AerSale Corporation

Good day and welcome to ESL Inc's fourth quarter and full year 2023 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press start and then zero on your telephone keypad. Please note that this conference is being recorded. It is now a pleasure to hand the conference over to Kristen Gallagher. You may begin.

Good afternoon. I'd like to welcome everyone to AirSail's fourth quarter 2023 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, 2023, filed with the Securities and Exchange Commission to be filed on March 8, 2024, 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.airsale.com. With that, I'll turn the call over to Nick Finazzo.

Thank you, Kristen. Good afternoon, and thank you for joining our call today. I'll begin today with a recap of the year and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. The final months of the year deviated meaningfully from our expectations headed into year end, which entirely stemmed from lower than anticipated flight equipment sales in the fourth quarter. If you recall, in the prior quarter we noted a significant number of flight equipment sales that were slated for delivery in December, which would account for the bulk of our EBITDA for the year. As noted at the time, the schedule of these deliveries is subject to change due to customer acceptance and delivery requirements, which were expected to occur in the fourth quarter. In total, we had 28.8 million of flight equipment sales that did not close in 2023, that have thus far closed in the first quarter. We expect the remaining sales that did not materialize in 2023 to close in the first half of 2024 or be returned to available inventory for subsequent sale or lease. Importantly, this is common in our business, and as a public company, we have had quarters that have demonstrated a significant deviation from our original expectations, both on the upside and the downside. As we have discussed, we operate a purpose-built, end-to-end solution, which is unique in the industry and gives us a competitive advantage to extract value from assets that our peer group is unable to achieve. This ecosystem allows us to direct assets to the most attractive ROI for our equipment, and we're agnostic to the end use, whether it be through part sales, aircraft and engine leasing, or flight equipment sales. With this complex ecosystem comes a significant fixed cost hurdle that we must clear annually, at which point we begin generating significant EBITDA on each incremental dollar of sales. In the short term, flight equipment sales generate significant revenue and therefore EBITDA drop through as we have already reached our fixed cost hurdles. In the longer term, to the extent we deploy more assets to USM, it will have a similar effect on our financials, but over an extended period of time. Following the lessons learned in 2023, we recognized the need to provide investors accurate and insightful inputs to our go-forward performance. Therefore, we're discontinuing our practice of numerical full-year guidance, but will continue to provide as much qualitative detail as possible about opportunities and outcomes expected over future periods. Our change in guidance policy should not be interpreted as a change in our bullish view about 2024 and future year's performance, which we are confident we can derive from the diversified air sale platform. Turning to a summary of full year results, our sales declined 18.1% to $334.5 million. Lower full-year sales were attributable to lower feedstock acquired in 2022, combined with significantly lower flight equipment sales throughout the year, particularly in the first half of 2023. Excluding flight equipment sales and the sale of a 737 aircraft in tech ops in 2022, which is not expected to recur, full-year revenue increased 5.6%, reflective of the strong commercial demand environment we're operating in. Turning to our profitability for the full year, we reported adjusted EBITDA of $12.3 million compared to $87.4 million in the prior year. The decline in EBITDA year over year stemmed from reduced volume in the first half of 2023 due to lower feedstock availability, substantially fewer flight equipment sales during the year, and the absence of stronger margins generated in the prior year related to our 757 P2F conversion program. At the segment level and beginning with asset management, our full-year sales came in at 215.2 million compared to 277.6 million in the prior year. Lower full-year sales almost entirely stemmed from a reduction in total flight equipment sales and fewer aircraft and engines on lease. Our full-year USM sales partially offset these factors, with a 26.1% growth year-over-year as we benefited from strong demand and improved fee stock in the second half of 2023. For the full year, we sold 17 engines and 4 aircraft, compared with 15 engines and 12 aircraft in the prior year. Turning to our end markets, commercial demand remains robust as a result of strong airline traffic and capacity, which has now exceeded pre-pandemic levels. This is a formidable tailwind to our business and provides significant demand for our equipment. Importantly, this is a compelling indicator as we've ramped up our asset purchase program in 2023. After a weaker purchasing environment in 2022, that unfavorably impacted our first half of the year. Simply put, with sufficient demand and favorable pricing, our current ability to drive revenue and EBITDA stems from our ability to acquire, service, and deploy equipment back into the market. In the cargo market, conditions remain challenging, as we've reported throughout the year. We have seven remaining 757s that are being converted and continue to actively market these aircraft to potential customers. In our USM parts business, airframe and engine parts sales both grew substantially year over year, driven by the success of our feedstock program. For the full year of 2023, we acquired $132 million of feedstock and had an additional $72 million under contract at year end. The availability of feedstock continues to be negatively impacted by the delay in new OEM production that has forced operators to retain older equipment for longer than is typical. Despite this environment, we've been successful in continuing to acquire feedstock as our purpose-built model was made to extract a maximum value of aircraft in any condition, allowing us to execute on purchases of unserviceable equipment that requires investment and expertise to monetize. In addition, the condition of records for these assets have been challenging as they have not met the robust requirements of the industry for full back-to-birth trace. This is again where our industry know-how and experienced team can add value where others cannot, but has also delayed the timing of closing on some of these feedstock acquisitions. Finally, in our leasing portfolio, Full year sales declined by approximately 50% as we had fewer assets under lease during the year. We had no aircraft in the lease portfolio in 2023 compared to three aircraft in the prior year that were sold at very favorable prices. In 2024, the company plans to increase of engines available for sale and lease based on engines that we purchased in 2023, as well as from engines that are returning to service after maintenance or repair activities that have been completed. Turning to our Tech Ops segment, we reported full year sales of $119.3 million compared to $130.9 million in the prior year, which included the sale of our 737 AeroWare demonstrator aircraft to a government entity for $23.7 million. Excluding this asset sale, Segment sales were up roughly 10% year-over-year as a result of strong demand for our MRO services, particularly at our Goodyear facility. Turning to engineered solutions and airware, I'm very pleased to report that on December 6th, we received our STC from the FAA for airware, which marks the conclusion of a multi-year development and flight testing process. With the approval, the FAA also determined that AirAware provided a 50% visual advantage over the naked eye, which will be instrumental in helping our customers assess and model the financial returns for the product. Importantly, AirAware is now the only enhanced flight vision system that the FAA has approved for this degree of visual advantage. The addressable market for airware is substantial, with more than 6,737 NG aircraft actively flying that would benefit from this product and qualify under the F-8 certification. This market includes very large passenger carriers that represent hundreds of units, Boeing business jet operators, as well as cargo and government operators. As we concluded the certification process, We also ramped up our go-to-market activities in an effort to secure a launch order and build an order backlog. We're in active discussions across these categories, and as we've detailed in the past, many of the largest players are already familiar with the product through demonstrations and flight testing. Further, I'm pleased to announce that as of today's call, we have written proposals out to five potential launch customers. which span from small to large passenger and cargo carriers. While we expect formal orders to take some time as customers fully assess the benefits and return profile of airwear, the proposition is clear and compelling that the installation of airwear will both substantially enhance aircraft safety in suboptimal weather conditions while providing a compelling ROI to customers through reduced delays, diversions, and fuel consumption. In closing, while 2023 was a challenging year that fell short of our expectations, we remain confident in the long-term prospects for our business. Our unique end-to-end solution provides a durable competitive advantage. The recent FAA certification of Airware was a major milestone that unlocks a large and exciting growth opportunity, and we have a robust pipeline of potential launch customers actively evaluating the system. By continuing to execute on our strategic priorities, acquiring attractively priced feedstock, maximizing returns across our asset management channels, and driving adoption of airware, we are positioned to generate significant long-term value for our shareholders. I want to thank our dedicated employees for their hard work and our investors for their continued support. We look forward to updating you on our progress in the future. Now, I'll turn the call over to Martin for a closer look at the numbers.