Q2 2021 AerSale Corp Earnings Call
[music].
Greetings and welcome to the Air sales second quarter 2021earnings 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 Christian Gallagher. Thank you you may begin.
Good morning, I'd like to welcome everyone to air sales second quarter 2021 earnings call.
Ducting the call today are Nick Finazzo, Chief Executive Officer, and Martin Gum, India, 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.
He 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.
And 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.
Well 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 for the nearest GAAP metric can be found in the earnings presentation materials made available on the investors section of the Aircell website at IR got air sales Dot com.
With that I'll turn the call over to Nick.
Thanks Kristen.
Good morning to everyone on the line and thank you for joining our call today on.
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 air sale, 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.
Certifications and aircraft storage and decommissioning this.
This will 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 would like to remind investors of a few important things to consider for.
We generally don't focus on quarterly year over year analysis to assess our financial performance, which youll notice throughout our commentary.
The rationale for this is simple our asset management acquisition and flight equipment sales businesses are a cornerstone of our success and account for large transactions at irregular periods throughout the year.
As we discuss our results will 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, our asset acquisitions and activities the outlook for our flight equipment sales throughout the year progress on engineered solutions STC development in 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 re commissioning 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.
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 adjusted out of our numbers.
These results are a modestly ahead of our expectations and position us well to deliver on our 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 on flight equipment.
Assisting of 351.
1 airframe and 2 engines.
In our USA 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 3 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 USA to fully monetize the investment.
This reduces our aircraft lease fleet to just for aircrafts to passenger and 2 freighter all of which have been performing well.
Regarding our tech ops business total sales remain a highlight of our performance and continued to accelerate as the commercial recovery materializes dimmed.
Demand for aircraft MRO is very strong and we're running at full capacity relative to current workforce levels to.
To the extent, we're able to attract and hire additional mechanics, we have the infrastructure to expand our throughput but.
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 aircrafts have been Recommissioned request request for air sales on airport MRO services.
Far exceeded capacity throughout the pandemic.
Turning to engineered solutions during the quarter, we saw a stronger interest in our aerospace product as airlines for learned they can utilize this solution to comply with both current and upcoming regulatory requirements.
Air sales holds a supplemental type certificate or STC issued by the FAA.
And other foreign regulators for are safe.
<unk> was developed by our engineering team to initially address the fuel tank flammability reduction rule, abbreviated as the ft fr or product serves as an ft fr alternative to the OEM nitrogen system instead.
Installed and Boeing and Airbus aircraft.
Aerospace incorporates a mil spec reticulated polyurethane foam system designed to achieve the technical requirements of the ft fr.
In addition to the TFR mandate, an airworthiness directive has been issued for the Boeing 787, which requires separation of the fuel quantity indication system in the center fuel tank.
<unk> has a mandatory compliance date of May 2022.
We are working on adding the 757 to the list of aircraft already approved to install aerospace which includes Boeing 737 classics on <unk> 760, Sevens and 770 Sevens as well as the Airbus family of <unk> Hundred 18, 1920, and 21 aircraft.
Aerospace is a cost effective solution for this new regulatory requirement.
Labeling 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 aerospace debt will peak in the coming quarters as we approach the may 2022 compliance deadline for the $75.7.
And continue through 2026 as compliance will be required for other aircraft on which we hold aerospace stc's.
Next I would like to discuss our strategic investments and priorities beginning with our engineered solutions products are aware and advanced technology enhanced vision system, incorporating a military style head wearable display, allowing pilots to see through the weather.
We continued to work closely with our partners potential customers and the FAA to bring our era where product to market.
We're scheduled to perform a second round.
A flight testing next week.
And are making progress toward an STC award.
As is commonly the case with FAA approved equipment, especially considering are aware 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 scheduled delays due to weather and alleviating airport traffic congestion.
Turning to the market outlook for our 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 our cycle as we see robust demand for MRO services and operators of weight system stability before divesting of unneeded aircrafts.
Several factors keep that 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 a number of out of service passenger aircraft remains high.
Second the re commissioning of Boeing 737, Max aircraft has placed an additional strain on the MRO supply chain, which will take time to EPS.
Once airlines have operating stability, we anticipate a flow 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 air sale is debt with our fully integrated multi dimensional adaptive business model, we participate in virtually all aspects of the aircrafts service supply chain.
This enables air sales to be patient throughout this 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 aerospace.
Our asset management business is on track driven by our 757 conversion program and demand is robust for used serviceable material, 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 <unk> product.
At this time I'll hand, it over to Mark for a look at the numbers before taking questions Martin.
Thanks, Nick I will start with an overview of our financial performance before ending with an update on our guidance. Our second quarter revenue was $91.9 million, which included $42.7 million of flight equipment sales compared to $45.4 million in the second quarter of 2020, which had $3.1 million of 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.
Looking ahead to the rest of 2021, we continue to work with our customers to finalize the sale of the 24, Boeing 750 Sevens, whose purchase we announced in September of last year.
During the quarter, we signed contracts for the sale of 3 aircraft in 1 airframe and we have commitments for the sale of another 11 aircraft and 1 airframe.
Second quarter revenue for asset management solutions, or Ams increased to $60.3 million from $20.9 million in the second quarter of 2020.
The increase was largely due to flight equipment sales of 3 aircraft 1 airframe and 2 engines sold during the quarter.
These gains were partially offset by lower leasing volumes, resulting from 3.747 passenger aircraft leases that expired as scheduled at the end of 2020.
Aside from flight equipment sales Ams revenue was also higher as we benefited from the pickup in consumption of used serviceable material USF parts for maintenance and overhaul activity due to air travel recovering in airlines, bringing portions of their grounded fleet back online.
We expect the consumption of USF parts to continue improving during the second half of the year.
Second quarter revenue from Tech Ops was $31.6 million up from $24.5 million in the second quarter of 2020.
Our MRO facilities business benefited from the re commissioning of aircraft and robust storage maintenance and rehabilitation work.
Looking forward, we remain prudent that we will enjoy substantial revenues from reactivation work heavy maintenance and the cargo conversion and have a strategic advantage in identifying feedstock for our asset management solutions segment as the recovery continues given the large number of aircraft under our care other on airport MRO facilities.
Gross margin expanded to 33, 4% for.
From a negative 4.7% as a result of flight equipment sales and lower inventory impairments during the quarter.
Selling general and administrative expenses were $8.6 million compared to $7.7 million.
The increase in payroll and public company expenses offset the higher contribution from the payroll support program the.
The payroll support program contributed $8.4 million this quarter and $6.3 million in the second quarter of 2020.
Income from operations was $22.2 million in the second quarter of 2021 compared to a loss from operations of $9.8 million in the second quarter of 2020.
Net income was $16.5 million or 18% of sales while net loss was $7.9 million in the second quarter of 2020.
Second quarter, adjusted EBITDA was $30.4 million for 33% of sales up from adjusted EBITDA of $12.9 million or 28% of sales in the corresponding period in 2020.
Adjusted EBITDA benefited from the cares act contribution of $8.4 million during the quarter. However, adjusted EBITDA would have been higher even after excluding the cares act benefit as a result of contributions from the high margin flight equipment sales aircraft storage and related maintenance activities, partially offset by lower leasing revenues.
As we have mentioned previously we do not adjust cares debt proceeds out of our numbers as there are associated costs embedded in our results that are required to remain compliant with the provisions of the act.
Cash flow provided by operating activities was $8.6 million in the second quarter of 2021, this is compared to $38.3 million in the corresponding prior year period the.
The main driver of cash utilization during the quarter was higher inventory purchases primarily related to the 787 program as well as higher accounts receivable balances due to increasing sales.
At quarter end air flow had approximately $42 million of cash on its balance sheet and an undrawn revolver of $150 million. We believe this provides us with ample financial flexibility to fund our asset acquisition priorities in 2021 and beyond.
Finally, our guidance update on summary.
We expect revenue of $340 million to $360 million and adjusted EBITDA of $60 million to $70 million in 2021.
This guidance is unchanged and reflects a stronger than expected first half, which we have offset as we risk adjust our back half performance for the increase uncertainty as the pacing of the pandemic recovery remains fluid given the spread of the COVID-19 Delta variant.
Our outlook also reflects an improvement in activity in our asset management solutions segment continued strong demand for our on airport MRO services accelerating demand in cargo and e-commerce markets and increased request for passenger to freighter conversions and other tech out products and services.
Because of the robust demand for cargo conversion aircrafts, we continued to project selling the majority of the available 757 aircraft in 2021 with the remainder in 2022.
For Tech Ops, we continue to expect strong contributions from our storage maintenance and component MRO activities and increased sales of our aerospace product.
If all goes well we may still commenced sales of our <unk> product in Q4, but we're very optimistic we will do so in the first half of 2022 at the latest.
In summary.
We believe that recent events have validated the strength of our unique multi dimensional fully integrated business model. We have consistently adapted in a rapidly evolving backdrop and remain vigilant for opportunities. We will demonstrate our continued commitment to driving shareholder value as we capitalize on a wide range of organic opportunities as well as <unk>.
Deploy capital for additional acquisitions going forward.
With that operator, we are ready to take some questions.
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Our first question comes from Gautam Khanna with Cowen <unk> Company. Please proceed with your question.
Yeah, Hey, guys. This is Dan on for guidance on.
Good morning.
On a nice quarter congratulations.
So I was curious first of all.
Are you seeing like what are you seeing in terms of engine overhauls is there any uptick in demand there.
Not on the near term, we don't see it on the narrow body side at this point there continues to be strong demand on the wide body side, which is primarily supporting the freighter operators.
Okay got it.
And then what are you kind of anticipating in terms of.
Kind of snapback in demand from I guess, the rotation of airlines fleets.
Is that kind of the right way to think about how like what's going to drive aftermarket recovery.
Are you factoring that into your outlook.
And in 'twenty, 1 or 'twenty 2.
We don't it depends on.
Whether we are speaking of the narrow body market or the wide body market goes to dose for markets. We think are just really completely different narrow body market may be recovering in the U S. Presently however, it is strained in and Europe with the spread of Covid.
Europe did not enjoy the summer this summer on level of flying that.
It was hoped to enjoy at this point, it's not going to happen for the balance of the summer.
Yes.
Recovered significantly.
For the summer.
We are hearing of declines in passenger bookings as a result.
The Delta variant of the <unk>.
The Corona virus.
So we're not so certain debt, there's not going to be a.
Many more aircraft brought into storage for maintenance and.
On.
Decommissioning.
Until really this pandemic clears.
Our best guess is this isn't going to happen for 6 months or more but again, that's just our opinion, we believe that international traffic will continue to stay depressed on the passenger side. So widebody traffic internationally will stay depressed demand for wide body engines on the passenger side will stay depressed.
But not on the freight side freight side internationally, primarily wide body aircraft. So we do anticipate strong demand continued demand on the wide body.
Engine side to support the international freight operators.
On the narrow body engine side.
We don't see a recovery in that for a significant period of time, our belief and we and we have this factored into our projections is there won't be a recovery on the narrow body side engine side for.
Until 2023 early 2024.
Okay that's interesting.
And then could you would you mind, providing an update on the.
Are aware certification efforts.
<unk>.
Glanced over briefly on the prepared remarks.
Okay.
Q4, I guess are you expecting it certified in Q4 and then.
And how are these sales reflected into your guidance currently.
I'll address the technical aspects of the certification and I'm going to let Martin talk about what we have in the numbers.
On the tactical side, we did our first round of flying with the FAA.
And the aircraft performed well did what we expected it to do the FAA addressed have identified a number of of.
Symbology issues that they wanted to see changed.
We are focused on making those changes.
They are all made now those are primarily software issues that our partner Universal avionics Elbit.
Done.
Our airplane is scheduled to fly again with the FAA.
Next week to demonstrate to them that all the symbology issues that were previously identified have been corrected.
And once that happens our expectation is debt will then be able to.
Technically freeze the software. So we can do our final study on that to confirm that it complies with all requirements and simultaneously had the FAA then allow us to do our final flight testing to demonstrate that the system does everything thats required.
So we expect there'll be a third round of flight testing, which will be done. After the software is validated that's where that's why we believe at this point, we'll be into the late third quarter potentially early fourth quarter to be able to finish our final flight testing, possibly at the end of the third quarter and the hope is.
Is that we will then get FAA certification and start delivering.
Kits to customers that are that have asked and are waiting.
Don't have it identified committed customer yet.
Haven't identified customer, we don't have a commitment yet.
What we need to do is we need to get this much closer to final certification I believe to get an order.
As far as the forecast our internal forecast do not include any air where sales in.
In the fourth quarter.
Without those sales we are still confident that we will meet the range that we had previously provided of what we do have those sales commencing in the second half of next year and starting to contribute to the bottom line.
Okay. So so your outlook.
It doesn't include <unk> until April next year.
Got it.
And.
Sorry last question all right. Thanks.
How are you doing on the labor side or are you facing on a constraints or on a requirement.
Increase hiring.
And related to that is the payroll support program finished.
There is no more.
On <unk>.
No more inflows from that I guess.
As we know payroll support program is finished.
Don't expect to receive any benefit from that in the second half of this year or going for unless something changes.
With respect to.
Personnel supply issues clearly.
That is the industry is facing strength when it comes to.
Labour supply Fortunately, we have enough labor to do all the work that we have planned for the balance of <unk>.
This year's forecast in the foreseeable future.
We also struggled to gain additional labor to be able to grow the business at this point and we're working on.
We're working on things that we've previously done to help supply to help attract additional labor to our business.
And we're going to have to implement those in earnest to gain additional labor. So we can continue to grow our MRO business.
There's no hiding from the fact that labor is an issue across the industry.
Got it thanks, guys I appreciate your chart on my questions.
Okay. Thank you Youre welcome.
Thank you.
Reminder, if you'd like to ask a question. Please press star 1 on your telephone keypad.
Our next question comes from <unk> <unk> of Bahia with Prescient point capital Management. Please proceed with your question.
Thank you hi, guys.
So I.
I think that you had just said that you don't expect to get a final order for era, where until you are closer to final certification.
But.
I guess implied in that is that you do expect.
Okay.
Order.
From your potential launch customer to come before the approval correct.
Not 100% certain indications.
Indications are for clothes.
Net.
That we will that we believe we can get on order because the airline once the system as fast as we can produce it.
Got it.
And are you seeing interest for air were from other airlines. Besides this 1 launch customer.
Yes, let's be careful potential launch customer and the answer is yes.
Okay.
Okay. Thank you.
That's all for me to welcome Youre on.
Welcome.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and I will now turn the call over to Nick <unk> for closing remarks.
Alright, again, ladies and gentlemen, thank you for your interest and Ursula and listening to our call today and we look forward to speaking with you again.
We give are our third quarter financial results.
Thanks again goodbye.
This.
Today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.