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

Good morning. Welcome to JPMorgan's 51st Annual TMC Conference. My name is Bill Peterson. I cover clean tech here at the firm, including Blade. And we're really pleased to have Will Heyburn, the CFO of Blade here to join us for the fireside chat. Will can introduce himself and the company here in a moment. [Operator Instructions] Thanks for supporting the conference, and welcome.

Bill, thanks so much for having us, and thanks to all of you for your interest. Will Heyburn, CFO of Blade. For those of you who are new to the story, just a quick couple-minute primer. Blade's approach to Air Mobility is to focus on the routes, use cases, customers that can be profitable and can grow today with conventional aircraft. We're doing that across medical, where we're the largest transporter of human organs in the United States, that's more than half of our business, and passenger, where we're laser focused on a handful of markets in the world, primarily New York, Vancouver and Southern Europe, where we've got the right value proposition in terms of time savings and cost for our customers. We're doing this in an asset-light way. We don't own or operate any aircraft. We work through a network of third-party part 135 operators. This is what has allowed us to be so capital-efficient as we grow 111% growth, for example, organically in medical in this most recent quarter, and we're able to do that without having to invest CapEx in aircraft. And we're focused on this strategy because we're building a huge competitive advantage for what we believe will be a massive market expansion opportunity with electrification of aviation. We don't need this to grow as evidenced by our growth in the most recent quarter. But because electric aircraft are going to be quieter, less moving parts, less maintenance, potentially less expensive to operate, we think this will create an opportunity for more places to land in the passenger business because communities would be more accepting of something that's quieter. And the medical business, it can replace what we're doing for last mile, which right now is helicopters or lights and sirens SUVs with something that's faster and because transit time is so critical in organ transportation, a heart, for example, only has 4 hours to get where it's going, that will also expand the addressable market and increase the number of organs that are available for transplant. So we're really excited about our ability to get a first-mover advantage in both markets today. On the medical side, 2- to 3-year contracts, contracting directly with transplant centers, they are our credit. We don't need to deal with any insurance. And the passenger business, we're building worldwide brand recognition, hundreds of thousands of people that fly Blade around the world. We're building exclusive terminal infrastructure in the heliports that we operate in places like New York City, absolutely critical to operating a service at scale. And we've got that network of part 135 operators that have capacity dedicated to Blade, pilots trained in the local environment, all safety vetted by our internal safety team and all with places to hangar their aircraft that are very close to these critical urban areas, eliminating repositioning time and giving us a cost advantage both today and with the transition to EVA. So here's my 1 subway stop pitch.

Okay. Well, that pretty much covers everything. So thanks, Will, for joining. So this is a tech conference, and I always want to kind of tie in what you guys have in your, I guess, under the hood or in the back end that maybe people don't see. But what are the key technologies you guys employ, competitive advantage of the platform you guys -- integrating this service from -- basically from customer to cockpit.

Great question, Bill. And really, the best thing I can say is, there's a lot of folks that might try to design on a whiteboard what kind of technology solution would work for passenger mobility or for organ transportation. We've been actually using it for years now. And that's the most important part of our tech platform is that this customer-to-cockpit link, you booking on the app, that information getting transmitted to our accounting department, our operations department, our operators dispatch the actual pilot who's going to fly the aircraft, seeing the manifest, that's all been battle tested in multiple geographies with multiple payment systems, multiple regulatory regimes, and we know it works. And we know it's able to allow us to operate all these aircraft at the same time with very minimal staff. It's allowed us to scale. And the same thing is true in the organ transportation business. The technology that's customized to that use case focused a little more on chain of custody, focused on making things easy for the hospital to see where is our driver? How is he getting to the helicopter? How is the helicopter getting to the jet or how is the helicopter going directly where it's going, it's been tested through the use by our customers, and it's been improved by their direct feedback. And no one who's not doing it today can really say that. And that's true of all those elements of the platform that I talked about upfront. We know what we need to have the competitive advantage because we're actually flying today.

Yes, great. You guys did do some acquisitions, Canada and Europe and MediMobility. I guess how common are the platforms between these? Are there further opportunities for synergies? I'd put them all in one system or how is that working currently?

We're making a lot of progress on the integration and the technology. Europe is now up and running on the Blade app. If you open up the app, you'll see, you can pick Canada, you can pick Europe, you can pick United States. So we're already starting to see the benefits of rolling that technology across geographies. And most importantly, it's the cross-pollination of our customer base. We've got a lot of customers that maybe fly with us in New York. And now when they're flying into Nice, and they're going to Cannes, they're going to Monaco, they see Blade as an option there in addition to the already very large market that existed when we made those acquisitions. So it's equal parts technology and cross-pollination of our customer base.

Great. I guess in addition to the consumer tech, the platforms you talked about, one thing that gets overlooked is the physical infrastructure. Why is that a competitive advantage and perhaps relative to future UAM? And I might bundle that with yesterday, you made the announcement of Newport. So that's another -- that's a new site. So how does that play in? And what does that signify?

Yes. So I mean a great example is New York City where we're the only company that has exclusive air mobility terminals at the heliports. So the heliports are public use. So if you decide to go buy your own helicopter, and you've got your SUV waiting for you at the West 30th Street Heliport, you can land there, you can hop into your car. But if you're trying to aggregate 6 people coming in 6 different Ubers, processing baggage, checking IDs, having them wait for the helicopter to arrive, you simply can't aggregate the demand. If you're unloading without the use of the Blade terminal, you're literally going out of a hole in the fence into the Hudson River Park bike path. It doesn't work. In fact, so much so that when a very large ridesharing company, a couple of years back, tested their own helicopter transfer service to airports in New York, they weren't able to operate from our West 30th, East 34th Heliport, and they ended up working out of the sightseeing terminal down at Wall Street, which has a lot of disadvantages, location and just the general customer experience there. So we think it's incredibly important to aggregate that infrastructure today. We're using it today. And Newport is another great example of that, where we had the opportunity to relight a path that we think will be value add to our customers, gives us the ability to build exclusive terminal infrastructure there. But most importantly, it allows us to start serving those customers on a charter basis today. So I want to be clear, we're going to be offering the ability for folks to charter an entire aircraft, which does not carry risk to Blade. So don't think of this as a place where we're going to be investing and building something that's going to be loss-making. This is something that's going to be additive to our existing customer bases. And to the extent we did offer any ability to book on a single seat basis, we would not do it in a way that would add losses to the business.

Yes. It's a good segue to short distance. So maybe you can talk about your current footprint, why you're in the markets you're in and maybe when we expect to have more routes considering you want to obviously optimize for loading, for profitability, but how should we think about that?

The focus right now is an inch wide and a mile deep. We're focused on places we like to say either that are extremely congested or geographically contested, right? You need to be able to save people a lot of time without having to fly very far. That's the sweet spot for air mobility. Manhattan to JFK is one of the best examples of that because you're talking about 10 miles as the crow flies, but I don't have to tell you, it can be 3 hours in the car. Because we don't have to fly very far, we can offer that service starting at $195, $95 for our customers to purchase the $795 airport pass, and it's really a great return on the cost for the customer themselves. Now there aren't that many places in the world today with helicopter infrastructure where that alchemy works. So you're going to see us focus on these areas where, besides the airport route, all these are flight margin profitable today. They're good businesses. They can grow. We have pricing power. The airport business breaks even at 2.5 out of 6 seats sold. So if we continue to have quarters like we had last quarter, where we had a doubling year-over-year of our revenues, we will get that business to profitability in terms of the airport new route that we launched, then you've got a nice profitable passenger business, and that's where we want to keep it. We'll be in the pole position then to launch even more routes once the addressable market starts to expand with electric vertical takeoff and landing or we like to call it EVA, electric vertical aircraft. So that's the focus, really laser in on the areas that can be profitable today.

Yes. I think there's been a lot of fears about slowing economy, maybe lack of business travel, but you still actually are generating pretty good year-on-year growth and airports continues to do well. But I guess how should we think about that business or even maybe in a short gist in general, airport and short distance per -- as we look at the back half of the year?

Yes, so we have seen a lot of resilience from our customer. We haven't seen any kind of slowdown to date. In fact, the opposite, if you look at what we've seen in airport, we've also been able to take advantage of pricing on top of that volume growth. So everything we're seeing is really positive. But if there's some uncertainty in the macro, this asset-light model is tailor-made to deal with that. Remember, exact same aircraft are utilized for our medical and our passenger business. The same helicopter that would be flying you to JFK this afternoon will be flying a heart for NYU Langone tonight. The same jet that could be flying a passenger down to Palm Beach will be flying a pair of lungs in for Mount Sinai. So we always have the flexibility to use these aircraft in different parts of our business. We can flex capacity up and down as we need it. So if there was a slight reduction in demand maybe from that incremental customer on the passenger side, we'd be able to adjust our capacity instantly. So we think we're set up really well. As far as the outlook for the back half of the year, the short distance business is a very seasonal business. When you think about it pro forma for the Europe acquisition, roughly 40% of the revenue is going to come through in Q3. So it's seasonal in that way, about 1/4 comes through in Q2. And then Q1 and Q4 are very light quarters for all of those short distance businesses with the notable exception of Canada, which actually sees its biggest season in the winter. So I think the seasonality is something that we always try to help investors understand a little bit. We expect to see continued growth in airport. And again, the #1 focus on passenger is on getting that business to profitability.

Maybe just speak a little bit more to Canada and the European operations. There were some challenges. I think Canada had challenges with COVID and everything like that and Europe had some strange weather, what are your current -- what current trends are you seeing in those businesses? Presumably, Canada is hopefully getting closer to normal. And I mean, France, you noticed, you had the summer travel, as you just sort of spoke to, what kind of trends should we think about those as we move through the year?

Canada had a great quarter in Q1, return to profitability, significant growth, obviously, from an easy comp with Omicron, though still demand not quite back to pre-pandemic levels. So we think there's still even some room to go from there. Europe, Q1 for us is a little more about ski season demand in Europe. We had some very rough weather this year, both in terms of bad ski conditions, but also in terms of unfavorable flying conditions, where we had to cancel a lot of flights. Again, that's a very light revenue quarter. So that doesn't impact the overall year all that much, but that's kind of what we saw in those 2 businesses. And then again, it's really -- it's all about the summer for the European business and for the U.S. business. So that's what we're looking forward to.

Yes. I want to pivot to MediMobility, but I want to see if there's any questions on short distance before pivoting. Happy to take questions. Okay. So 2 years ago, nobody really thought too much about the organ transplant business, and now it's over half the revenue. So obviously, through acquisition and some strong growth on top of that, you mentioned that. But I guess, for people that are not as familiar, how does this business work? I mean who's the customers? I mean, what does a typical organ transplant mission look like? And what are the costs associated with it?

Great question. Our customer is the transplant center. So that is the organization that's going to be putting the organ into the recipient or an organ procurement organization, which is more on the procurement side. We can work for both. There are credit. There may be some reimbursement on the back end on their side. We do not have to deal with that at all. They are good credits, and they pay us according to their terms. So that takes a lot of the risk out of it for us. In terms of how the organ transportation space works, the governing body for organ allocation in America is a group called UNOS. UNOS keeps a database of everybody who's on the recipient list, and they will help identify matches of a potential donor that's in a hospital somewhere and a potential recipient that's in a transplant center. The transplant center then can accept that match, and that's when they start to call us because a big part of whether or not you can accept the match is whether or not you can get there in time. Again, 4 hours for a heart, 4 to 6 hours for lungs, a little bit longer for liver. Heart, liver, lung is where we're focused, which is about 1/3 of the 40,000 organ transplants that happen in America every year. And a big part of our value add is because we have that asset-light model, lots of different aircraft available in lots of different places, we are able to move more quickly. And in some cases, for example, in the northeast, when before folks were working with Blade, they might have been driving to Teterboro, taking a jet down to Philadelphia Airport, getting in another car, 2.5-hour journey for tens of thousands of dollars. We'll do that with a direct helicopter that might be 45 minutes and just a few single-digit thousands of dollars to complete that trip. So our flexibility in terms of the aircraft we have available to us allows hospitals to save a lot of time and then because we're now the largest player in organ transportation, we're aggregating more flight hours across the U.S., both from our medical business and from our passenger business. And the more you fly, the more hours you can promise to your operators, the less it costs you to fly because they're able to amortize those fixed costs, pilots, hangar, insurance, asset ownership cost, whether that's financing or just internal cost of capital, they amortize that over more hours and so it gives us a huge competitive advantage on cost. So when you think about the old way of moving organs, most hospitals worked with a mom-and-pop operator. That's still true in a lot of cases with aircraft that were based very light jets right near their hospital and everything was a round trip and you couldn't fly very far. The world has completely been turned upside down. Hospitals are getting much more aggressive. They're having local surgeons examine an organ to see if it's accepted, that doesn't work with the mom-and-pop operator because they would have to send the plane before you know if you're going to accept the organ. We can have a local aircraft from our network waiting on standby. If the organ is rejected, it's a couple of thousand dollars, no harm, no foul. If it's accepted, we have an aircraft ready. And then the most exciting thing that's happening right now is multiple different developers of perfusion technology. This is equipment that can preserve an organ for longer in flight that's allowing hospitals to go lengths that would have been unheard of years ago. And so when you look at the overall growth in the organ transportation space from the UNOS data, maybe 10% growth in the number of organs transplanted. That incremental organ is actually flying a lot farther and then often using a larger aircraft to make the trip. And in fact, one of our partners and customers did a press release this morning, having set the record, and we were proud to support them on the logistics side for the longest the heart has ever flown to reach a recipient, over 2,500 miles. Much longer than 4 hours. So it's really revolutionary what we're able to do with this new technology. And we think uniquely Blade, with our distributed network of aircraft, is situated to help everyone grow this market and really help these transplant centers save some more lives.

I want to stick on that topic just for a second and maybe the synergies between the two. So some of these companies, these perfusion companies are talking about trying to become vertically integrated, maybe taking care of their own transport. What kind of challenges may they encounter? And again, tying it back to you in the combined business, like what are your advantages relative to anybody that would be trying to do that vertically?

First of all, we always welcome competition, and we work with multiple different operators of perfusion technology. And what they're doing is fantastic, and it's changing the market. What I would say when it comes to transportation, it's just math. It's all about scale. How many hours can you put on these machines. And from our perspective, we have traditional cold transport. That's still the vast majority of organs moving around because it's much less expensive to just put the organ in a cooler and move it. We have perfusion technology that's maybe enabling that incremental organ and some of that growth. And then we got to fly Bill to Cabo on the weekend. And so when you have all of those use cases, you've got a lot more flight hours. And if you're only doing one of those things, it's just going to be hard to have enough demand to be able to be competitive on price. And it's going to be hard to have enough demand to have aircraft where you need them. So you're going to end up flying more repositioning to get the aircraft where it needs to go, and you're going to be paying more per flight hour because the aircraft is not flying as much. So we think it could be hard, and we think we're in the best position to support everyone as they're using this new technology and all of our customers. But we always welcome competition, and we think there's going to be a lot more demand from this new technology. So lots of players are going to need to help support this. And ultimately, that's what's going to allow more organs to get recipients because the sad fact is about 20% of organs that are wrapped up, ready to go to a recipient get discarded because they can't get there in time. It's really ridiculous and there's been a lot of focus on getting that statistic to improve. You've probably seen some news articles recently about pushing transplant centers and organ procurement organizations and all the players like us that support that with data and with more transparency to be more effective. And so I think it's going to take a team effort from everybody to get there.

In light of these newer technologies, coupled with your existing heart and lung and so forth, how should we think about your current market share? And maybe how should we think about the growth of the market now that there's some new opportunities out there?

Yes. So we think we're kind of high 20s in terms of our percent market share in heart, liver, lung today. We see no reason we can't be the majority of this market. We think we've got the low-cost option. We think we have the most flexibility. So we're seeing incredible growth that recently, last few quarters, has been about an even split. So if you think about like the 111% growth in this quarter organically, about half of that was from new customers and the other half was same-store sales growth, really. It was customers flying farther or more. And so we see a big opportunity to continue growing our share. And then intrinsically, if you look at heart liver lung, you've got that 10-ish percent growth. But remember, that will translate to us -- since that incremental organ is maybe coming from a center being more aggressive or using some new technology that lets you fly farther, that's going to come with more flight hours per organ and potentially more cost per flight hour if you're using a larger plane. So there's a multiplier effect in terms of how it drops down to Blade. And then as we think about getting to maturity in terms of market share, somewhere the maturity of the market, there's a lot of horizontal opportunities that we've looked to and that we've talked about. Kidneys is something that we do for some of our transplant centers today, generally using dedicated aircraft. The vast majority of that market today, though, is next flight out, meaning it's going on the next flight to LaGuardia and then you're picking it up. That has a lot of problems. Just like LaGuardia loses your bag, sometimes they actually lose organs. So that's one of the things that we hope that the market is going to improve. And we think our model, though it could be a little more expensive, could provide a more reliable service. So that's something we want to focus on in the future. Other critical cargo, whether that's for medical radioisotopes with a very short half-life is something we support hospitals with -- up in Canada actually today but don't do in the United States. Just-in-time manufacturing parts is something really we'd start to look once we get the market share maturity at any way to leverage this great network we have and the asset base that we have devoted to us for any other similar critical cargo.

Okay. That's interesting. And I guess in terms of flight margin and maybe you can define flight margin, how does that compare to your corporate average or maybe a mature short distance route, and how should we think about that type of margin opportunity over the longer term, especially in light of these new opportunities?