Q3 2021 AerSale Corp Earnings Call
You're currently holds the aerosol Inc. Third quarter 2021 earnings conference call. At this time, we're assembling today's audience and plan had been to weigh shortly we appreciate your patience and please remain on the line.
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Good day and welcome to the Air Sale, Inc. Third quarter 2021 earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Christian Gallagher Human Resources Director. Please go ahead.
Good afternoon, I'd like to welcome everyone to air sales third quarter 2021 earnings call.
Conducting the call today are Nick Panozzo, Chief Executive Officer, and Martin Garnham, 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.
It 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, 2020 filed with the Securities and Exchange Commission on March 16th 'twenty, 'twenty, one and it's.
Other filings with the SEC.
These filings identify and address other important risks and uncertainties that could cause actual events or results to differ materially from those indicated by the forward looking statements on this call.
We will 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 Aircell website at IR Dot Aircell Dot com.
With that I'll turn the call over to Nick Panozzo.
Thank you Kristen and 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 followed by operational updates and progress we're making on our engineered solutions products are safe and are aware.
I will then turn the call over to Martin to review the numbers.
We produced strong results in the quarter, which was driven by the broad based success of our 757 program and an increasingly supportive commercial aerospace end market as airline operations begin the process of normalization.
Our third quarter revenue was $73 3 million, which included $27 4 billion of flight equipment sales compared to $57 1 million in the prior year, which did not include any flight equipment sales.
The increase in flight equipment sales was partially offset by lower leasing revenue primarily related to an end of lease payment recognized last year.
A decline in tech ops revenue on account of lower aircraft storage and related maintenance activities moderated the increase in our asset management solutions revenue to some extent.
Demand for passenger to freighter conversions remained strong and our plans to monetize the remaining Boeing 757 fleet are on track.
Adjusted EBITDA in the third quarter of 2021 was $13 9 million or 18, 9% of revenues compared to 25.6 million or 44.8% of revenues in the third quarter of 2020.
The company recognized $6 3 million in payroll support program proceeds during the third quarter of 2020.
There were no corresponding proceeds in the third quarter of 2021.
Our lower margins this quarter were largely due to the absence of these proceeds as well as the contribution from the lease return condition payment we received last year.
These results are in line with our internal expectations for the year and we believe we are well positioned to deliver on our value proposition to our customers and shareholders.
Turning to segment specifics and beginning with asset management.
We sold 27.4 million of flight equipment that included three aircraft and one engine in the quarter.
Within our used serviceable material or USF parts business airframe and engine parts sales were higher than the prior year period.
We are on track to monetize the strategic assets withheld as airlines continue to return aircraft into operation in order to keep up with the upswing in air travel.
In line with previous quarters. This year, our leasing revenue was lower than the prior year period.
Due to the expiration of three Boeing 747 passenger aircraft leases at the end of 2020.
In addition, the prior year period benefited from lease return payments that did not recur in 2021.
Our aircraft lease fleet currently stands at five aircrafts to passenger and three freighter all of which continue to perform well.
We remain in the market for asset purchases and expect attractive opportunities in 2022 as airlines assess their fleets following more normalized service levels.
In our Tech ops segment.
Third party sales were down 10.9% due to lower volume at our Roswell storage facility as airlines returned aircraft into operation.
And due to reduced capacity to perform third party work at our Goodyear facility.
At Goodyear, we took one of our eight hangar bays and associated Labor force to support our Boeing 757 cargo conversion line given the strong demand for freighters as.
As a result.
All the value we added through the supply of labor materials engines and landing gear support are rolled into the cost of the aircraft and the recognition of any built in margin is deferred until the aircraft is subsequently sold.
Despite this margin deferral, our aircraft storage facilities remained at high utilization and the labor associated with the re commissioning of stored aircraft has consistently been at near capacity since the start of the pandemic.
Moving to engineered solutions, we continue to see incremental demand for our existing air safe product platforms, which includes the Boeing 737 classic and N G 767, and Triple seven and the Airbus a 318 1920 and 21 fan.
We have aircraft.
We're nearing a final FAA certification to receive an air safe STC for the 757 platform.
Air Safe serves as a fuel tank flammability reduction otherwise known as the F. T F. Our alternative to a nitrogen alerting system installed by Boeing and Airbus in new aircrafts.
Aerospace incorporates a military specification reticulated polyurethane foam system that achieves the technical requirements mandated by the F. T F R.
In addition to the requirements of the F. D. F. R. An airworthiness directive has been issued regarding the fuel quantity indication system in the 75 Sevens Center fuel Tech.
With a mandatory compliance date of May 2022.
Which can be satisfied by installation of are safe.
As such we expect demand for our seven by southern Air Safe product to accelerate as aircraft operators utilized our cost and time effective solution to comply with this regulatory requirement.
We have also continued our work on product development and FAA approval of era, where our advanced technology enhanced flight vision system, incorporating a military style head wearable display that allows pilots to see through adverse weather conditions.
We're progressing well towards certification and at this stage are sale has successfully integrated the multi spectral camera head wearable display and other components manufactured by our partner Elbit systems and its subsidiary Universal avionics into an air sell one Boeing 737, 800 and <unk>.
<unk> prototype aircraft.
We're also installing this system into an air sell one Boeing 737 Dash 700 N G.
Concurrent with the Boeing 737 N G platform, we're engineering the integration of the era, where system into the Airbus a 318, 1920 and 21 family of aircrafts.
Due to the complexity of the technology and in part due to labor constraints with our partners. The pacing item for completion of our era, where S. D. C continues to be a software verification and validation with.
With expected completion before the end of February 2022.
Final FAA approval should be granted shortly thereafter.
After three sets of initial flight testing with the FAA, we had been verbally reassured by the FAA that our system is certified <unk>.
Consequently, although we're disappointed with the length of time. This has taken this is not unusual for the approval of groundbreaking braking advanced technology.
We're highly confident it's not a matter of it rather it's only a matter of when we will receive an error with S. T C.
In the interim we've been beefing up production capacity at our Miami P. M. A facility to produce all of the necessary parts to install the elbit systems Universal components in a 737.
While we have limited visibility on the exact timing of final FAA approval. We're excited by the massive market opportunity of <unk> and its potential to transform our business.
We expect Aero, whereas enhanced vision technology to become the gold standard on commercial aircrafts with its ability to improve safety offer a very attractive return on investment to airlines and to reduce the carbon footprint of flight operations by minimizing flight delays caused by poor weather conditions Airport diverge.
<unk>.
At airport traffic congestion.
Looking forward, we expect the ongoing recovery in commercial markets to continue, albeit at a mixed pace as the impact of the COVID-19 Delta variant makes the outlook less clear.
There are continued opportunities in the freighter markets and we're seeing an increase in aircraft reactivation and aircraft made available for sale.
We're on track to monetize our Boeing 757 investment through the remainder of 2021 and the first half of 2022.
And we expect to benefit from a pickup in MRO volume due to the re commissioning of commercial aircrafts Gray.
Greater demand for U S M parts consumption for overhaul activity and ultimately contributions from our era where product launch.
In the long term air sale is excellently positioned.
We operate a purpose built fully integrated multi dimensional adaptive aftermarket aviation model that includes part procurement light 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.
Our model and diversification have demonstrated <unk> ability to deliver exceptional results in dynamic and complex circumstances Andrew.
And is the primary driver in our ability to increase our full year EBITDA guidance.
Importantly, this guidance increase which Martin will detail in a moment is despite the aforementioned delay in the air where certification and projected sales which were included in our original forecast for 2021.
We have fully mitigated this delay by higher than expected margins in our 757 conversion program.
Our value add was enhanced by taking advantage of the goods and services incorporated by all of air sales four operating units.
Our unique ability to utilize all the value extraction methodologies of our multi dimensional integrated business models.
Enables air sale to achieve positive financial results, where our competition cannot.
Before turning the call over to Martin I wanted to take a moment to address the numerous investor questions that we've been receiving concerning our ability to redeemed warrants that were issued as part of our spec transaction visa V Cares Act restrictions.
Air sales determination is that a redemption employing a cashless the exchange of warrants for air sell common stock does not violate the cares Act.
We submitted our position to the Treasury Department and just this past Friday afternoon received confirmation that quote the cashless warrant redemption does not appear to be a compliance issue under the acts and quote.
As such Aircell can exercise its right to redeem the warrants at the appropriate time as prescribed in our warrant agreements.
I will not be making any further comments or answering any questions on when we will redeem the warrants until we're able to do so and I have board approval to publicly issue a notice of redemption.
So at this time I'll hand, it over to Martin to go over the numbers before taking any questions.
Martin.
I will start with an overview of our financial performance before ending with an update on our guidance.
Our third quarter revenue was 73.3 million, which included $27 4 million of flight equipment sales.
Revenue in the third quarter of 2020 was $57 1 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.
Third quarter asset management solutions increased to $48 9 million from $29 7 million in the third quarter of 2020.
The improvement was primarily on account of the above mentioned flight equipment sales.
Consumption of used serviceable material for U S. M parts for maintenance was strong through the quarter as airlines continue to return aircraft into operation against the backdrop of the upswing in air travel.
The increase was partially offset by lower leasing revenues due to a lease return payment recognized in the prior year.
Looking forward, we expect the ongoing recovery in commercial markets to continue, albeit at a mixed pace as the effects of the COVID-19 Delta variant makes the outlook less clear.
We are on track to monetize or seven by seven investment through the remainder of 2021 and first half of 2022.
Third quarter revenue from Tech Ops was $24 4 million down from $27 4 million in the third quarter of 2020.
Primarily due to a shift in resources at our Goodyear facility away from third party work and towards our 757 cargo conversion line as.
As well as lower aircraft storage and related maintenance activities at our Roswell MRO facility as airlines returned aircraft into operation.
We are in a great position to benefit from additional reactivation work heavy maintenance and cargo conversions going forward.
We expect the benefit from a pickup in MRO volume due to the re commissioning of commercial aircraft greater demand for U S. M parts consumption for overhaul activity and contributions from our innovative era where product launch.
Third quarter gross margin was 33, 6% compared to 46, 4% in the third quarter of 2020.
The decline was primarily due to the lease return condition payment recognized in the prior year.
Selling general and administrative expenses net the payroll support program proceeds were $22 8 million compared to $13 4 million in the third quarter of 2020.
The company incurred $8 7 million of noncash equity compensation in the third quarter of 2021 with no corresponding equity based compensation in the third quarter of 2020.
We also received $6 3 million in payroll support program proceeds during the third quarter of 2020 and did not receive any payroll support program proceeds in the third quarter of 2021.
Income from operations was $1.8 million in the third quarter of 2021 compared to $19 3 million in the third quarter of 2020.
Net loss for the third quarter was $1 6 million, while net income was $14 7 million in the third quarter of 2020.
Are still incurred $8 7 million of noncash equity based compensation expenses this quarter as well as $2 1 million in mark to market costs related to our private warrants for which there were no corresponding expenses in the year ago quarter.
Adjusted net income excluding both of these items was $9 2 million.
Diluted earnings per share was a loss of four cents for the third quarter of 2021 and is not comparable to the third quarter of 2020 due to the public listing of air sale on December 23 2020.
Excluding the impact of noncash equity compensation and the mark to market on the private warrants adjusted diluted earnings per share was 22 cents for the quarter of 2021.
Third quarter, adjusted EBITDA was $13 9 million or 18, 9% of revenues, while adjusted EBITDA in the corresponding period in 2020 with $25 6 million or 44, 8% of revenue.
Adjusted EBITDA benefited from $6 3 million in payroll support program proceeds during the third quarter of 2024.
For which there was no corresponding benefit in the third quarter of 2021.
Adjusted EBIT declined from the year ago period, largely because of the absence of the corresponding payroll support program proceeds in the third quarter of 2021.
As well as the contributions from the lease return condition payment received last year.
Cash flow provided by operating activities was $17 7 million in the third quarter of 2021 compared to cash utilized of $18 $3 million in the corresponding prior year period.
The main driver of increased cash generation during the quarter was lowered net inventory purchases as well as higher cash collections from accounts receivable and customer deposit.
At quarter end aerosol had approximately $62 million of cash on its balance sheet and an undrawn revolver of $150 million.
We believe that this financial flexibility will allow us to opportunistically execute and fund our asset acquisition <unk>.
And merger and acquisition opportunities going forward.
Finally, our guidance update and summary.
Our revised guidance calls for revenue of $320 million to $340 million and adjusted EBITDA of $80 million to $90 million in 2021.
This guidance is based on an improvement in the EMS segment ongoing demand for our on airport MRO services accelerating demand in cargo and E Commerce markets increase request for passenger to freighter conversions and other tech ops products and services.
The decrease in revenue guidance is related to the timing of flight equipment sales. However, strong margins for strong margin performance offset this decline and resulted in higher adjusted EBITDA.
The ongoing and continued monetization of the Boeing seven by seven fleet acquisition is expected to be the main driver of the EMS segment.
We continue to expect to sell the majority of the available aircraft in 2021, and the first half of 2022 as a result of strong demand for cargo conversion aircrafts.
For Tech Ops. In addition to higher MRO volume from the re commissioning of commercial aircraft. We expect increased contributions from demand for air safe product.
In summary, we are satisfied with our performance during the third quarter of 2021 we.
We are increasing our full year profit guidance, because our profitability is exceeding our forecast as we recognized higher margins for our freighter aircrafts due to strong customer demand.
And our value add.
We expect the burgeoning recovery in the commercial markets to continue for the foreseeable future, which will support strengthening demand for our products and services.
With that operator, we are ready to take some questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to Larry Snow Tree chart equipment again press star one to ask a question.
And we'll take our first question of day from Gautam Khanna with Cowen and company.
Yeah. Thanks, guys good afternoon.
Good afternoon.
Good I had a couple of questions first just on the guidance change the revenue range and the EBITDA take taken up.
Could you is the entire $20 million EBITDA raise related to monetization of the 750 Sevens.
And Relatedly the revenue reduction was at.
Due to what you did at the base to prepare for the.
The monetization.
If you could walk with Gaslog.
Yeah, So as Nick noted part of the reduction in the overall revenues was one we removed resources at our MRO facilities to focus on the conversion process. So that revenue will be recognized as we monetize on the $75 seven transaction.
In addition, as Nick noted based on our original projections. We did have arrow, where originally included we had taken those amounts out.
So looking at kind of what we had already deals that were in the overall pipeline.
We did reduce revenue slightly due to the timing of the flight equipment sales.
But margins have been so far for sales that we have actually done and that we expect for the remaining quarter had been much higher than what we expected again, because we have been able to do much more at value add by using all four sections of our business.
That makes sense and could you remind us on how many.
750 Sevens are remaining to monetize and engines and.
What the plans are for the ones that may not have a resale but.
Youll part amount or do what the absolute just if you can give us an update on.
I'm sure you have mou's.
Et cetera sure.
We have.
Of the 24.
Actually 26, we parted out two airframes.
The first two.
Of the remaining 24 aircraft with engines.
We have under contract or LOI 22 of those aircrafts.
Martin can give you the details on 23 three or not.
But the only one we have 21 I'm sorry of those aircrafts.
And.
Two aircrafts that three aircraft actually that we will schedule for spec freighter conversions, which we don't have customers for but we'll be looking for customers for those so we expect to monetize the entire package.
We're not nothing is going to get parted out from the original 24 as a matter of fact.
In addition, 25, all of which will will end up being.
Being placed as whole aircraft.
Okay, and then could you comment on on the acquisition environment for us.
For equipment, what are you seeing what are you bidding on.
Any way you want to frame it but.
What are you seeing out there.
So I've previously described the acquisition market as the incoming tide and the tide continues to come in we're not in a flood state yet, but we are seeing.
Incrementally almost every week more aircrafts that are becoming available at pricing that starts to work for US now why is that is it because more aircraft are actually hitting the market or it's because aircraft have now been on the market for a year and a half and haven't moved and pricing is becoming more of it.
Realistically what the real market is I think it's the latter.
That more aircraft are becoming realistically price because they are not moving.
In this market.
So.
Oh, you're out of that equipment. Since then a pure financial buyer who's buying an aircraft that's ready for service.
Potentially can find alessi to operate that aircraft without having to do much to start generating that revenue.
<unk>.
We've got we've got to use our entire machinery to refurbish that aircraft into a whole aircraft a whole you know an edge that's able to be uhm <unk> released are sold into the marketplace.
And that's a value add that I was that Martin and I were describing earlier that we that we added to our 757 transaction.
And that's what it's really going to take.
And <unk> and our opinion, if you're gonna buy used aircraft that are off lease that need a lot of work, it's gonna take a company with the infrastructure of yourself too.
You know to do all the work that's necessary.
Under one roof to retard those aircraft engines to service, that's where we feel we have a competitive advantage over over anyone else in our space and that's where the opportunity is gonna lie with us it's not gonna be in a newish aircraft that needs no work that could go into service with the next operator, there are plenty of financial.
Buyers out there that will acquire that equipment and they'll hold it and wait for somebody Lisa at whatever price they can lease it out.
Because that's really a financial transaction, it's really not a you're not having to work the metal to to to add value to create something that could be leased or sold.
Makes sense I'll get back in the queue. Thank you.
Sure.
As a reminder press star one if you have a question.
We do have a follow up from Khartoum kana with Cowan.
Oh, sorry, I didn't want to monopolize, but I was gonna ask also just do you have a placeholder target for what you expect to deploy.
For equipment by his next year.
That you can share with us.
<unk>. This is the operator, we're unable to hear you at this time.
Hi can you hear me guys.
It'll be one moment.
Hi can you hear me.
Our project is a brief interruption please standby.
Hi, kidney care research.
Yes, we can hear you be one moment.
This is Nick Okay. So speaking.
Back on.
Yes, Sir please go ahead.
Okay. This is this is Nick Panozzo speaking, we got cut off the only thing that we heard was.
Gotham head finished and said he would say he would get back in the queue I didn't hear anything after that.
Okay. We do have Mr kind of on an open question.
Brad can you hear me guys.
Yes, we can.
Oh terrific, Okay, sorry about that I don't know what happened, but can I ask if you had a preliminary view on.
You know what would be the amount of capital you might deploy for equipment by its next year or maybe just over the next 24 months just based on the pipeline what youre seeing so it sounds like it's more promising but.
Any sense of sizing what the opportunity might be.
Sure.
Yeah, It's a really hard question to answer.
I can only tell you historically.
We have deployed.
Significant capital early on in our business $500 million in the first five years of our business.
So by comparison, we we can move so quickly today and monetizing whatever acquisitions, we make.
I would expect over the next several years that weekend. This weekend deploy hundreds of millions I can't tell you, if it's going to be a $100 million, a year or greater or less but based on our prior performance when we have less infrastructure.
We were able to we were able to on average deploy.
Deploy $100 million a year.
On average.
So I think it is realistic to assume that we can double that.
At this time.
Okay and then on.
That makes sense.
An era, where and so it sounds like.
Is that do you think it's first half of next year, where it will get approval.
<unk>.
You mentioned kind of soon after the.
All the testing is done but I just wonder like how what is the lag there do you think.
How soon could this happen do you think it's the June quarter.
Do you think it's a September quarter next year, and then on the back of that.
Any sense for.
What are the initial order might be for the product based on your customer conversations.
You know I feel like the boy, who cried wolf on this.
Alright, I hate answering that specifically so let me give you the milestones for us.
We're waiting on validate verification and validation of the software by our partner and we've been told that we won't receive that well that we will receive that at the latest at the end of February.
So let's assume that that's on time and we get that you don't get it early to get it at the end of February if by the end of February the software has validated what.
What we're hoping is that prior to software validation the FAA will let us perform our final flight testing so that.
So that the issuance of the STC is not predicated on.
Well they will it will be predicated on the validation of the software, but the flight testing will not be held up due to software validation because the system works and how we've been flying with it we've demonstrated to the FAA now three times, so that they see that the system works. The validation of the software is just a an audit process that is necessary.
To verify that all the testing has been done.
So hopefully we will get the FAA to fly with us and do the final flight testing prior to the end of February.
If we're able to do that.
Our expectation is that all that will be left will just be our validation of the of the software.
Once.
Elbit universal issues their certification.
And we're working that concurrently with them. So we.
We would anticipate that maybe in the best case that we could be.
Some time in March, but more realistically I think it's going to be.
I think it's going to be in the second quarter could it be could it roll into the third quarter.
I can't imagine why it should roll into the third quarter, but.
But it really depends on the FAA at the FAA gives us the attention that they've been giving us because they are waiting on us at this point too.
If we get that kind of attention and that remains because the interest level is there.
We are hopeful that we could receive certification in the at the end of the first quarter or.
During the second quarter of next year.
We don't think that's unrealistic.
I forgot your other question industrial besides us.
The other question was just on the initial.
Orders that you might receive on the back of that.
Certification, Jim Sam score.
How how big that might be based on your conversations with the customers.
Customers.
We've heard multiple times that.
Because the FAA will require.
The airline to have.
Half of its fleet.
With the <unk> system installed before they'll they'll be able to use the <unk> system that it would be half of be it would be a minimum of half of the existing fleet of 737 aircrafts that would be both 737 N G and 737, Max because we're working on both.
And.
A 250 aircrafts order would not seem to be unreasonable.
That's a number that's been bandied about already.
We don't have any specifics on that is as I've mentioned previously our conversation has been primarily with a with.
With one of our with our potential launch customer, but we have had discussions with other airlines as well.
But if our if the if a customer we've been talking to.
Gives us a lot shorter.
I would I would imagine that it would be in the 250 aircraft range.
Thank you very much.
Youre welcome.
That will conclude today's question and answer session I will now turn the conference over to Nick Finazzo for any additional closing remarks.
Okay well. Thank you all again for your interest in air sale and listening to our call. This afternoon.
I look forward to speaking Martin and I look forward to speaking with you again, when we do our fourth quarter earnings call.
Have a good evening everyone.
That will conclude today's conference. Thank you for your participation you may now disconnect.
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