AerSale Corporation (NASDAQ:ASLE) Q1 2024 Earnings Call Transcript

AerSale Corporation (NASDAQ:ASLE) Q1 2024 Earnings Call Transcript May 11, 2024

AerSale Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the AerSale First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jackie Carlon, Vice President of Marketing and Communications. Please go ahead.

Jacqueline Carlon: Good afternoon. I'd like to welcome everyone to AerSale's first quarter 2024 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 facts should be considered forward-looking statements within the meaning of the federal securities law, 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 on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission, SEC, 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 metrics can be found in the earnings presentation materials made available on the Investors section of the AerSale website at ir.aersale.com.

With that, I'll turn the call over to Nick Finazzo.

Nicolas Finazzo: Thank you, Jackie. Good afternoon, and thank you for joining our call today. I'll begin with a recap of the quarter and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. We're off to a good start in 2024, driven by stronger feedstock acquisitions in the back half of 2023. This facilitated whole asset sales and increased USM volume and was supported by continued strength in our TechOps segment as commercial MRO demand remains robust. This translated to first quarter revenue of $90.5 million, which was up $15.7 million from the first quarter of 2023 and also led to stronger profitability as adjusted EBITDA grew 80% year-over-year to $9 million. As we remind investors every quarter due to the nature of our business and the impact of whole asset sales, our revenue levels tend to be volatile quarter-to-quarter, and we believe our business is best assessed based on aggregate performance over a longer period of time with a focus on MRO activity, feedstock levels and our unique business model that enables us to extract significant value from our inventory.

At the segment level and beginning with Asset Management, first quarter sales were $59.3 million, which increased 22.4% year-over-year. Stronger revenue in the first quarter of 2024 stemmed from higher flight equipment sales of $38.6 million compared to $27.7 million in the year ago period. Excluding whole asset sales in a period, segment level sales were relatively flat as lower leasing revenue offset gains in USM volume. In the quarter, we sold one aircraft and four engines compared to two aircraft and one engine in the year ago period. Commercial demand remains strong and is particularly elevated for USM. Airline traffic and capacity continued to operate above pre-pandemic levels, which is a strong indicator for our business. That being said, the supply side remains challenging, given OEM production and delivery delays, which substantially limit our ability to acquire feedstock.

Regardless, our primary competitive advantage is in our purpose-built end-to-end solution, which enables us to drive asset value from feedstock across various segments of the supply chain. As asset availability improves, we're ready to move decisively on acquisitions. To date, we've acquired $31 million of feedstock and have an additional $52 million under LOI. In our USM parts business, we continue to realize the benefits of better feedstock acquisitions in the second half of 2023, specifically in engine USM, which grew more than 30% year-over-year. In the cargo market, the environment continues to be under pressure as we saw during 2023 as the strong demand that carried through the pandemic unwinds and cargo shipping normalizes. We expect these conditions to persist for some time, but did see incrementally positive movements in quoting activity and customer interest in our 757 freighters in the first quarter.

As of quarter end, we have one converted 757 available for sale with six more that will complete the conversion process through the remainder of this year. Finally, in our leasing portfolio. Full year sales declined by approximately 45% as we had fewer assets under lease during the period and no aircraft on lease in the first quarter of 2024 compared to one aircraft in the prior year that was subsequently sold. We expect to see an increase in leasing activity as more engines become available and placed on lease this year resulting from increased feedstock availability. Turning to our TechOps segment. Our MRO facilities were busy during the quarter. Sales improved across all of our facilities with additional growth from the sale of components by our off-airport MRO shops, which includes landing gear, thrust reversers and other complex assemblies.

As a result, segment sales were $31.3 million compared to $29.8 million in the year ago period. We anticipate continued strength throughout the forecast period because of a supportive end market. As we look to increase our MRO business beyond the current run rate, we see growth opportunities on component MRO, heavy MRO and aerostructures. In our Goodyear heavy MRO, we're realigning our operations to create additional facility capacity for heavy maintenance activities, coupled with a significant initiative to increase the availability of trained mechanics. We've been actively recruiting and training new employees for our on-airport heavy MROs, which has been assisted by awards of over $2 million in state and federal training grants this year.

We also expect to commence operations at our on-airport heavy MRO facility in Millington, Tennessee in the third quarter and anticipate this facility to be a positive contributor in the latter half of 2024 and beyond. In our component MROs, we're winning new contracts that are generating recurring and predictable revenue, utilizing existing facility capacity to significantly grow these business units. Next, I'd like to provide an update on our Engineered Solutions business, beginning with AerAware. In the first quarter, we continued our go-to-market efforts, and all five of the written proposals we made remain outstanding and under consideration since we reported these in March. We continue engagement with these customers. And notably, we've had incrementally positive discussions with several as it relates to the safety enhancements that AerAware provides.

Across the airline system, the pandemic led to early retirements of commercial pilots and experience levels have decreased as new pilots are brought online. AerAware can enhance safety under these circumstances and has been a focus area with potential launch customers beyond the ROI associated with decreased diversions and ground stops. This has led some discussions to expand well beyond the original scope. All of the proposals remain under review, but we consider this enhanced focus on the safety profile of the AerAware system to be a meaningfully positive note to our overall market acceptance of this product. Besides the existing proposals we've made, we're engaged with three new operators who have expressed a requirement for their 737s. As word spreads throughout the industry, there is also interest in other aircraft models, including the A320, wide bodies and regional aircraft.

Concurrently with our go-to-market strategy, in April, we successfully demonstrated our AerAware ground and flight training program to the FAA, which included classroom and flight training of six airline and four FAA pilots. Once our AerAware training program is published by the FAA, it will be the first and only FAA validated training program, covering operation of a 737, incorporating an enhanced flight vision system. Although FAA validation of this training program was not a requirement of our STC, it will assist in the adoption process for airlines that install AerAware in their fleets. Besides AerAware, we've increased our marketing efforts for AerSafe, our STC product covering field tank flammability. Operators that do not have an existing system to prevent fuel tank explosions must provide a means to mitigate a potential electrical short in the wiring of an aircraft's fuel quantity indication system from causing a catastrophe.

Installation of AerSafe complies with this requirement with regulatory compliance deadlines for different aircraft types running through 2026. We expect increasing sales of AerSafe throughout the balance of this year and into 2026 with sustainment sales lasting the life of a given airframe. AerSafe is approved for the Boeing 727, 737, 757, 767 and 777 and the Airbus A320 family of aircraft. In closing, we're off to a good start in 2024 and end market demand remains strong. Our team is working hard to maximize the ROI on feedstock we've acquired, and we continue to evaluate additional opportunities amid a challenging supply environment. Meanwhile, we're working diligently to advance conversations with potential customers for our Engineered Solutions products.

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. Now I'll turn the call over to Martin for a closer look at the numbers. Martin?

Martin Garmendia: Thanks, Nick. First quarter revenue was $90.5 million, which included $38.6 million of flight equipment sales comprising of one aircraft and four engines. Our revenue in the first quarter of 2023 was $78.3 million and included $27.7 million of flight equipment sales, consisting of two aircraft and one engine. Excluding flight equipment, the company continues to demonstrate underlying growth as our base revenue increased to $51.9 million from $50.6 million in the prior year. As we have pointed out in the past, flight equipment sales fluctuate significantly from quarter-to-quarter, and we believe monitoring our progress based on asset purchases and sales over the long term is more appropriate. First quarter gross margin was 31.8% compared to 31.2% in the first quarter of 2023, largely due to the sales mix in the first quarter, which included additional higher-margin flight equipment sales.

Selling, general and administrative expenses were $24.1 million in the first quarter of 2024, which included $800,000 of noncash equity-based compensation expenses. Selling, general and administrative expenses were $25.2 million in the first quarter of 2023 and included $2.7 million of noncash equity-based compensation expenses. First quarter 2020 income from operations was $4.7 million, while loss from operations was $800,000 in the first quarter of 2023. Net income was $6.3 million in the first quarter compared to $5,000 in the first quarter of 2023. Adjusted for noncash equity-based compensation, mark-to-market adjustment to the private warrant liability and facility relocation costs, first quarter adjusted net income was $5.5 million, while adjusted net income was $3.3 million in the first quarter of 2023.

First quarter diluted earnings per share was $0.12 compared to zero earnings in the first quarter of 2023. Excluding the adjustments mentioned, first quarter adjusted diluted earnings per share was $0.11 compared to $0.07 for the first quarter of 2023. Our adjusted EBITDA was $9 million in the first quarter of 2024 compared to $5 million in the prior year. The increase in adjusted EBITDA was primarily due to the increase in flight equipment sales. Cash used in operating activities was $21.5 million, primarily as a result of cash deployed to increase inventory availability. As we look to the balance of the year, we expect to see continued demand in our TechOps segment driven by a healthy commercial backdrop and several contract wins that will allow us to benefit from our available capacity.

We also remain focused on monetizing the inventory we have on hand from a stronger feedstock environment in 2023. While the current supply side for feedstock remains challenged, we have a healthy pipeline of deals recently completed or in process to drive volume through 2024 and into early 2025. We continue to make progress on our go-to-market with AerAware and anticipate AerSafe will be supportive to our results as the year progresses. With that, operator, we are ready to take questions.

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