete, we then submit our final report, including the test data, to the FAA. I would guess if our validation is completed by early May, we've done our test flying. We do our reporting sometime in May, hopefully earlier than later, but if it's done in May, we submit everything to the FAA. We're just in a wait mode. We will have completed and done everything that we have to do to get this system certified by the FAA. It'll just be a wait until we can get the FAA to give us the resources to complete the certification process. We have no way to assess at this point how long that will take. Typically, something like that would take 30 to 60 days. That would be our expectation, barring something else that would distract the FAA from putting resources on it. Things have taken longer with the FA over the past several years because predominantly the FA has been working out of their houses. So there's been limited availability to interact with other members of the FA face-to-face. That's definitely slowed things down. Hopefully that is resolving itself as more and more people are going back into the office. And so we remain optimistic that the FA will put energy and focus on this and that we can get this completed by the FAA within a few months after we submit our final documentation.

Okay, and you did make a comment about air safe and sort of the May timeline. I'm just curious, what happens after May? So does that open up a new market potentially? I'm just curious how the May date matters on air safe.

On the May date for, let's say, 757, the compliance requirement date is May. So by May, all 757 passenger aircraft have to have a compliance method for these fuel quantity indication system separation. AirSafe obviously complies with that, and we now have certification of that. So by May, all aircraft that are active and operating in passenger service have to have that system in it. Now, that's not in every jurisdiction. As aircraft move from jurisdictions that don't have their requirement into jurisdictions that have the requirement, that will also spur sales of our AirSafe product. We had a number of sales of AirSafe product for airlines that fly into Russia. Current Russian sanctions prohibit us from selling those aircraft, sorry, those kits today. We have sought, I take it back, we are seeking approval from OFAC, to sell those kits to airlines that even though those airplanes may fly into Russia on the basis that they're a safety item, we don't know whether OFAC would grant that approval. If they don't grant that approval, those sales will be delayed. And by the way, they're not in our forecast. Those sales will be delayed until such time as those aircraft come out of Russia. Aircraft are coming out of Russia, despite what may happen, leave a lot of airplanes in there. And as those aircraft come out of Russia that don't have the kit installed in them, the next operator that takes them is likely going to need the kit, and we'll have the opportunity to do those sales. As Martin mentioned a few minutes ago, we don't have sales. The sales that we pulled out of our budget that we intended to sell into airlines that were operating into Russia, we pulled out, and they don't appear in our forecast for the balance of the year. Doesn't mean we won't have sales. Just means that we took them out. So we have no, we don't have visibility of that yet.

Got it. And just one last one on the 757 monetization. You mentioned the bulk of them will be done this year, that will remain 15, of the 15. Any sense for kind of how those phase through the year and, you know, how much, are you thinking 12, 13 of them get monetized this year or is it, you know, eight, you know, just over half? I know you said the majority are. the bulk of it. I'm just curious, timing and magnitude this year, just so we can calibrate.

Okay. So we have three aircraft that are undergoing conversion right now. One is almost complete, expected that we'll deliver it to a lessee and sell it to a leasing company within the next 30 days. We have two other ones that we're doing conversions on that will follow on in the second and third quarter. And we have two aircraft airplanes that we have committed to a Chinese operator that will get them converted in China themselves. This would be an existing Chinese operator that we've already sold airplanes to. These would be the last two aircraft we would deliver to them. That would take 10 airplanes that we will have delivered this year. We'll leave five left. We have placed a commitment or we've made a commitment with Precision to have Precision do, not us, Precision to do six more cargo conversions, whether they be in China or if they find another domestic facility because of the gap between the availability of kits. We basically have committed all of the available kits, all the available cargo conversion kits available from Precision through 2023. And as I said, we've got a commitment for six. We have five airplanes. We're counting on at least acquiring one more with an option to go to 10. So, you know, our expectation is we'll sell the balance of our airplanes as converted freighters in 2023 as those airplanes start the conversion process by a third party in the last quarter of this year. And we'll carry all through 2023. And if we go to 2010, they'll probably carry us again into 2024.

Great. Thank you very much. You're welcome, Gotham.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Nicholas Bonazzo for closing remarks.

Okay, as always, thank you for listening to this call today and for your interest in air sale. We're very pleased with our progress to date and excited about the future. Have a good evening, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.