Volato Group - Q4 2023

Transcript

Operator (participant)

Hello, and welcome to the Volato Group fourth quarter and full year 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad. At this time, I'd like to turn the call over to Jonathan Johansen, Director of Communications. Please go ahead, sir.

Jonathan Johansen (Director of Communications)

Thank you, operator. Good morning, everyone, and welcome to the Volato conference call. Our press release was issued this morning and can be found in the Investors section of our corporate website, flyvolato.com. Joining me on the call today is Matt Liotta, our Chief Executive Officer, and Mark Heinen, our Chief Financial Officer. During today's call, we will provide a business update and a financial overview of the fourth quarter and fiscal year 2023, and provide our outlook for 2024. A Q&A session will follow our prepared remarks. Before we begin, I would like to remind everyone that any statements we make or information presented on this call that are not historical facts are forward-looking statements that are based on our current beliefs, plans, and expectations, and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's most recently filed periodic report on Form 10-K and subsequent filings. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, management will discuss non-GAAP measures, which it believes can be useful in evaluating the company's performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with US GAAP. The reconciliation of these non-GAAP measures made to the most comparable GAAP measure can be found in the company's earnings release. I'd like to now turn the call over to our Chief Executive Officer, Matt Liotta.

Matt Liotta (CEO)

Thank you, Jonathan, and good morning, everyone. It's great to be with all of you on our first earnings call to discuss our fourth quarter and full year results. I'll start with a summary of our accomplishments, review our 2023 performance, and then give an overview of our strategy. Mark Heinen, our CFO, will then provide more detail on our financials and outlook for 2024. While we only became a public company in the last month of 2023, we spent the year diligently executing on our strategy to set ourselves up for a pivotal year in 2024. Our priorities included scaling our fleet, growing our market share, and demonstrating Volato's exceptional value to customers.

Though top-line revenue came in lighter than anticipated as OEM supply chain delays outside our control pushed out the timing of aircraft deliveries, I am pleased with what we have achieved to date. Across the business, we have demonstrated measurable success, and we are now at the point where we are beginning to see the tangible benefits of operating leverage and strong signs of momentum. This progress gives us a clear roadmap to near-term profitability, which we believe we can achieve with three strategic levers. These are fleet growth, utilization rates, and operational efficiencies. Let me briefly discuss each of these in turn. Regarding fleet growth, we have good visibility into the timing of aircraft deliveries and fractional sales in 2024.

We expect delivery of 8-10 HondaJets and 2-4 Gulfstream G280s throughout this year, taking into account the well-known supply chain challenges that aircraft OEMs are facing and the potential for delivery dates to shift. We anticipate the Gulfstream deliveries will occur in the third and fourth quarters of this year. Fleet growth provides us with two immediate benefits. First, fractional sales are a major cash generator for us. We pre-sell the fractional shares for every plane we have on order, collect deposits along the way, and recognize the revenue when the plane is delivered, generating approximately $1 million-$2 million of margin per HondaJet and approximately $5 million-$6 million of margin per Gulfstream G280, depending upon the size of the fractional shares. Second, every additional plane adds to our recurring revenue base from flight operations and helps us better leverage our cost base.

Our second strategic lever is utilization. We've designed our product offering to drive higher and more efficient aircraft utilization across our network. This includes our suite of ad hoc charter products, as well as our jet card program and our strategy for monetizing empty leg flights. Take our deposit jet card program, for example. We just completed the first full year of the program and are seeing solid growth in program hours, as evidenced by the shift to higher-yielding non-owner hours over the course of the year. We also run a dynamic pricing strategy on flights, which is designed to incentivize customer behavior that supports greater network density and efficiency. ... Our progress in this area is clear. With empty leg rates approaching the mid-30% range, we are already near industry-leading efficiency levels. Our third strategic lever is operational efficiency.

As I mentioned, we have substantial operating leverage on our cost base, with most of the pieces already in place to continue scaling up the size of our fleet. Core elements of our cost base include our pilot pool, flight operations, customer service, and sales. Notably, on the pilot side, we have had success recruiting and retaining the necessary pilots to serve our fleet. This has helped us to reduce our risk in a tight pilot market and sets us up for additional contribution margin expansion moving forward. So overall, as you think about our revenue profile, 2024 will be tilted toward fractional share sales. The timing of revenue from fractional sales will vary based upon the timing of aircraft delivery. Over time, our goal is to grow our base of recurring revenue from aircraft usage, which should make our business more predictable while also driving higher margins.

Importantly, as we progress through the next few years, we will begin to see our earliest fractional customers roll off of their initial five-year contracts and into new five-year contracts on brand-new jets. The industry-wide average for these renewal rates is strong, approximately 80%, and given our customer satisfaction and Net Promoter Scores at Volato, we believe there is room for us to exceed this rate. Given the nature of the assets, the contract structure, and the low churn, over time, we expect the fractional sales part of our business to generate a flywheel effect, with strong renewal rates and a favorable margin structure complementing our core flight operations revenue. Let me now spend a moment on the market opportunity. The market for private aviation is large, growing, and highly fragmented.

In the United States, the top 10 largest operators control approximately 25% of the total light jet flight hours. In our earnings presentation, we provide an estimate of Volato light jet market share, which we've grown from 0.7% in the first quarter of 2022 to 2.9% at the end of 2023. We believe we are well positioned to continue these market share gains, given the demand for customer-designed, modern, and efficient fractional programs. In recent years, the experience of COVID-19 and the difficulties with commercial travel helped introduce private aviation to a new set of flyers who had the means to fly privately but may not have tried it before. On the supply side, aircraft availability remains near historical lows, driven by supply chain challenges, OEM discipline, and a tight secondary market for used jets.

We also see a substantial opportunity in the corporate travel market as companies move away from having jets on their balance sheet. The other aspect of the market opportunity that we saw is the mismatch between the typical mission profile and the types of planes that most fractional operators and owners use for their missions. The largest market segment in private aviation is for missions below three hours and with fewer than four passengers. We chose the HondaJet as our main aircraft because it is ideally suited for this largest market segment. It fits this exact mission profile with lower operational costs and no compromise to safety, comfort, or experience. In fact, it has a quieter cabin and more legroom than the top-selling light jet, the Embraer Phenom 300.

In building our fleet of HondaJets, we've developed a close relationship with the Honda Aircraft Company, a subsidiary of the global auto company. To have a partner that is reliable, well-capitalized, and has the resources of one of the world's largest companies behind it, has been a tremendous benefit. Volato is not only the largest HondaJet operator today, we are also HondaJet's largest customer, with a meaningful percentage of their order book over the next two years. Our business model also offers a variety of benefits that differentiate it from traditional private aviation models. In designing Volato's product suite to serve this market, we want to embody three characteristics: customer design, modern, and efficient. By customer design, we mean that we combine continuous feedback from customers with our own experiences across the private aviation industry to produce programs and products that return value to our flyers.

For our fractional owners, that means that we design an ownership structure that doesn't penalize them for flying too little or too much. Instead, they earn revenue each time the plane is used. Our use of a more efficient light jet model means that our flights use less fuel and generate less carbon, and we structure our model so that owners can take advantage of the full tax benefit of their ownership share. Our shareholders benefit from this model in numerous ways. Our fractional sales model provides a lower risk and capital-light way to grow our fleet, avoiding the balance sheet risk that other private aviation companies have taken on and ensuring a better alignment of risk and reward across the company and our fractional customers... we can achieve higher yields on flights as owners underfly, freeing up capacity for higher margin non-owner flights.

To conclude, we are confident in our capital-light strategy and team of aviation veterans. We've had a strong positive response from customers. We have clear visibility into our fleet growth and revenue, and a path to profitability, and we are very excited to demonstrate continued progress this year. With that, let me turn this call over to Mark.

Mark Heinen (CFO)

Thank you, Matt, and good morning, everyone. Before I dive into the numbers, I want to take a moment to briefly highlight Volato's differentiated business model. Volato has a unique asset-light business model where our customers own the planes and have special access to our fleet. In our fractional ownership program, we pre-sell fractional shares and recognize revenue when the planes are delivered, allowing us to keep our capital available to continue growing the fleet. In other words, we don't own our planes, nor are they held on our balance sheet, making us much less capital reliant than peers. Our model for growing and operating our fleet is also more efficient and lower risk. By leveraging our fractional ownership program to build our fleet, we are achieving a lower cost of capital than leasing or acquiring aircraft, and with less risk.

Our goal of maximizing utilization by supplementing owner flights with non-owner flights also contributes to a higher yield based on the higher realized pricing for non-owner flights. Over the life of the aircraft, we also have access to multiple recurring revenue streams, including the initial fractional sales, management fees, and flight operations. As Matt mentioned, we did see downward pressure on top-line revenue in 2023 due to aircraft delivery delays, but we expect this to smooth out over time as we continue to grow the fleet. In 2023, given the timing of deliveries and Honda's production schedules, we took delivery of 2 new HondaJets in the fourth quarter, bringing our total floating fleet to 24 HondaJets at year-end.

Turning to our fourth quarter and full year results, revenue for the fourth quarter was $31.5 million, a decline of $4.5 million year over year. While aircraft sales revenue declined to $15.7 million due to aircraft delivery delays, aircraft usage revenue grew 121% to $11.6 million, highlighting the impact of our growing fleet on this recurring revenue stream. For the full year, revenue was $73.3 million, a decline of $23.4 million over the prior year. Aircraft sales revenue for the full year 2023 was down $46.3 million to $21.4 million due to the timing of aircraft delivery. However, usage revenue was up $23.4 million, or 162%, to $37.8 million, due to the growth in our floating fleet during 2023.

Net loss for the quarter was $23.6 million, compared to a net loss of $3.1 million in the same quarter of the prior year. The fourth quarter net loss included a $13.4 million non-cash charge for a fair value adjustment on our forward purchase agreement. For the full year, net loss was $52.8 million, compared to $9.4 million in the prior year. Adjusted EBITDA loss for the fourth quarter and full year was $8.1 million and $32.1 million, respectively. Our Adjusted EBITDA includes adjustments for the impact of interest, depreciation, amortization, the previously mentioned non-cash charge, and other non-recurring items.

Now, the key performance indicators that we consider most relevant to understanding our business are fleet growth, total flight hours, network efficiency, measured in terms of empty percentage, owner versus non-owner demand mix, and average yield per flight hour. We have provided a detailed historical breakout of these metrics in our table in our earnings release and investor presentation. Looking to the future, we have firm orders for 22 HondaJets and 4 Gulfstream G280s that will be delivered in 2024 and 2025. As Matt mentioned, we expect delivery of 8-10 HondaJets and 2-4 G280s in 2024. Based on our forecasted HondaJet deliveries for 2024, we expect to generate $72 million-$90 million in revenue and $16 million-$20 million in margin from fractional sales.

Our forecasted G280 deliveries are expected to generate $50-$100 million in revenue and $10-$24 million in margin from fractional sales. The additional aircraft will also contribute to higher usage revenue as they enter the fleet. We expect gross margin from aircraft usage to continue to improve throughout 2024 and turn positive over the next 12 months. We also expect our SG&A expenses to increase as we ramp essential functions and marketing spend to support fleet and customer growth. Given our forward visibility on aircraft deliveries, we believe we can achieve an EBITDA positive quarter in or before the first quarter of 2025. The exact timing is dependent on the aircraft delivery schedule and the ramp-up of flight hours. We are also exploring additional financing options to accelerate our fleet growth.

To conclude, we expect this to be a pivotal year for Volato as we execute on the strategy we have in place and begin to benefit from our scale and operating leverage. We have a clear path to profitability and substantial room to grow, grow beyond that. With that, we will now open the line for questions.

Operator (participant)

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question is coming from George Kelly from Roth MKM. Your line is now live.

George Kelly (Analyst)

Hey, everybody. Thanks for taking my questions.

Matt Liotta (CEO)

Good morning, George.

George Kelly (Analyst)

First one for you. Hey, Matt. First one for you on your expected delivery, the target that you put out for this year. Just curious what the visibility and kind of confidence level is on those targets, and when should we expect the deliveries to phase in through the year?

Matt Liotta (CEO)

Absolutely. So we have spoken quite a bit with both our OEMs, Honda Aircraft Company and Gulfstream, and we believe we are conservatively estimating the delivery of 8-10 HondaJets and 2-4 G280s. We would expect, as we mentioned in the comments, that the G280s would be in the second half of the year. We also expect that the bulk of the HondaJets will be in the second half of the year. And this fits sort of the general model of aircraft deliveries, tending to be highest towards the second half of the year. So, you know, we don't see any real difference there.

George Kelly (Analyst)

Okay, excellent. Thanks. And then still same topic. I'm curious, Mark, you gave margin targets associated with each different jet that's coming on board this year. I was curious, do those margin targets that you gave reflect kind of a fully sold amount? Or how far along are you in the actual sales process? I know you don't disclose too much there, but any kind of information would be helpful in that respect.

Matt Liotta (CEO)

Yeah, sure. So those margin targets, they reflect kind of our maybe a midpoint on the size of the fractionals. So as you envision, if we sell a full plane, we're going to charge less than if we sold, you know, a bunch of sixteenths. But as far as how far we are along sales, we aren't giving that guidance at this time, but we are pre-selling. As I think we've talked about, we pre-sell all the planes prior to delivery, so there's never really any risk there.

George Kelly (Analyst)

Okay, excellent. And then, last one for me. I'm curious what your plans are this year to continue growing the network of non-owners. Just curious how you're planning to really get the word out and keep bolstering that piece of your business. And that's all I had. Thank you.

Matt Liotta (CEO)

Yeah, absolutely. So, as mentioned in the comments, we've seen solid growth on our program customers, and we continue to have excellent relationship in the wholesale market for charter. We are increasing our sales and marketing efforts this year, although we are keeping that within a certain band tied to our revenue growth. And we have seen substantial progress on our program sales, so we anticipate we're going to just continue to increase that. And as we report each quarter in 2024, we think you'll see that subsequent increase.

Now, we don't break out the difference between charter and program sales, but what you'll be able to see is, again, a shift in the blend from owner to non-owner on our demand and the associated blended yield going up. So program sales generally has a higher yield than charter. And then both of the non-owner categories have a higher yield than owner. So when you see the yield number go up and the demand for non-owner go up, you know that we're executing on this strategy.

George Kelly (Analyst)

Thanks.

Operator (participant)

Thank you. As a reminder, that's star one to be placed in the question queue. One moment, please, while we poll for further questions. We've reached the end of our question and answer session. I'd like to turn the floor back over to Matt for any further closing comments.

Matt Liotta (CEO)

Thank you, everybody, for attending our first earnings call. I know it was an early morning, but we're excited to be a public company and to complete our first earnings. We look forward to reporting subsequent quarters and showing our progress on the execution of our business. Thank you again.

Operator (participant)

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.