AerSale Corporation (ASLE) Earnings Call Transcript & Summary

Welcome back to the SHARE lunch and learn series. I'm Dan Aldridge. And with me this morning -- excuse me, is Nicolas Finazzo, who we're welcoming back for the third time. Nick is the CEO and Chairman of AerSale. Nick will start out with a brief overview of the company before we dive into Q&A, but Nick it's been fascinating to watch the company's progress over the past year. I love having you again back for the third time. And so with that, without further ado, I'll turn it over to you for just a brief overview on the business and what AerSale is and kind of what the value prop for investors is.

Okay. Thanks for having me back, Dan. So good afternoon, everyone, and thank you for joining our presentation today. So we founded AerSale a dozen years ago to provide support and services to the airline industry. We're an aftermarket participant, we don't deal with brand new aircraft, but rather, we focus on mid-life and mid-technology flight equipment, including jet engines and component parts. We compete with hundreds of aviation companies that may provide only a single product or service that we offer, and that's where we're dramatically different. AerSale was purpose-built as a fully integrated multidimensional and adaptive aviation service and supply company. By integrating all of the things we do, we've become a one-stop shop for many of our customers who may have initially come to us needing only a single product or service, but once they learn of our additional capabilities, they avail themselves of these expanded offerings. Our business has performed in 2 distinct units: Asset Management Services and Technical Operations, which we refer to as TechOps. Our Asset Management business involves the purchase and resupply of mid-life, mid-technology flight equipment that I previously mentioned. That could include buying a single aircraft, engine or a fleet of aircraft. Then determining the best and highest use of these assets, whether it's whole aircraft or engines to be sold or leased or broken down into their component parts, such as landing gear, flight controls and auxiliary power units, APUs, or even further to the piece part level as used serviceable material, which the industry abbreviates with the acronym USM. Whereas our Asset Management unit supplies products to the airline industry, our TechOps group repairs and overhauls these products at 1 of our 6 Federal Aviation Administration approved certified repair stations, which include on-airport aircraft heavy maintenance in Roswell, New Mexico and Goodyear, Arizona. Structural component maintenance at our structure shops in Miami, Florida and Memphis, Tennessee. Repair and overhaul of electrical and mechanical components in Miami and landing gear overhaul at our facility in Rio Rancho, just outside Albuquerque, New Mexico. But that's not all TechOps does. In our TechOps Engineered Solutions unit, we develop high-margin proprietary products that modify aircraft from their original certified design, FAA certified design to comply with new regulatory mandates or to incorporate a product improvement that brings current technology to mid-technology aircraft, thereby extending their useful life or utility. When we modify an aircraft from its original FAA-approved design, we're issued a supplemental type certificate, or STC by the FAA, which is our exclusive and proprietary license to incorporate our Engineered Solutions products into that flight equipment. Further, using our engineering capability, we highly modify and supply a whole aircraft to governmental agencies such as the National Nuclear Security Agency and the U.S. Marshals Service. Our STC products include AerSafe, which we developed to comply with the regulatory mandate to prevent catastrophic fuel tank explosions. AerTrak, which enables air traffic control centers to follow aircraft by GPS instead of old technology radar. And our latest advanced technology Enhanced Flight Vision System named AerAware, which allows pilots using AerAware to see through poor visibility and both take off and land in conditions others cannot. In summary, it's the dynamic and adaptive integration of all of these products and services by our tenured senior management team with decades of industry experience that enables AerSale to achieve record revenue and profitability, even in the most difficult economic environment, as we've seen during the COVID-19 pandemic and which validates our unique multidimensional business model.

Thanks. So let's talk a little bit about the industry. Where are we in the recovery of commercial aerospace?

Okay. So we've seen -- there's different markets for commercial aerospace recovery. You've got the passenger market, and you've got the freighter market. And they're recovering at very different rates. And even within the passenger and the freighter market, you've got subsets. There's wide-body passenger, wide-body freighter and narrow-body. So on the passenger side, narrow-body passenger traffic has recovered substantially in the U.S. from pre-COVID levels. We think by this summer, we're going to be substantially at our 2019 pre-COVID levels. That's domestic traffic flying between various points in the United States. Same thing is happening in China because of the implementation of very strong vaccination mandates. So countries that have strong vaccination, they have it -- they can receive vaccinations in those countries and/or strong vaccination mandates are recovering faster than countries that don't have availability of vaccines or a vaccination mandate. So U.S. is recovering on the domestic side for narrow-body faster than the rest, probably matched by China. Europe is probably behind both of these locations. However, recovering and recovering very strong. Now that's the passenger narrow-body side. Now for passenger wide-body traffic, which is primarily long haul that is not recovering. It is recovering somewhat. I mean, it did drop almost 90% right after the start of the pandemic. But the recovery in the international side is way behind because of, again, lack of vaccines in a number of international jurisdictions, lack of vaccine mandates in countries where people are not going to be able to fly from one country to another without vaccination. So that traffic continues to be substantially off 2019 pre-COVID levels. Now so that's passenger wide body. Now let's go to the flip side of that, talk about the cargo side. On the cargo side, you've got this booming e-commerce market. And that is creating a very strong demand for all kinds of freight that's being carried both domestically and internationally. Again, domestic freights carried in both wide-body small packages like 767s and 747s, same thing on international. However, because there are no international wide-body aircraft flying, which predominantly have been carrying most of the international freight traffic, there is an undersupply and an over demand for long-haul freight capacity. And that's kept the freight carriers that are flying wide-body aircraft internationally busy beyond their capacity. There's just not enough capacity on the international freight side. So freight market is booming. There doesn't seem to be any downturn in the projected freight market as a result of a prolonged recovery in the international wide-body passenger market, coupled with a booming e-commerce market. So freight seems to be staying strong. So you contrast the 2, you've got passenger, freight side. Freight side is booming. Passenger side is recovering, but narrow-body not to miss not wide-body.

Yes. I can definitely attest to the narrow-body in the U.S. domestic market because over the past 3 weeks, I don't think I've been able to get standby on any airline. So let's talk about the business itself and let's talk about the asset management piece of it. And really what that looks like, how that business works, the life cycle from acquisition to monetization.

Sure. So when we look at acquiring an aircraft engine or a fleet of aircraft, the first thing we do is we study the asset, see where the demand is. Is this an aircraft that should be -- we take a fleet of aircraft. Should we take and cobble together the best pieces of the whole fleet to produce an aircraft that can be sold or leased into the market. Where is the demand for that equipment? We may determine that the aircraft has a better use, not as a passenger aircraft, but as a freighter aircraft, then we would study the freight market for that particular aircraft that we bought, and we would look at that as potentially an aircraft that we would convert ourselves or that we would send to third parties for conversion or to even sell that aircraft to a party that would get it converted themselves. Take as an example, a number of Chinese carriers have bought 757s from us and had them converted in China and are still having them converted in China. If we determine that the value of the aircraft or engines that we buy have greater value at the piece-part level, meaning it's too expensive to put them back in service, we won't get enough revenue generated out of it to justify the expenditure to place it back into service as a whole aircraft then we go back and we look at all the information that we've generated over the past decade that we've been in business, and we can make a fairly good determination that this airplane and/or engine has more value in the piece parts as piece parts use serviceable material, USM, than it would as a whole aircraft. In that case, we'll break the aircraft down into engines and airframe parts, landing gear, APS, et cetera. We may have those parts overhauled and will supply those components or parts at the USM level into the industry. And the same thing if we break an airplane down, it may have -- there may be engines that have greater value as whole engines versus engines that have greater value as piece parts, too expensive to repair overhaul. So we're constantly looking at what's the best and highest use that we could make of the assets that we buy, and then we feed it into whatever unit that we have that can maximize the value out of those sub pieces.

So on that side of the business, what does the asset pipeline look like? Like where do you expect to find quality attractive aircraft and engine parts in the future?

In various presentations I've made over the past year, I've described the availability of flight equipment as an incoming type, that you had airlines didn't know what equipment they would need to fly in a post-pandemic world, which we're not quite there yet, but we're getting there. And so airlines have kind of been frozen on what they should do with assets. So a lot of aircraft have stayed parked at our facilities in Goodyear in Roswell and at other dry desert locations throughout the world, where airlines don't know what to do. Some of them have figured out, "Okay, we're not going to have this aircraft type anymore. So we're going to monetize this equipment." Because of labor shortages all across the board, COVID restrictions, it's been very difficult for airlines even to get aircraft in a condition that they can then sell them. So the availability of feedstock on the airline side has -- it's there, it's part, but it's not -- it's been slowly coming to market as the airlines have the capacity to focus on, not just recovering their passenger traffic, but figuring out how to sell their used flight equipment. Similarly, with leasing companies, leasing companies have a big chunk of the airline fleet. And they're also trying to determine what equipment will have future demand, and that's been changing over time. And so as they're trying to figure that out, aircraft sit in the desert are not coming out. Airlines leasing companies generally have had book value issues on a lot of their flight equipment. So they're not going to sell those aircraft to depressed market as we've seen post-COVID. They're going to hold that, write them down through depreciation. But we're 2 years into this. And after 2 years into this, people have written stuff down. Airlines have got this figured out. They know what they can dispose of. So that incoming type is coming in a lot faster. And I feel there's a lot more -- there a lot more available, and we're buying more than we bought since pre-COVID. So asset acquisitions are picking up, we expect them to continue to pick up. We expect this to be a flood tide here in the next 6 months to a year. The tide is definitely coming in.

Let's talk in particular about one of those acquisitions, right? So you guys had a large asset purchase of a package of 757s that you're going to convert over to freighters. Can you talk a little bit about that process, where we are, how those have been performing?

Sure. We bought 26 -- I'm sorry, it's 28 757s, 3 of which were aircraft that we bought just for airframes. So we parted those aircraft out. We had 25 aircraft that is basically dedicated that we would use for either operation, either feeding in the passenger market or the freighter market. Now I say passenger, a few of the airplanes went to passenger carriers. But substantially 20-plus of these airplanes of the 25 airplanes that we acquired of the 757s, they're all getting converted to freighter. They're getting converted to freighters. We're doing it. We've got -- I think we're on our aircraft conversion number 6. We've got 2 Chinese operators that have acquired aircraft from us. They're getting those aircraft converted to freighter themselves at China at Chinese facilities that do that. And we actually just signed an agreement to buy 10 more kits conversion slots from the vendor that we deal with Precision to convert another 10. We don't actually have another 10 aircraft. We've got 6. So we will -- so we're going to be acquiring more aircraft to feed that -- those additional 10 slots. And we believe that all of the aircraft that we acquired, all the 757s we acquired will end up as freighters and a few that will have gone into the passenger market. Again, the narrow-body freighter market is also booming, and the 757 is a really unique airplane. It's got size. So it takes a lot of freight. It also has range. So unlike some of the smaller narrow-body airplanes, you can get more cube, more cargo space in a 757 and you can fly it over a longer distance. So it kind of fits in a middle market between what a wide-body, long-range airplane can do and what a narrow-body short range airplane could do. And so that's why that airplane is so popular. As of yet, there's no replacement for that aircraft.

So let's segue to the other side of the business and really talk about the maintenance, repair and overhaul, the MRO business. Can you give us a kind of a high-level overview of the services you provide there and how it fits into the overall AerSale business?

Sure. On the MRO side, we do -- we have 6 repair stations, as I mentioned, that operate in different parts of the country. And we focus on -- when we think about what repair capability we want, we want repair capability that is going to enable our customers to come to us and where we can provide more or less a one-stop shop for them to provide the services that they need to keep their flight equipment flying, whether that be an airline or a leasing company. So what do we do? We -- at our component overhaul shops, we overhaul the components that we pull off of aircraft or the customers bring us when they have aircraft that need maintenance. And that's -- and that will include landing gear overhaul. We do landing gear overhaul in our Rio Rancho facility for 737, 757, 767 and A321s. We do structural component overhaul, which is like flaps and slats and nose cowls at our structural shops in both Memphis, Tennessee and Miami, Florida. As I mentioned, we've got heavy MRO capability, where we do full aircraft overhaul at our on-airport facilities in both Roswell, New Mexico and in Goodyear, Arizona. Now there, we could do anything from a light maintenance check on an airplane to a heavy overhaul. And that would range anywhere from a small airplane A321, A319, A321, 737 to all the way up to a 767-300ER. So being able to do both light repairs, major overhauls and on 757s, actual passenger to cargo conversion and landing gear overhaul provides us a lot of capability when a customer brings us an aircraft. Couple that with the USM business, where we're supplying USM parts to airlines and leasing companies. When a customer comes to us and they need heavy overhaul work, we're finding that we're drawing from all the different areas that we perform MRO services, where we're providing multiple products and services to our customers. And that's, again, when they view us as a one-stop shop, it keeps the customers coming back, they're happy. We can provide them with a cost-effective solution to maintaining their equipment, not to mention aircraft painting which we do in Goodyear. So that when you're transitioning an aircraft from one operator to another, you can put aircraft in that operators delivery you don't have to flight and any place else to get painted.

So let's switch and talk about a pretty exciting opportunity of growth for you guys within Engineered Solutions, and that's AerAware. And we've actually gotten a couple of questions from the audience. We talked about this, I think, at every session. But again, for the new folks that are on the call today, I think it would be great to give a high-level overview of what AerAware is? What it does? Where we are in the process and the outlook for broad commercialization?

Sure. So AerAware is a product that we developed in our Engineered Solutions group, which is part of TechOps. So our AerAware product is we are seeking a supplemental type certificate from the Federal Aviation Administration, the FAA. What's the supplemental type certificate? When an airplane is built, airplane is built to a particular design. They call it a type design. It is issued a type certificate and operators can fly the airplane as long as it conforms with its original FAA approved design. If you're going to make a modification to that design, you have to submit to the FAA document, you have to submit all your engineering studies to show how you could modify that airplane from its original type design. If you can prove that, that it's a safe modification to the airplane, the FAA issues you a proprietary certificate called a supplemental type certificate. So we have 2 supplemental type certificates issued right now for 2 other products, AerSafe, which covers fuel tank flammability and AerTrak, which allows aircraft to be seen by GPS instead of old technology radar. The third STC that we're working on, and it's the one that we're most excited about, and we think it has the greatest market penetration or market potential penetration and could be transformational for AerSale is our AerAware product. So for those that don't know, our AerAware product incorporates a military style head wearable display. As a matter of fact, it is technology that currently exists in the F-35 Stealth Fighter pilot helmet, where the head wearable displayed it, that we've incorporated in a -- and it's actually a 737 that you see behind me, the model behind me. We've put that product inside the aircraft. So what does it do? Here's a special camera mounted on the front, the radome of the aircraft. That camera can see through weather. That can see through fog, smog, snow, when a pilot puts his head wearable display, I think of it as a flight vision goggle, he puts it on almost like my glasses. And in those glasses in that flight vision goggle, he can see it through the weather and never had to take its eye off what he's looking forward by looking down at the instrument panel to see his altitude, heading, speed, things like that because he can also select flight deck instrumentation to be displayed in his head wearable display, flight vision goggle, enhanced flight vision goggle. So that, that pilot never has to take his eyes off of looking outside. He's seeing outside, he's seeing through the weather. He sees all the data on the flight deck that he needs to see to operate the airplane without having to take -- without ever having to look away. Now that's pretty significant when you're landing in inclement weather, where you don't see very far. This will help you see farther away you can land under conditions that are less visible than others, whereas other pilots might not be able to land because they fly below the minimum altitude the FAA allows you to fly even under Instrument Flight Rules. If you can see the runway long before you reach those minimum altitudes, you can land. Same thing with taking off. There are minimums required for takeoff. If the field is fogged in and doesn't meet the FAA minimums for takeoff, you're not going to be able to take off the aircraft. With our system, those minimums get reduced even -- actually increased because our pilots will be able to see through that. And as a result, we can take off in whether that others cannot. We can land in weathers that others cannot and we can -- and that's going to avoid diversions. It's going to reduce air traffic control delays. It's going to reduce flight operations due to diversions. It's going to reduce carbon emissions, is all the good stuff that we're seeking today to do everything we can to make the operation of these aircraft in and out of air traffic control centers more efficient. And the market for that, we think is basically the entire used narrow-body market, whether that be substantially the A320 family of aircraft and the 737. There's about 10,000 aircraft in that group. All of those aircraft that are not equipped with that type of technology would be eligible for that. Not to mention that retrofitting even new tech -- even brand-new aircraft, such as the A320neo family and the 737 MAX family. We think that those aircraft don't have this capability either. And although they may have a traditional head-up display system like you'd see in your car, that's decades-old technology. This technology doesn't exist in a large commercial aircraft like a 737 or A320, although it does in the airplane sitting behind me.

Yes, I think I have heads up technology in my car that's 15 years old. So completely understand that. Let's talk a little bit about the practical nature of it itself building out the product. And so how long does it take if an order comes in, once this is commercially viable. Are there any constraints from a raw materials perspective and building it and kind of at what point do you think you can be at scale? And what does that look like? Does that look like producing 1,000 of these a year, 4,000?

So I think that from AerSale's -- so there's 2 aspects to producing this head wearable display Enhanced Flight Vision System. There's products that are manufactured by our partner Elbit Systems and their subsidiary Universal, that would be the actual head wearable display and the camera and the eye tracker and the computer that basically processes all this information, so it can be seen on the head wearable display. And then -- and that's what -- those are -- that hardware we will be acquiring from Elbit Universal. And then the other half of it is the actual integration of that equipment. Remember, their system is not FAA approved hardware. So by us integrating that and doing all the flight testing in our 737 or A320 or whichever aircraft we subsequently do, we will get those parts to be FAA certified using our supplemental type certificate and our production manufacturing authority, which is FAA speak for, it allows you to certify a part that you manufacture or that you process. So even though we don't manufacture it will get an AerSale part number, we'll be able to put -- we'll be able to get FAA certification for those components. So Elbit supplies the hardware, we supply the installation kit, we modify the radome, we do the -- we actually will do the installation, all the wiring, where you're going to mount the head wearable display. We've done all the flight testing. We will be issued a supplemental type certificate. So what are we working on? We're already working on producing the first 100 kits of installation hardware for a potential future launch order. We want to try to be ahead of that. Elbit at the same time, Universal, are working towards gearing up production to feed a pretty substantial commercial market. Now they have this, and they have some pieces of this for the U.S. military, but it's different because we've modified it, but not the level of potentially thousands of aircraft demand that could exist on the commercial side. So they are seeking to gear up their capability to manufacture the hardware, while we're gearing up to manufacture the installation kits. So realistically, how many of those can be done a year? I'd like to think no less than 10 sets a month, but really to maintain the customer demand, I think we're going to have to be 3, 4x that. And we're going to have to be able to produce 300, 400, 500 kits a year. And that's a big task for production of this equipment. Now, is it doable? Absolutely, doable. Good thing about dealing with Elbit, it's a $5 billion company. They are geared up. They have the capacity to do this kind of manufacturing. Thankfully, our portion of it is not as complicated as theirs. And we're already working on that in anticipation of a demand for a substantial amount of kit orders. I would think that if we get this certified here in the next 2 quarters, somewhere in the next 2 quarters, then we can start delivering some kits in the later part of this year, and we'll -- that my expectation is that we'll be able to deliver at least 10 kits a month starting next year. And we're going to push for a lot more than that.

Yes. So we're getting to the bottom of the hour. So Nick, what I'd love to do is just to turn it over to you for any closing final thoughts, and then we'll do some logistics and we'll wrap it up.

Okay. So AerSale has performed really, really well in this post-COVID environment. We were purpose-built to thrive in a market where there's rapid change. It's the multidimensional integrated business model that allows us to adapt to changes in the market and to basically outperform when things are tough. So we adjust our market focus, where there's market demand, [ all other ] our 757 transaction and shift more from dealing with providing equipment and services to passenger airlines to more on the freight side of the business. As I mentioned earlier, we've got a very tenured management team that have been doing this for decades. We're now a dozen years of working together. The company organically has the ability to continue to grow just by virtue of the fact that as we -- as the company gets older, we are expanding our customer base and the products and services we offer those customers. And it feels like a snowball rolling down a hill, it's gathering momentum and attracting more customers as we age and we adapt to the market. So we're really excited. That's why 2021 was our best year. It was for all the things I just described, and we're optimistic that we're going to beat that at '22 and beyond.

Great. Thank you again, Nick, for your time, and thanks for AerSale for being on today. I'd like to thank all the companies, all of the sponsors for making this possible. And we're also excited that we'll be announcing a new structure with some new partners and publishing new dates for the rest of the year and all of 2023, including our first hybrid in-person event in NYC. So be looking out for that announcement in the second week of May. So thanks again for everybody, and we'll see you next time.

Okay. Thank you.