AerSale Corporation

Good afternoon, ladies and gentlemen, and welcome to the ARCEL Inc. First Quarter 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, May 9, 2023. I would now like to turn the conference over to Christine Padron, VP of Compliance. Please go ahead.

Good afternoon. I'd like to welcome everyone to Airtel's first quarter 2023 earnings call. Conducting the call today are Nick Sinalzo, 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 31st, 2022, filed with the Securities and Exchange Commission, SEC, on March 7th, 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 four 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 metrics 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 Bonalto.

Thank you for that explanation, Christine. Good afternoon, everyone, 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 first quarter results were in line with our expectations and reflect the cadence of flight equipment sales we shared last quarter. This resulted in total first quarter sales of 78.3 million compared to 122.8 million in the first quarter of 2022. I would remind investors that the prior year quarter included the sale of a highly modified 737 aircraft that was used for airwear testing in our tech ops segment, which added 24 million in high margin sales. The remaining decline compared to the prior year period was entirely the result of the timing of whole asset sales, as we had 27.7 million in aircraft and engine sales during the first quarter of 2023, compared to $51.9 million in the first quarter of 2022. Excluding the sale of whole assets and the ex-AirAware 737, the remainder of our business grew approximately 8% year-over-year, as strong growth in our tech ops segment more than offset a modest decline in asset management. As we note every quarter, it is important for investors to analyze air sale on a full-year basis and assess feedstock and whole asset sales to fully capture our performance, as quarterly sales volatility is common based on the size of flight equipment transactions. Further, while flight equipment sales add substantial variability by quarter, it is important to understand that these activities are an essential, profitable, and recurring component of our end-to-end solution. Specific to 2023, we continue to expect higher whole asset sales related to our 757 P2F conversion program in the second half. As a result, the year-over-year quarterly comparisons will be more dramatic as we report this year, as 2022 was heavier weighted toward whole asset sales in the first half. Further, we expect the success of our feedstock acquisitions which have included nearly $125 million in awarded deals year-to-date, to bolster our second-half results. Turning to profitability, our adjusted EBITDA in the first quarter of 2023 was $5 million, or 6.4% of sales, compared to $29.9 million, or 24.3% of sales, in the prior year period. The lower EBITDA margin observed in the period resulted from lower cost absorption from lower sales during the quarter combined with an unfavorable mix from fewer high margin whole asset sales. At the segment level and beginning with asset management, first quarter sales were 48.4 million compared to 74.5 million in the prior year period, primarily the result of lower flight equipment sales and planned reductions in our aircraft lease portfolio. In the first quarter of 2023, we sold one engine, one airframe, and two aircraft. This compares to six aircraft and four engines that we sold in the prior year quarter. Looking forward to the balance of the year, we continue to expect flight equipment sales to be stronger beginning in the third quarter. This expectation is supported by a very strong feedstock acquisition cycle at the start of the year, combined with forecasted deliveries of 757 P2F aircraft. As Martin will detail in our guidance, we've subcontracted for an additional 12 conversions from multiple providers, of which one has been completed and sold in Q1, and eight more are expected to be completed over the remainder of 2023, and three in Q1 2024. In our USM parts business, airframe and engine part sales were roughly flat compared to the prior year, which, despite a stronger commercial backdrop, was constrained somewhat by lower feedstock purchased in 2022, resulting in less feedstock available for sale in early 2023. As noted, we expect sales from feedstock to improve materially as the year progresses based on asset acquisitions completed year to date. In our leasing portfolio, revenue was down compared to the prior year, as we had only one aircraft and fewer engines on lease during the period. As a reminder to investors, we're agnostic to the type of sale in our asset management business and seek to maximize return on investment on feedstock through the highest return in current market conditions between USM parts, sales, leasing, or whole assets. As a result, we decided to sell our remaining aircraft on lease during the quarter, a 737-400 freighter, as we concluded that the ROI associated with continued leasing would be significantly less than a sale in a very favorable market for this type of flight equipment. In our tech ops segment, reported sales were $29.8 million, compared to $48.3 million in the prior year. Excluding the $24 million sale of the X-Airware 737 in 2022, our underlying sales grew 22.7% as a stronger commercial aerospace backdrop and better MRO availability bolstered volume in the quarter. In our engineered solutions unit, we made substantial progress in our effort to obtain FAA approval of our enhanced flight vision system airwear product during the quarter. We've been testing this product on two aircraft since August 2020 in order to be issued a Supplemental Type Certificate, which you may hear me refer to as an STC, and to commercialize this product. As part of the certification process, the FAA required, among other things, that we prove this system through FAA-observed flight tests. with the FAA scheduling five sets of flight tests beginning in February 2023. We successfully completed the first four sets of flight tests from February through the end of April, the most important of which proved that the enhanced flight vision capability met the criteria set out by both AirSail and the FAA for STC certification. We're currently working diligently to schedule the fifth set of flight tests, which will complete the flight testing aspect of the certification process. We expect this to occur once our engineering team has completed a minor software change to address FAA comments from the first four flights. The FAA approval process is lengthy and exhaustive to ensure public safety, which is underscored by the excellent safety record of the U.S. Commercial Aviation Network. Through this process, we have continually improved the system to near perfection and as a result, we believe the safety and quality aspects of our advanced technology product is superior to anything available on the commercial market today. Further, given the substantial investment of time and resources to obtain an STC of this complexity, we believe we'll be in an excellent position to become the market leader in the category. To that end, after demonstrating to the FAA how the system worked in low visibility conditions, the feedback was very complimentary. We're excited to be near completion, considering all the positive comments from the FAA and the interest of multiple potential customers. Turning to capital allocation and our feedstock program, we remain ready with ample liquidity to execute on equipment packages that satisfy our financial requirements. In total, we have more than $230 million of capital to deploy to support our growth strategy, comprised of $87 million on our balance sheet and an additional $150 million undrawn on our revolver. As we noted several weeks ago during our year-end call, we had a notable uptick in feedstock availability at year end and into the first couple of months of the year. Year to date, we have won nearly $125 million in flight equipment packages, with slightly over $50 million already closed and another $70 million awarded and in the process of closing. We expect this added inventory to support our full-year projections and drive a stronger second half of the year. To add further context, This rate of fee stock acquisitions compares to just $50 million in all of 2022 and is the most important leading indicator to the future performance of our asset management segment. Before turning the call over to Martin, I would also like to welcome Andrew Levy to our Board of Directors, which we announced in April. Andrew joins us with over three decades of corporate and entrepreneurial experience in the aviation and telecommunications sectors. and he brings a wealth of knowledge to AirSail as a founder of Legionnaire, his work as the CFO of United, and as the founder of Avello Airlines. We're thrilled to have Andrew on the board, and we look forward to working with him. To conclude, we're exactly where we expected to be as of the first quarter, and we continue to make progress in securing the feedstock we need to drive higher volume in the back half of the year. On airware, We have passed significant milestones to being awarded our STC and look forward to the final steps of the certification process. I would like to thank all our employees for their dedication to AirSail and for their efforts in delivering on our commitments to all our stakeholders. Now, I'll turn the call over to Martin for a closer look at the numbers. Martin?