Greetings, and welcome to the AerSale Inc., Third Quarter 2022 Earnings Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, November 8, 2022. I'd now like to turn the call over to Kristen Gallagher, Human Resources Director. Please go ahead.

Good afternoon. I'd like to welcome everyone to AerSale's third quarter 2022 earnings call. Conducting the call today are Nick Finazzo, Chief Executive Officer and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 15, 2022, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investors section of the AerSale website at ir.aersale.com. With that, I'll turn the call over to Nick Finazzo.

Thank you, Kristen. Good afternoon, and thank you for joining our call today. I'll begin with a brief overview of the quarter, including operational updates, and I'll then turn the call over to Martin to review the numbers in greater detail. As we do every quarter, we believe it's important to remind investors that our financial results are typically uneven quarter-to-quarter, and we recommend our performance be analyzed on a full year basis. This results from the nature of our flight equipment sales programs, which tend to occur at irregular intervals throughout the year. The pacing of our revenue in 2022 is no exception to this phenomenon as the timing of flight equipment sales created record first and second quarters, followed by a lower third quarter with an anticipated strong finish to the year. The underlying growth and volume of our business has remained robust throughout this period. And I'm pleased to report that all but two of our flight equipment sales that were contemplated when we issued our initial 2022 guidance earlier in the year have now closed. I'll comment on the remaining two planned flight equipment sales in a few moments. Turning to the details. In the third quarter, we reported consolidated sales of $51 million, which compares to $73.3 million in the prior year period. Our adjusted EBITDA during the period was a loss of $500,000 compared to a gain of $13.9 million in the third quarter of 2021. As I noted, the lower sales during the period were entirely the result of the timing of flight equipment sales being pulled forward into the second quarter or delayed into the fourth quarter. Year-to-date, sales have grown 40.1% to $313.4 million and adjusted EBITDA has increased 16.2% to $70.5 million. Further, excluding the effect on adjusted EBITDA from…

Thanks, Nick. I will start with an overview of our third quarter financial performance and end with our guidance for 2022. Our third quarter revenue was $51 million, which included $2.7 million of flight equipment sales comprising of two engines. Revenue in the third quarter of 2021 was $73.3 million and included $27.4 million of flight equipment sales, which consisted of three aircraft and one engine. If we exclude flight equipment sales, our third quarter revenue would have been $48.3 million compared to $45.9 million in the third quarter of 2021. As a reminder to investors, we delivered a B747 freighter in the second quarter that was originally slated for the third quarter. We also delivered the final internally converted B757 passenger to freighter or P2F aircraft in the beginning of the fourth quarter that was also originally planned for the third quarter. As we have noted during multiple earnings calls, our business may, and often does, fluctuate from quarter-to-quarter based on the timing of flight equipment sales. It is, therefore, important to monitor our progress based on asset purchases and sales over the long term. Third quarter Asset Management Solutions, or AMS, revenue declined 57.9% to $20.6 million in the third quarter of 2022, primarily due to lower flight equipment sales. USM parts sales were also lower in the third quarter of 2022 due to extended turnaround times for overhauled parts during the quarter. Leasing revenue of $7.8 million in the third quarter of 2022 was close to third quarter 2021 leasing revenue of $8 million, as engine demand from wide-body freighter operators partially offset lower revenues from aircraft leasing with only one aircraft on lease during the current quarter. Excluding flight equipment sales, our third quarter AMS revenue would have been $17.9 million compared to $21.5 million in…

Thank you very much. [Operator Instructions.] Our first question comes from the line of Gautam Khanna with Cowen. Your line is open

Hi. Good afternoon, guys. I had a couple of questions. First, I was curious on the Q4 equipment sale. What does - how big a revenue item is that to start with?

So, we don't give exact numbers on the overall flight equipment sales. But as Nick noted, that will put us in a position to meet the overall guidance that we provided for the full year.

Got it. So, it's pretty chunky. The other thing I was curious just on AerAware, if you could kind of update as you mentioned weather permitting and FAA time and all that. But is the software totally locked down at this point from what you know? And how long a process do you think it will be to do the flight hours from here? And what's a realistic time frame for an initial order from a large customer?

Okay. So, regarding - I'll try to answer the three questions you asked. Regarding weather and what do we need to see when we fly this aircraft and demonstrate it to the FAA. So, the mention about specific weather was the FAA has told us that we've shown them video of different weather conditions, fog, sleet, snow, hail, smog, sand because we have same storms in Goodyear. And so, they've seen that. But the one thing that they insisted on is that they'll accept a lot of that video from test line that we've done, but they need to see the airplane in foggy conditions. So, they need to see that - we need to - when we get the FAA on the airplane, we've got to go find an area with fog in the morning or whenever, and we've got to demonstrate the system to them. So, that's - this is a good time of the year for that. There's fog in many sections of the country in the morning. So, when we get the FAA on the airplane, we're going to have to fly the airplane to wherever that fog is and demonstrate it to them. So, I can't predict for sure when or where we're going to find fog, but that is - we specifically are going to have to demonstrate the operation of the system in foggy conditions. We are coming up on the end of the year as we have heard many times from the FAA as they approach the end of the year, a number of the FAA personnel, if they don't use their vacation time, they lose it. So, I'm a little concerned that we - we're ready. Airplanes ready, crews ready, system is checked, software is validated. There are no technical reasons…

Yeah. That's fair. Thank you. I was going to also ask on the USM turnaround time, you mentioned some constraints there. If you could just elaborate on what were the bottlenecks? And have those been resolved? Or is that sort of an ongoing issue? If you could just elaborate on that.

Yeah. That's - I mean there's been a lot of discussion internally about that on what can we do to get more availability of USM. And the frustrating answer is that turnaround times for everything, whether it be getting aircraft torn down in foreign locations or even U.S. locations due to labor constraints, things that would normally take 30 days, 45 days to tear down an airplane, we have to get in line. If we're not doing it ourselves, it could take three, four, five months to get an airplane torn down so that we get access to the USM that we can then get refurbished, whether we do it internally or whether we do it externally. When we send out parts externally to get refurbished, what would normally be a 45 to 60-day turnaround time is, in some cases, taking six months to get a part back. So, we've got more - we've got - we have more inventory sitting at vendors in process being overhauled mostly engine parts than we've ever had in the history of the company. That's because there's just the lead times or the turnaround times are so extended. Now how is that going to get fixed? I don't think that's going to get fixed anytime soon. I think that's - that's a multiple year problem. How do we fix it? We just keep feeding the system. We're not, not buying just because there's extended turnaround times. We're buying. We're tearing down. We're getting the products out to the vendors to get them overhauled. We're putting them in the queue. And when we get them out, we'll have had enough pre-sell time probably to sell them when we get them out. So, other than what we're suffering through right now, the feed into the system will eventually be consistent and then the output will be consistent. It's just not there today because we're - as we're just acquiring equipment and putting it in, we're still in the weight mode. But we expect a steady flow of materials starting to come out, but with extended turn times. And I think it's unavoidable. I can't call or predict when that's going to abate, but my expectation is it's potentially - its years before that's going to be.

Thanks, guys.

And your next question comes from the line of Bert Subin with Stifel. Your line is open.

Hey, good afternoon. Maybe staying on the AerAware conversation. I know this has gotten moved out to the right a couple of times out of your control, just due to sort of the constraints with getting the STC [ph] and getting that finalized. Could you just give us maybe, Nick, what your bull case is on approval and ultimately the resulting sales and maybe what the bear case is? Is there sort of any potential that this would get moved to 2024? Or do you think pretty solidly in '23? And it sounds like from the conversation you're having with potential customers that you think that there could be demand to start getting those kits moving?

Okay. That's a good question, Bert. Thanks for asking. The bull and the bear case, the bull case, which doesn't feel like a bull case, it feels more like a base case is the certification flight testing is imminent. Again, literally, it could be in weeks. Could it be in months? I don't think so. If I would - if I believed it would be in months, I would have stated that in the next several months, we'll get it certified. I think it's in - or do our flight testing. I think it's in the next several weeks. Typically, when flight testing or flight test certification is completed, typically, that's the last step in the certification process. Once it's completed, satisfactorily, and we expect it to be completed satisfactorily because we've flown the airplane and already demonstrated that it does what the regulations require, typically, at that point, you prove what you already know, you demonstrate it to the FAA. When that's completed, they do all their homework, they check all their boxes. Within 30 days, you get an STC. That's typical. So, let's take best case, bull case. It's - it won't happen next week because it's too early. Let's say --and then you've got Thanksgiving coming up soon thereafter. Let's say, we get it after Thanksgiving, maybe early December, we do our week of flight testing, we finish no issues. We don't expect there to be any issues, and we are coming up on a Christmas break. And hopefully, by then, the FAA will have done everything they need to do from a documentation point of view to go through the process of issuing the STC. We got Christmas involved. So, I don't expect we're going to have it in December. But I would expect if we…

And So, let's say, if the bear case plays out, and this is sort of a March is when this is fully completed and you said sort of you would expect an order of 90 days, so maybe that puts you into the second quarter. In thinking about that, I know there's that regulation, you have to have at least half of the aircraft outfitted with this. So, if we're talking about a large fleet of 737 something a 300 fleet airline. How - can you walk us through how that process would work if you have to do 150 of these kits in order for that airline to use it, how long that takes and sort of how that process plays out?

Yeah. So, there's two pieces to that. One is manufacture and availability of the Elbit components, the Elbit Universal components, which be the camera, the head wearable displays, the eye tracker, the flight computer deck [ph] it ties all that into the main aircraft system. So, that hardware has to come from Elbit/Universal. So, we have primed the pump there and placed an order for equipment to ensure that we'll have available equipment from Elbit to commence installations starting now. I mean, we have a certain number of kits already in stock, and there are kits being made available to us on an ongoing basis to fulfill the $33 million [ph] order that we made earlier in the year. We also are in the process of building up our capacity to manufacture the install kits. We've got multiple kits already that have been manufactured each month that's improving month-over-month. Our expectation is that we'll be at capacity to build as many as 20 to 25 kits a month in - starting in 2024. And so, we're building to that capacity. We will have kits for '23, assuming. I mean, we have the hardware in '23 and an order in 2023. We expect to have substantial deliveries of kits in '23.

Okay. Maybe changing gears. I just want to make sure I understand it. This is a question probably for Martin. Can you just help us understand the cadence of maybe 4Q in 2023 P2F sales? And what number of aircraft of that 12, I guess, in total, that's 13, what number of those you currently own and sort of what your expectation is for that sales process? And then maybe lastly, how should we think about engine sales? Just trying to get an idea for the cadence of whole asset sales?

Sure. So, of the 12 P2F converted assets that we are doing. In fact, the first one is already ongoing at a third-party facility. We are deploying three facilities to do that work. So, delivery of those assets will be more evenly spread through 2023 than they were in 2022. So, I know that will make - probably life easier for you guys in modeling that overall. Of the 12 assets, we own seven. Nick noted we strategically deferred two assets that were going to be sold as passenger to freighter to put him into the P2F conversion program to generate higher returns overall. We're in negotiations already and looking for the additional five. We're in negotiations to buy already three or four of those assets. So, we're in a good position to have the full feedstock that is needed to fulfill that overall, 12 aircraft demand. From an overall engine perspective, again, we continue to purchase engines in the overall market. And obviously, we have inventory available as well overall in timing. That timing was obviously as opportunistic as items go through it. As a reminder, these are not new engines, these are used engines. So, they're all sold in a spec basis, so, we need to identify buyers. So, as far as kind of the quarterly projections of that, it's difficult to tell, but we definitely have a good amount of inventory available to us that will feed 2023 engine sales and leasing and USM sales through 2023.

And just so I understand that cadence correctly, the 12 would be one in 4Q and 11 next year? Or is that one plus 12?

No, no. That aircraft is currently being delivered, but it will not - sorry, being converted, it will not be ready for delivery until 2023. So, all 12 aircraft are expected to be available for sale or lease in 2023.

Okay, that helps. And just last question for me. Thinking through maybe more of the sort of the core business of MRO, and I know you walked through the USM part earlier. How do you expect that business to hold up sort of in this backdrop? Air travel demand has been resilient and capacity keeps coming back, aircraft are aging, cargo is slowed, but still been strong. Like would you expect MRO now that you're putting more capacity towards that to continue to build? And is there any sort of difference in trends you're noting between component and aircraft and engine MRO?

So, yes, as you noted, we've seen a lot of positive momentum in that overall side. That's why we strategically moved the P2F conversions to third parties. And that's the best of both worlds. We continue to preserve the margins that we've been able to make in that overall program and have additional third-party capacity overall, and that's in the heavy MROs. And our component MROs and our landing gear shop, we definitely have seen that increase in demand from passenger and still strong freighter overall demand. So, we have a lot of capacity to continue to grow. So, we continue to see that kind of forward projection through the remainder of 2022 and in through 2023.

Thanks for the color.

[Operator Instructions] Your next question comes from the line of Ken Herbert with RBC. Your line is open.

Hi. How are you doing this evening?

Yeah. We're good.

Yes, Nick, maybe just to start off, on the 12 aircraft expected to convert in next year, how many of those would you expect in 2023 to actually be selling versus how many would you expect to just put out on lease for maybe sale at a future date?

I don't know specifically what that is. The - we have been talking to a number of customers about outright purchases of the aircraft after they are converted. We have a number of customers that are interested in leasing the aircraft after we convert them. And then as you've seen previously, if we put an aircraft out in a long-term lease, there are plenty of financial buyers that would buy the aircraft with a lease attached. So, it's hard for me to be able to specifically tell you we're going to sell, so, many airplanes we're going to lease, so, many airplanes. One way or the other, we expect to place all those airplanes next year in some form, whether it be as a sale or as a lease. If it's a lease, it's possible we'll keep some of those aircraft on lease depending on the circumstance, but more probable, if we put the aircraft on lease, we'll find a financial buyer to take the lease and then it will become a sale.

Okay. And as you think about these aircraft going into the conversion process, is there any risk that because of supply chain constraints or labor or anything else that you see delays on these aircraft coming out of the conversions?

No. Fortunately, the availability of kits has been an issue and we're not seeing any significant delays. Not to say that there haven't been delays. I think the second airplane that we were to put into conversion is delayed while the vendor that's going to do the work is working through their contractual issues, not with us, but with the supplier of the kits. So, there are things that will have a minor impact and may have minor delays on that equipment coming out, but we don't see anything major. Those kits - we placed deposits for the kits that we ordered where we're finding the vendor to do the installation. And we also placed deposits on the conversions that our partner Precision is actually doing on that. And then they turn around and they order that material from their vendors and we're not hearing of any significant delay in the delivery of the kits to perform the conversions. And the conversions are on a really tight slot. So, there's a limited amount of availability of people who can do the conversions, and they have the labor to do the conversions, and they have available slots to do the conversion and they have lots of other work to do. So, you get to have your kit, you got to have your airplane and you got to have it in there at the time they have a slot and it goes pretty quick. It's pretty efficient.

Okay. That's helpful. And just with some of the slower growth on the cargo markets, obviously still fairly robust, especially for the 757s. But are you seeing any downward pressure at all on lease rates within that marketplace?

Not the overall marketplace, not on 757s because there's a limited amount of aircraft out there. I think we're going to have the last 12 of 13 airplanes that get converted and then Precision won't be doing any more 757s. Now there are A321s out there that are being converted A320s, 737NGs and there's a lot of companies with book value problems that are converting airplanes to basically kick the can down the road and re-up the depreciation to, I don't know, 15 to 30 more years depending on how aggressive the opt [ph] lessees are being with that equipment. And we are hearing that there's a lot of availability of 737NGs hitting the market and that, that market is softening. Now that's part of the reason why you're not seeing us do any 737NG conversions because right now, the economics don't look good. It looks like you're just trying to defer depreciation over a longer period of time by making a conversion investment. So, yes, I do believe there's downward pressure on the cargo market, depending on the specific aircraft type, 737NG, I think, is an example of significant downward pressure because of the amount of availability of equipment, not seeing it on the 757. 767, everything that's out there, again, I've said previously that those are being committed by the large cargo carriers that operate large fleets of that type. There's very little availability of that. It's forcing people to look at converting A330s. There are some parties out there that now are looking at doing A330 conversions. That's probably -- maybe not as good as the 767, but there will be - there will be A330s converted. As I said, there are A321s out there. It doesn't quite do what a 737NG, I mean, 757 does, and it's going to be a little similar to a 737NG, but there's not as many of those being converted at this time to say that there's an oversupply of the A321s. So, I don't see a downward pressure on that market yet until - unless I'm going to say -- unless and until there becomes a flood of those airplanes that have been post conversion on the market and available and un-leased, but I'm not hearing that on the A321 yet. It doesn't mean it can't happen. I'm just not hearing it. So, yes, depending on each aircraft type, there are different pressures, positive and negative, on the narrowbody side, I think, that overall, I would describe that as there's a little bit of negative pressure on the - there's a headwind on the narrowbody side for a while. There's too much supply versus the demand. Not seeing it on the kind of the hybrid airplane or the middle of the road airplane the 757, lots of demand on the wide-body side on the 767 and up.

Yes. Okay. I appreciate all the color. And just one final question, if I could. Nick, when you look at - you've made a few comments on the USM market, and it sounds like the issues you're facing are getting material out of shops to resell it. What are you seeing in terms of feedstock? It sounds like you're seeing more feedstock, but are there - is that still supply constrained in terms of your ability to find engines or other assets to put into the USM pool? Or how is that trending?

So, that's not a - that's a complicated answer, and I'm going to try to give you the best that I can. What we're seeing today, what we've been feeling for the last several years is an expected significant supply of older aircraft coming into our space and being the feedstock for our USM. We continue to buy airframes where the lessors or airlines are pulling off the serviceable engines and selling an airframe with maybe one unserviceable engine or just an airframe alone. So, we're doing very well on the airframe side, and we're buying more airframes now for part out than we've ever bought in our history of new issue planes. We're not talking about DC-8s. It's not about 737s, A330s, A320s; mid-technology equipment. We're buying more airframes than we've ever bought. So, you say, well, there's definitely - it's definitely not a lack of supply of airframe. Airframes historically represent about a third of our USM revenue, the parts that come out of airframes, roughly a third of USM revenue. Engines parts would be roughly two-thirds of USM revenue. However, we're not seeing enough engines coming out that are ending up being parted out. When we do get an engine for part out, what we're doing is a number of those engines that we're buying, we may be buying them at part out prices, but we're not even parting them out ourselves. We're refurbishing those engines and putting them back into service because we believe that there's higher value of those engines, those kind of good quality 737 engines, A320 engine, CFM56-5, B-2500s, CFM56-7. And so, we still see good quality engines. And if we have USM material that's available from other engines that we've decided to part out, instead of selling the really good stuff to…

No, I appreciate all the detail. Thanks, Nick.

You're welcome, Kent.

And there are no further questions. I'll turn the call back to Nick Finazzo, Chief Executive Officer, for closing remarks.

All right. Well, thank you for listening to our call today. Look, we will continue to work hard and smart to meet and exceed expectations. Nothing in the third quarter is reflective of our future prospects, all as well with AerSale and our future is bright. Have a good afternoon, everyone.

And all that will conclude the conference call for today. We thank you very much for your participation. You may now disconnect your lines.