Strata Critical Medical, Inc. (SRTA) Earnings Call Transcript & Summary

Great. Thank you for the last session of the morning. The last session between you and lunch, we have Blade Air Mobility. We've got Will Heyburn, their CFO, and they're going to start with a quick video here before we get started. So do you want to get that going? [Presentation]

That's great, Will, thanks for coming.

Thanks for having me. And just before we dive in today's conversation, we'll probably talk about some forward-looking statements subject to risks and uncertainties. You can read more about it in our 10-K.

Excellent. So -- well, maybe if you can start off maybe a little bit more big picture overview of your business because I think a lot of people think of you as just sort of a short-haul kind of leisure chopper service, but you're clearly much more than that. So -- and you do it in the capital-light way. So kind of -- maybe kind of start off giving kind of the pitch on the different businesses here at Blade.

Absolutely. So we're working in an asset-light way, meaning we don't own or operate any aircraft to aggregate the world's best use cases for urban air mobility today. And what we mean by that is use cases where the unit economics makes sense, we can make good gross margin, we can get good return on invested capital using conventional aircraft, and all fitting with our strategy of routes that have a last mile component or are just short enough in nature, that at some point in the future you can substitute an electric vertical aircraft or a drone and increase our profit margin or increase our overall addressable market. So there's roots that you've heard of on the retail side, like our airport service between Manhattan and Newark or Manhattan and JFK, where we're charging $195, generally less than you're going to pay for a black car or an Uber Black. And then there's big parts of our business that you don't see as much on the retail side like our organ transportation business, makes up about half of our revenues. We're the largest dedicated air transporter of human organs in the United States. We made an acquisition recently that significantly increased the size of that business, and it fits perfectly with this thesis because every trip, whether it's going from a hospital helipad to another hospital helipad or whether you have a longer distance aircraft that's connecting with an ambulance or a helicopter for the last mile, it's got that critical last mile component that's going to be a great fit for a drone. The things that you think about when you think about compatibility for electric aircraft is their infrastructure. Well, hospitals already have helipads. Is there a customer that's willing to pay the price? There's nothing more important than giving a heart that only has 4 hours of time before it needs to get to the recipient. Then transit time. So absolutely, they're willing to pay. So we feel like the pieces of that business are in place. And again, we're doing it profitably today in that business unit using conventional aircraft. So good, strong gross margins.

Yes. I guess in your -- thinking about your consumer business, right, can you -- what's your -- what's the core demographic like there?

And the consumer business depends on what part of the business you're talking about. We've been able to benefit into the leisure side of our business, some of the commuter routes from this new paradigm and work. People may be coming in 1 or 2 days a week from vacation homes. So you see that business start to expand to be more of a year-round commuter business. And then you see people that are even just coming into a place like New York City for 1 day. That tends to be, maybe you'd call it a leisure traveler, they may not be expensing it, but they're probably coming in for a business meeting. Then you take our business in Vancouver. Pre-COVID it was flying about 100,000 people. These are very inexpensive flights between Vancouver Harbor and Victoria, which is to see the government. You have a number of government workers that will take these products back and forth for meetings, and people coming to meet for government. And then you have our airport product, which we already talked about. This is anyone and everyone who wants to pay a little less than they might pay for an Uber Black to have a 5-minute flight instead of a 2-hour or 3-hour experience between Manhattan and JFK. But we are seeing right now, on business travel, we look at our surveys, it's only about 60% of that airport product that is a business travel, a little bit lower than what we would expect. And that makes sense when you look at the same data that everybody looks at, how many office swipes are you seeing in New York.

Absolutely, that sort of lines up.

It's still under 40%. So we see a lot of growth left in that business.

Yes. That's the reason why I asked the question, right, in terms from a demographic standpoint, because in the markets these days, everyone is obviously worried about inflation and that eating into the consumers' wallet. So I guess any work that you guys have or have you seen in terms of what that demand and elasticity is like for your products?

We've taken pricing recently on some of the longer distance routes, for some of the Long Island commuter destinations as much as 30% price increase, which has gone well so far. On the short flights to the airport, you really don't see as much impact from inflation of cost. The flight is just so short and the aircraft are relatively fuel-efficient. You're talking about just over a gallon of fuel per seat to get someone between Manhattan and JFK. So even if fuel prices go up a lot on a per seat basis, it's not a huge impact. And then the business is really diverse and built to be defensive with so much medical business, right? With that being about half of our revenues and growing very quickly. You've got an industry that has to continue operating -- continued operating throughout the pandemic. And so you've seen us invest a lot, both in terms of time, but also in terms of capital in that business just because it can generate a fantastic risk-adjusted return for us in any market. So I think we're targeting the right consumer on the retail side that's going to be less impacted by an economic disruption. And if you look at the alternatives on the ground, we're charging a fair price. And then we have a part of our business that's completely non-correlated with what's going on.

Got it. This might be a stupid airline analyst question, but how are you thinking about -- like how do you see bookings for the peak season? Or is your booking curve just so short that it's kind of hard to tell?

It's really short. The funny thing is people think about Blade on the retail side really as a substitute for ground transportation. So about half of our bookings, believe it or not, are within 24 hours. So it's really that point of decision, do I order an Uber, do I take a Blade to the airport. And that's when we see a lot of folks booking. So hard to say on a forward-looking basis. What I can tell you is, we talked about in our earnings call very recently, we had our best week ever for airport. Just in the first couple of weeks of May, 25,000 flyer a year run rate, about 25% better than we ever did pre-COVID. And pre-COVID, we were running routes to LaGuardia, 3 routes to JFK, 1 route to Newark. Right now we just have 1 route to JFK, 1 route to Newark. So it's really impressive the level of demand that we're seeing right now, particularly with business travel the way it is, as you know.

Exactly. Yes. And look, a lot of that commentary lines up with what a lot of the airlines are seeing, right? Like in earnings, they were talking about like the weeks leading up to the earnings call being some of the best booking weeks they've in their history, right? So the travel is coming back. And actually from a corporate perspective, it's really beginning to move. It's really been the last, call it 6 to 8 weeks, I think, we've seen a little bit more of an inflection in corporate travel, so.

Great to see people back here in person.

Yes. Be on the lookout for that. I saw in your video, you do have some kind of relationships with other travel companies, I believe, like with American. Does Blade -- does the business model need to be aligned with larger travel providers like that? How does the team think about -- can they just create a bigger opportunity for you? And any plans to expand those?

We don't think we need it, but it can be helpful in certain parts of our business. So we've done it in the past. We'll seek to do it in certain situations. We're always trying to align ourselves with brands, even if they're not directly integrated with what we're doing. So in a lot of parts of our business, brand alignment is a profit center for us. When you're talking about other transportation companies, tends to be more of a partnership. But for the most part, that's not where we're seeing the growth come from in our business. We're seeing it come from people who find us through Blade's own homegrown technology application. Well, frankly, gives us a real nice barrier to entry for potential competitors because that's where 90%-plus of seats are booked on Blade, is through our app, and that's directly integrated all the way through to the pilot in the cockpit who sees, manifests, updating in real time. So it's really a huge differentiator for us. And it's designed for an asset-light model because as you may or may not know, we're using lots of different operators to service short flights. So it allows us to pick which aircraft is best positioned. We're always taking advantage of dead heads and trying to lower our overall cost structure this way. So it's helpful to the cause that people book with us directly.

Right. On the operator side, like, how many different unique operators do you have within your model? And like how do you recruit, how do you create that more standardized Blade product?

So it depends on what part of our business you're talking about. We've got a handful, call it a dozen of deeply integrated operators where we'll make sure that we have dedicated capacity at all times, particularly for our medical business, where most hospitals will have a 2 to 3-year contract with us. We will line up the capacity behind that, whether it's fixed wing, whether it's rotorcraft. But the beauty of combining our retail business and our medical business, which, to my knowledge, nobody else really does, is that the medical business for the most part has demand at night. The retail business for the most part has demand during the day. So you put those flight hours together, and we're able to create a pretty sweet deal for our operators. The most important thing is keeping them happy, healthy and profitable, giving them enough hours to incentivize pilots to come work for them. In some cases, we may have a single pilot helicopter that has 4 pilots assigned to it because you just have that much demand. And as you know, there's a lot of fixed costs for the operators, so it allows them to amortize their fixed costs over more hours of the day, ultimately giving them more margins and us a better price. So it's a mix of arrangements like that where we're deeply integrated. And then for businesses like Jet Charter, you're going out into the market and you're not making a commitment.

Maybe changing gears a little bit. eVTOL, it's kind of -- we've seen a lot of companies come public in the eVTOL space of late. They're obviously looking into your short-haul business. I know you have a relationship with a few of those. What do you think of eVTOL? How do you view that industry?

We view it as a new piece of equipment that is going to be most importantly much quieter. And that's really the way we think about it. We'll talk about some of the other benefits. We do think it's going to cost less. We do think maintenance is going to be more simple over time. But the most important thing is that these machines are very quiet, near silent in flight, turn the engines off right away when you land. Very quiet. And that is going to allow us to create more places to land. So we really think about designing a business where these machines don't need to be less expensive on day 1. And when we run the math on how many hours you could put on a tail in a year and we look at the fixed cost, we're not sure that you're going to see a paradigm shift on day 1 in the cost. And our business model doesn't require that. So that's why we love working with the many different partners that we speak with that are creating electric vertical aircraft because we can tell them, look, even if this costs something that's kind of similar to what a helicopter costs today, we're going to be able to make money using it. And that's really where we're focused on finding those use cases that are going to make sense. And then over time, we do believe costs will go down substantially. But day 1, it's probably taking a business in New York where we have exclusive terminals, at the Manhattan heliports. And then maybe you start seeing some communities in Connecticut or some communities in upstate New York that want to build a vertiport only for quiet electric vertical aircraft. And the best use case for that is going to be coming to our existing infrastructure in Manhattan. So that's -- we view it as an evolution, not a revolution, and that's the way we're setting up our business.

Yes. I guess from an infrastructure -- like to me, that's -- with eVTOL, that's the issue, right, or probably the big cost behind it, right?

Right.

Like if you want to bring someone from midtown out to JFK or something and not have to go out to one of your heliports, right, like in your model, is that infrastructure development going to be the cost up to you? And how is it like to build a vertiport in midtown, right? Is that going to be your cost? Or are you going to try to do that in an asset-light way as well?

Typically we're working with folks, like for example, Atlantic is at East 34th Street. We're working with companies you've heard of that operate that infrastructure. And almost always the land itself is owned by the municipality, and there's a concession agreement with an FBO operator, and then we have a lease with that operator. So that's our typical model. And so we would expect it would continue much like that. But to the extent there's a business, there's an opportunity to build a vertiport in the middle of Manhattan, that could be hundreds of millions of dollars of business. So absolutely, we could see a return on invested capital there if it was required. Historically very minimal, a few hundred thousand dollars of CapEx for us to build a terminal in one of these existing locations.

Okay. I have a list of questions here. But anybody in the audience have one? Can we get a microphone upfront, please?

Maybe 2 quick ones. What's the utilization rate on the helicopters?

So it depends on the business. We don't talk about what the utilization is on a per product line basis. But what we've said, and we know this from experience, is that over time you can probably get to about 75% utilization. That's what we can get to in one of our mature businesses. And so that's what we underwrite too when we think about the cost of a new route. So if you take something like flying between Manhattan to JFK, a one-way flight on one of those routes might cost us about $500. That's 6 seats, right? So you're breaking even about 2.5 seats full. So if you take a 75% long-term average utilization there, you can generate great margins once you get to what historically we've gotten to on a mature route. Now we're not there yet, as we said on our most recent earnings call. Those businesses are still ramping to that breakeven utilization, but we had our best week ever and we'll continue to make progress.

And then typically, how many hours in a day would a helicopter operate?

For Airport, for example, we're flying from 7:00 a.m. to 7:00 p.m. every day, generally the same tail going back and forth between the same 2 points all day. That saves us a lot of money because a big component of our cost, about 40%, is landing fees. And a landing fee, if you do it the right way, can service both that arriving flight and the next departing flight. So it's really important to be able to aggregate demand and use that same aircraft going back and forth. If you try to do it one-off, right, you're flying from a base in Caldwell, New Jersey or Linden, New Jersey, you're picking someone up, you're flying 10 minutes, you're dropping them off, you're flying back to Linden, New Jersey, you're flying more and repositioning than you are in the actual flight. So the aggregation of demand is critical for the cost structure to make any kind of sense.

And then maybe just one last one.

Please.

In an hour, like how many trips would a helicopter make on the airport route?

Maybe it would do 3, 3 one-ways. The beauty of the business model is, if we don't fly, we don't pay. So we can flex capacity up and down even in real time if we want to, based on that turn. So it's a 5, maybe 10-minute flight. So we don't need to take 20 minutes to do a flight if we don't want to. We can take longer if we see a period of less demand or we could really tighten those turns and effectively inject capacity into the system in real time.

When we think about growth of Blade, you're obviously in New York, you mentioned Vancouver. I think you just opened up an office in Paris.

That's correct.

Is it easier, like from a regulatory standpoint, is it easier to grow here in the U.S., in Europe and Asia? And like are you agnostic to where that growth comes from?

The beauty of the asset-light model is we can grow anywhere. We have the joint venture in India that's starting to really find its footings coming out of COVID. And because we're not going to own or operate those aircraft, all you need is a great local partner, and you can bring the brand anywhere. And you get tremendous benefits from the power of the brand that we've built in these big cities in America because that does transcend borders. So I think you're going to see us do what we've done historically and really be about an inch wide and a mile deep. Find those areas that have the requisite infrastructure, that have the consumer that's willing to pay a good price, that the operator can make money and that Blade can make money. And if you look around Europe, there are a handful of places that fit the bill for that. So that's why we think it's important to spend some time there.

And can you do it organically? Or would you do other route like you did in the hospital business in terms of M&A?

We would consider both. We would consider both. I think in all cases, you're going to need a great local partner. It starts with a great operator. And so in India, you see us partner with someone and create a joint venture, and we are growing that business organically. In other locations like Helijet, you see us entering into a transaction that gives us access to an existing business. So I think you'll see us evaluate both paths. And it really depends on the environment as to what's the easiest path forward. But we're setup very well to do both.

Is there someone like laid in London?

There's not. So we get asked about London a lot. And really the problem is that with the location of the primary heliport there, Battersea, it would almost be like if you were taking a helicopter from JFK to the city, but I flew you to LaGuardia and put you in a car. It's just not the location that people want to go to. And so as a result, you don't see as much charter demand for that route. And that can be the canary in the coal mine for us. So there's a lot of places where we're offering charter service. And on our app, you can book a whole helicopter to anywhere that you want to book. And that's a really important demand signal that we get from our technology, which helps us figure out what the right new routes are. Newark is a great example. Pre-COVID we offered that service from East 34th Street, and what we saw is a huge amount of charter demand from West 30th Street, and we realized just that a lot of folks who fly at a Newark Airport live on the West side of Manhattan and wanted to fly from that heliport. And so that's where we offer the $195 product today.

Yes. How many cities are there in the U.S. that you want to have a presence in, but they just don't have the infrastructure to support it? Is that the biggest issue?

That's the biggest issue. We talk about Los Angeles a lot as being one of the best urban air mobility markets in the world. The only problem is there's nowhere to land. There's a handful of places like that. And that's why the eventual introduction of electric vertical aircraft is so important because for the most part, the limiting factor is the noise and the community not wanting noise. And so we're very sensitive to that. We have a lot of experience working with communities and trying to take noise abatement routes, trying to do everything we can to take over water routes. So there's a lot you can do to mitigate that concern. But there are some communities that, we're honest about it, they're going to want to see electric vertical aircraft, hear them, believe that they're going to be quieter, and then welcome them into their communities. And again, that's what our whole business model is setup to do. We are creating those showcase routes, the ones that already work, the ones that already have infrastructure. This is going to be the proving ground that is going to allow us to then introduce these aircraft to other environments.

With all of that on the come and you think about kind of the success that you've had in the health care business thus far, how big as a percentage of Blade can health care become? Do you want to keep it like -- is 50-50 the sweet spot? Or would you like to continue to grow that?

We think there's a huge amount of continued growth in that business. We're incredibly excited. We finished the Trinity acquisition in September of last year. Since then, on an organic basis, we've nearly doubled our overall organ transportation business. And it really shows the power of plugging what was a medical-only business into a platform that has a great brand that has a significant amount of retail demand for the exact same aircraft. And then that allowed us in a market that as you know, it's a little bit hard to find airplanes in this market. It allowed us to grow in that unit, MediMobility/Jet, 30% sequentially this most recent quarter. It's pretty hard to do that if you don't have demand from multiple parts of your business, to bring new capacity on. So we've been thrilled with the growth in that business. We think we're probably mid-teens market share today. And then the market is growing pretty nicely on a same-store sales basis as well. If you look at some of the big technology revolutions that are happening in organ transportation, you have devices now that can keep blood pumping through organs, which allows you to transport them from larger distances. So you might have had a situation where you have some lungs that are available for transplant, but they're too far away to any available donor. They go unused. About 20% of organs that are ready to go, but they can't find an organ, so they get discarded. That's 20% of organs that are available every year. So you have that ability to capture more of that. And then you're also going to do more trips that are longer. So your revenue per trip could go up. So we see this great combination of continuing to capture more market share because we think the DNA of Blade, having dealt with an extremely discerning business traveler that needs to get there on time, we think we're bringing a level of customer service to the medical world that they've never seen before. And that's why we added 14 new customers in the last quarter alone. We have about 40 now. So pretty significant customer growth in the last quarter.

I mean, that 19% share is pretty, I didn't realized it was that high.

Yes, probably mid-teens is probably where we are.

Yes, but like 5 years ago where was that?

5 years ago, we were the largest in the Northeast by far, but we didn't have the national platform. So that's what we got from Trinity. We got an operations center where 3 or 4 people are on 12-hour shifts at any given time. They cover the whole country from Phoenix to Arizona. We're in 20 states today. We have the ability to continue building on to that platform and combining the power of those 2 businesses to grow really fast. So we're extremely excited about the growth there. And particularly we get a lot of questions, including at this conference, about what are the defensive aspects of this business. It's completely non-correlated with consumer demand. There's a very long list, unfortunately, on the demand side of people who need these organs. And so you got that lightning in a bottle, that one opportunity to get an organ to a recipient when it comes up. And so you have to take that opportunity regardless of the economic environment at the time. And so we're really excited because, honestly, this can make a difference. And that's what some of the hospitals we work with, they tell us, you've shortened the amount of time it takes to get the organ to the recipient, and we can see it in our data. We can see that the outcomes are better. So it feels good to be a part of it and we really uniquely are able to lower the cost and increase the speed for these folks.

Yes. So we talked about Blade being an asset-light business. How much like asset-light, minimal CapEx? What is your annual CapEx budget? And what is it spent on?

It's de minimis. We spent less than $1 million last year. Generally, it's if we need to refresh 1 of our terminals, we spend a few hundred thousand dollars if we're building a new lounge, might spend a few hundred thousand dollars, it's things like that.

Yes. So I guess when we think about the financials, what is the -- what are the building blocks to positive EBITDA from here? Like how do you get there?

So it just depends on the business. Well, it's 2 things. It's scale in a business like medical. So a business like medical, flights are coming in at a consistent contribution margin. And the more volume that we can get through that business, the more contribution margin we're going to have. So that's a little simpler, and we have the absolute best team that we acquired from Trinity that's out on the road, talking about all the benefits that we just talked about. So that will continue to grow. On the retail side of things, you have 2 elements, right? You do want to grow volume, but you also need to grow utilization on your individual flights. And that's why we try to setup the unit economics, and we talk about it openly with our investors, where you have an achievable breakeven target that is well below what we see on average in a mature route. So it's just a matter of having enough people flying through that route, and then you start to throw off profitability. So I think once we get above that threshold, you're adding capacity in increments of 6. It's not going to blow up the unit economics of the model for that route. So there's -- you got to kind of get above the low waterline for airport, for example, 2.5 seats. And then once you've done that, you can start to add capacity in busy times only. And so you know you're going to be able to fill it. So we're not quite there yet as we've been very honest about, and that's been depressing the gross margins or the flight margin, as we call it, in the near term. But once you get there, it becomes much easier to get towards that free cash flow positive moment.

Got it. Minute or 2 left. What do you think is the biggest misperception amongst investors about Blade?

I'm not sure folks appreciate either the fact that we have such an important medical business or the fact that it's so complementary with our retail business. Those 2 things work hand-in-hand. Without the retail demand for the same helicopter in New York City, we wouldn't be able to provide that helicopter at such a favorable rate to NYU Langone and Mount Sinai and all the other hospitals that we work with. So it's really a unique barrier to entry for us, we think, that we've been able to put those businesses together. And I think the other piece also related to the medical side of things. When you think about the thesis of transitioning over to electric, one of the interesting things that happened during the pandemic with organ transportation is that because you had so many restrictions with hospitals, it used to be you'd send a team, that team will procure an organ and fly back. Hospitals did a funny thing. They started trusting other surgeons to remove the organs for them. Now you're sending a 10-pound box by itself. I can't think of a better use case for drone technology that already exists and is already proven. Now it is not certified to carry this kind of payload. But you can go on YouTube and you can find any number of drones that can carry a 10-pound box, 15 miles, which is what we're doing with the much more expensive helicopter today. So I'm very optimistic about the prospect of replacing ambulances that we're arranging for our hospitals that are maybe taking a 40-minute trip with a drone that can service that mission or replacing helicopters with the same thing, which I think will serve to increase the overall revenue we're getting from these clients, increase the profitability of those trips, but most importantly, get that organ to where it needs to go more quickly.

Great. You timed that perfectly. Thank you very much.

Thank you so much it. Really appreciate it.

Yes. That's great. Thanks a lot.