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?