Greetings. Welcome to the AerSale Corporation Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Jackie Carlon. You may begin.

Good afternoon. I'd like to welcome everyone to AerSale’s fourth quarter and full-year 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 facts 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, 2022, filed with the Securities and Exchange Commission, SEC, on March 7, 2023, 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 metrics 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, Jackie. Good afternoon and thank you for joining our call today. I'll begin with a brief overview of the quarter and year and provide operational updates before turning the call over to Martin to review the numbers in greater detail. By nearly every measure 2022 was an excellent year for AerSale. We reported record company revenue and made significant progress in the FAA certification of our enhanced flight vision system AerAware and its subsequent commercialization. Strong operating results were driven by broad market success and strategic execution on our 757 passenger to freighter, which you'll hear me refer to as P2F conversion program, which was well timed with elevated demand for freighter aircraft. Our solid financial performance was only achievable due to our unique end-to-end solution, which enabled us to secure the necessary aircraft and perform the conversions in a timely manner to have these aircraft customer ready. The year was also supported by a strengthening commercial recovery, which kept our on-airport MRO facilities at capacity all year and drove demand for our used serviceable material, which you'll hear me refer to as USM part sales business. Taken together, these factors led to a year-over-year increase in full-year revenue of 20% to $408.5 million. GAAP earnings per diluted share was $0.83 with adjusted EBITDA of $87.4 million, compared to the prior year GAAP earnings per diluted share of $0.76 with adjusted EBITDA of $89.3 million. Higher margins in the prior year were almost entirely attributable to CARES Act proceeds of $14.8 million, which were not excluded from our adjusted EBITDA numbers. As such, our underlying business performed at a similar margin level relative to revenue when considering CARES Act funding. As we do every quarter, we believe it's important to remind investors that our financial results are typically…

I will start with an overview of our fourth quarter financial performance and end with our guidance for 2023. Our fourth quarter revenue was $95.1 million, which included $51.4 million of flight equipment sales. Revenue in the fourth quarter of 2021 was $116.8 million and included $73.1 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $43.7 million in the fourth quarter of 2022 and 2021. In addition, as we mentioned on our last earnings call, the delivery of one 757 P2F convert aircraft, which was initially anticipated to close during the third quarter of 2022, was delivered at the beginning of the fourth quarter. As we have noted on multiple earnings calls and press releases, our business may and often does fluctuate from quarter-to-quarter based on the timing of flight equipment sales. We believe that investors and analysts should monitor our progress based on asset purchases and sales over the long-term. Fourth quarter asset management revenue decreased 27.4% to $67.9 million, largely due to lower flight equipment sales. Leasing revenue for the fourth quarter declined as a result of the planned reduction in the number of aircraft in our leasing portfolio as we determined market conditions would not support our historical return on investment for these assets. Fourth quarter USM parts sales were similar to levels seen in the fourth quarter of 2021. technical operations or tech ops revenue was $27.2 million in the fourth quarter, which was an improvement of 17.2%, compared to the fourth quarter of 2021. Tech ops benefited from better performance from landing gear activities and Goodyear on-airport MRO services. Revenue growth from our Goodyear facility within tech ops was offset by lower revenue at our Roswell facility due to fewer customer aircraft in storage, as compared to prior…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bert Subin with Stifel. Please proceed with your question.

Hey, good afternoon and then thank you for the time.

Hey, good afternoon, Bart.

Hey, good afternoon. So, I just had maybe a question on 4Q to start. On your last earnings call, which was on November, you're anticipating sales just if I look at the guidance about $30 million higher at the midpoint for the quarter, you just sort of walked us through maybe what drove that discrepancy just because it seems pretty large and maybe how you are still able to outpace the midpoint of EBITDA guidance, despite those contemplated sales?

Yes, I'm a little confused when you say we had projected for the quarter to have another $30 million in sales, what specifically you're referring to?

So, you had $420 million to $450 million for your guidance, right?

Correct.

And came in below that. So, I'm just sort of wondering what drove that discrepancy, were you expecting higher flight equipment sales and things slipped into ‘23? Or was there something unexpected that happened?

Yes, I mean, I would say we were projecting, we were hopeful to have more whole asset sales happening in the overall fourth quarter. Fortunately for us, we were able to generate strong margins off the equipment we were able to sell that's what we offset that overall revenue shortfall.

Okay. And maybe just on the AerAware side of things, based on sort of the commentary you have in the call and in the release, it sounds like, you know, if everything went as sort of as well as it could based on the scheduling right now. You could in theory have an STC granted in May. If that were to happen, if that schedule were to play out, I mean, do you think it's conceivable by July or sometime in that timeframe you could be earning sales again if that were to play out as in that sort of best-case scenario?

Well, I think it's possible, but it's really impossible to predict. It's possible as we have kits in stock, but it's impossible to predict when we would get our first -- until we get this FCC approved and we have a first order, we're not going to speculate on when we might have sales, we did not put any sales in our guidance, not that we don't think that that's possible. We think that is possible, but we think it's maybe a little irresponsible to be projecting sales of AerAware before we even have the STC or an initial order.

Yes, that makes sense. And just a final question, Nick, maybe this is more just like a high-level question on the industry. If we look at aviation aftermarket demand, it's been pretty robust and it looks like it's -- that strength is not really slowing. Could you give us maybe just some thoughts around what inning you think we are with regards to the cycle? Having seen a lot of these cycles play out? And sort of how you're thinking about positioning the company to capitalize on that demand? Sounds like USM is maybe easing a little bit, but still expected just to remain in a challenge. What's the best way for AerSale to capitalize on, sort of, the way the market is today?

Well, I don't think there's ever enough good USM to supply the market with the USM requirements. Now that was certainly an exception during the peak of COVID, because you had hit so many airplanes parked and not flying and there was almost no demand for USM. Now as the narrow body market has substantially recovered and we're well underway for a same recovery on the wide body side. The demand for USM is picking up. And again, what we're starting to see is there's just not enough good USM to service the requirements, because aircraft are flying, consuming USM, engines that have been -- airlines have cannibalized engines that are on parked aircraft to keep the airplanes flying. The -- those engines now have been depleted or quite a few engines have been depleted of their useful life, well, of their overhaul time. They need to be repaired. Puts those engines in the shop. The shops are backed up and there's just not enough good engine USM to supply their requirements for the amount of engine shop business that are going in. And that doesn't seem to matter whether it's narrowbody or widebody. Widebody hasn't suffered as much due to the substantially widebody market is the freighter side. And we didn't see a much decline in the demand for widebody engines or widebody engine parts. So, we see the requirement for USM continuing to stay extremely strong. Now affecting USM it kind of -- it's just two sides to that story with the delay and delivery of new aircraft, which we're definitely experiencing both with Boeing's issues with the FAA and with Airbus's narrow body issues with the multiple amount of engine problems they've had with the A320neo. That those aircraft are not displacing the older flight equipment that…

Really good color. Thanks so much, Nick.

You're welcome.

Our next question comes from the line of Ken Herbert with RBC. Please proceed with [Technical DIfficulty]

Hi, Nick. Hi Martin. Good afternoon.

Good afternoon.

Hi, Ken.

Hey Nick, maybe just to start off, could you update us on the -- of the 12 755, it sounds like there's been some delay with the PDUFA process, does the guidance assume nine of the 12 are moved -- sold or put into your lease pool this year? And how should we think about the completes on some of these conversions and where you stand in the process?

So, I think we have three or four aircraft in conversion now. One of them started I believe in December. The first one started in December; it was supposed to start in October. And that was -- those were -- we relied on our -- on one of our SEC provider to have contracted for those slots and that got delayed. They ended up not being able to contract with one of their providers. Initially, we thought we would have three and now we have two. So, between us and the STC provider or the 757, we've now got all 12 slots booked. Some of those actually we took as cargo kits and then we contracted with a provider to do the installations. AerSale itself will not be doing any of these conversions. But that pushed back the second and third aircraft that we're supposed to go in, in October and December and to push it back several months. I don't know the exact dates out of top of my head.

It's supposed to be delivered in those periods.

Well, the October 1 would be delivered in the first quarter, so deliveries that we expected to happen in the first quarter, I don't even know if we may get one in the first quarter. As you previously asked and we mentioned, when we thought we would get all 12 in the year, we thought those would be fairly evenly spaced throughout the year. Now with the exception of maybe one in the first quarter, I don't even know if it's possible to get maybe two the balance will come in the rest of the year and we've got a pretty full line at this point on a go forward basis. But that whole thing shifts back a couple of months, so think aircraft that we expected to have delivered in the last quarter, three of those will push into the early first quarter and will be available in the first quarter of ‘24.

Okay, okay, that's helpful. Are you finding with the delays that the cost for the conversions has significantly changed? It sounds like you're doing more maybe of the kit purchasing relative to outsourcing that. How should we think about your costs associated with the conversions here on these next 12 aircraft, it sounds like there's been a number of changes in your strategy around that?

So, the actual cost of doing the conversions is actually better for us or by us buying the kits and having the vendor, our own vendor do the installation. It actually lowers our cost over having the FCC provider do the conversions for us. So, the actual shift where we had to buy kits and get them converted ourselves actually is a benefit to the conversion cost itself.

Where we are seeing -- yes Ken, we are seeing increases in the 757-conversion program is on the overall cost of engines and that we had the advantage of the benefit in the first two years of pretty robust spare engine inventory balance. Now the engines that we have require more engine work, so that's increasing the cost and even for a few of those assets, we might have to go into the market to secure those overall assets. So, we reflected that in our guidance, which is why we're projecting a lower margin profile for this year, compared to the last.

Okay. Thanks, Martin. Just finally, on the flight test associated with Artware, you commented you've completed two of the five that are outlined. Can you provide any indications of how those first two, sort of, flight test packages went? Was there anything you learned that either positively or negatively that was significantly incremental to expectations and how have those gone?

They've gone great. I think that when the FAA got on board and started flying the airplane, they were, and this is not a new comment, because I've made this comment before. These are different FAA people than had previously been on the airplane. They're impressed, they like it. They see how the system works. So, I would say overall, we did as well as we could expect. There were no negatives that came out. The only negative part of this whole thing is I think we've probably only flown in the first two phases of flight tests less than 10 hours. And again, the disappointing part for us, I'm sure, for anybody that's invested in the company, is that this flight testing is spread out over a longer period of time, even though in the last couple of months, all through February, we only flew seven hours. So that's the disappointing part that it's just that the elapsed time between flight sets are relatively long. But understanding the FAA, there's multiple parties from the FAA involved. It's multiple areas and our fifth set of flights, there will be a lot of pilots on the airplane, both commercial pilots that will get on the airplane and flight and will be demonstrating to the FAA how a brand-new pilot gets trained on the system and multiple FAA pilots and human factors, individuals from the FAA will be assessing how those pilots perform, who have never flown the airplane with that system on it. So, it’s all good, it’s -- Ken, it's frustrating that it's so long. I mean, we're getting a level of scrutiny from the FAA that we've never experienced that all people we’re dealing with, but never seen this before when we're really sort of -- we're not making modifications to the like characteristics or physical part of the aircraft. We're just giving it enhanced vision. And so that's maybe that's a result of the increased scrutiny that they got over the max. And the good part about that is when we're done with this system, it will have gotten all the scrutiny of the FAA, they're fully behind it. They're very supportive, very cooperative. I have nothing, but really positive things to say about the FAA's attitude on getting this certified. I think they see what we have, which is advanced technology is something that doesn't exist today. And I think that they're going to do their job. They're going to be thorough. But at the end of the day, we're going to have a rock-solid safe system that has the full support of the FAA and we'll get an STC.

And if I could add, this is the first primary flight control system, that's being certified by the FAA after the 737 MAXC at primary flight display. So again, this is -- we're kind of in new territory. This is novel technology. So, the FAA is providing more screening, which is rightfully so.

Great. Thanks, Martin. Thanks, Nick.

Okay, welcome.

Our next question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed with [Technical Difficulty]

Hey, good evening, guys. Thanks for taking the questions. Nick maybe just to stay on AerAware. Can you tell us how many kits you've gotten inventory? Are you still building up finished kits? And do you know what the launch customers potential volume requirement will be once this does get certified? And maybe even presumably customers behind the launch customer?

So, I won't tell you exactly how many kits we have, but I will tell you that I have mandated our people to build a minimum of 100 kits by the end of the year, and we're well underway of doing that, I think we'll exceed that. And with regard to the other question, regarding – regarding launch customer, again, it's premature to talk about who the launch customer will be, but I will tell you this. The customer -- potential customer that has flown with us on multiple occasions all throughout the past 200 some hours we've flown our airplanes. They have a fleet of over 500 737NGs and MAXs. So that would be a big one. How long would it take to get up to 500 sets of flight equipment? Just -- if we did 100 this year, a set a target of minimum 250 for next year and another 250 a year after that and then adding in 25 250 A320 kits. It would take several years to build up to a 500-airplane fleet for one customer or one airplane type.

Got it. Yes, on that customer, I realized the 500 plus 737s. But do you have an idea of what their initial take rate might be? You get the SPC, are they going to take five right out of the gate? Do they take 10? I guess, I'm asking what kind of cadence you see from them?

Again, we don't know. Let’s -- however, what we have been told is that the airline will start using the system so they get at least 50% of their fleet installed. So, I would expect that they would want them installed as fast as they could get and because they could if it takes a year or more to get to those 250 kits, they're not going to be able to use the system for that period of time. So, they would want it as fast as we could deliver it. And that's why we've been working on production of kits in advance of their requirement, because it's just going to take time for us to build the kits, put the kits in and it's going to take time for Elbit Universal to manufacture the kits and gear up their manufacturing capacity for this level of requirement.

Got it. Helpful. And then you talked about, kind of, potential revenue accelerating-second half ‘23 into ‘24. Obviously, AerAware, you talked if obviously the feedstock purchase conversions continue and then some of your capability expansion. I'm not going to ask you for specific revenue numbers, but if we were to look second-half this year even into next year. Can you maybe size or kind of rank order what you think would be the bigger growth driver? And I guess, AerAware into next year would be a big one, kind of, based on what you just said. But any color as you, kind of, think about maybe the contribution from those growth drivers?

It would be too speculative at this point for me to answer that question.

Okay, okay. That's fair. What about last one on kind of the feedstock? I mean, are you guys seeing kind of hinted at it? Do you know how many kind of entities you're competing against for purchases? Are you seeing less competition out there? And then I guess with, sort of, all the airlines running all of their assets burning all of the green time. Do you think that's potentially driving the need for more USM?

Of course. Of course, the increasing utilization of the flight equipment is driving the need for more USM, but we've not seen other -- once the market started to recover as far as utilization, we've not seen our issue with USM is getting the USM out of the shop. So, we were force feeding USM into the shop even when there wasn't the demand. And I'm glad we did that, because now we're seeing very strong demand and that's why we feel optimistic about increasing our USM sales continuing to increase, because now we have more product. As long as we get the stuff out of the shop, it doesn't seem like we're having any trouble selling it to somebody who needs it. So that's having a lot of material that we put into work is helping our availability of ready USM to sell demand continues to rise. So, I don't see that changing. Again, it's the availability of feedstock that is the issue. Now with regard to competitors that we bid against, look, we bid on over $1.4 billion in deals last year. I could have won hundreds of millions of dollars if we chose to push our numbers up and really push our margins down. And we're just not going to do that. We've never done that, not certainly not intentionally we're disciplined. I'd rather pass on hundreds of millions of dollars’ worth of crappy deals than to win $50 million worth of terrible deals, because $50 million worth of terrible deals can light about hundreds of millions worth of good deals. So, we remain very disciplined I'd say we won $50 million of deals last year. We won them. Those were properly priced deals. The rest -- their deals we could have won if we chose to…

And a temporary [Multiple Speakers] those single dimensional players have an uphill battle with those lower margins.

Yes, absolutely. That's great color. Thanks guys. Love that disciplined commentary. I'll jump back in the queue.

Okay. Welcome. Good talking to you.

Our next question comes from the line of Gautam Khanna with Cowen. Please proceed with your question.

Hey, guys. This is actually Jack on for Gautam today. Thanks for the question. Just back to AerAware and I know you guys provided really good detail about one specific customer kind of talking about some interest here. Just wanted to kind of hear your perspective on incremental customers just other than this one that you're highlighting? And I know you talked about the 100 kits potentially getting up to 250. Just what do you have to see in regards to their orders to actually like pick up production and start to monetize this further? Thanks.

Okay. Hi, Jack. Regarding -- we got too many questions, let's go back to the first question.

Overall, beyond our launch customer. Other customers…

Okay. Yes, okay other customers beyond our launch customer. So, we are talking to a number of airlines that are very interested in the system and their fleet sizes would range from let's say 20. We have some that could be even smaller, a couple to 20 to 100s, not necessarily 500, but 100s. And as far as our ability to deliver kits to all of those companies at the same time, if we're fortunate enough to get an offer, that would be challenging. Our ability to increase our production of kits, I think is not problematic for us. We are staffing up our own production of kits, but our kits consist of a number of sub components modifying the radome, manufacturing an installation bracket for the camera. I think it's an eight-segment wire harness that has eight separate packages. We can subcontract out to other companies to remanufacture the radomes to accommodate the camera. To make the brackets to pick any piece of those -- of that eight-piece wire harness and have other people do a piece of the eight pieces or all of the eight pieces at third-parties or use multiple third-parties to increase our manufacturing capability, not necessarily internally, but externally. Getting up to speed to be able to do a minimum of 100, what is teaching us is the most expeditious and cost-effective way to build these kits, so that if we're going to contract if we get the demand and we need to go to 500 kits a year. Well, let's say 500 kits a year that would -- we either build up the internal capacity to more space to do more ourselves or once we understand the right most efficient way to do it, we then contract that out to several vendors that make the kids and then we review the -- on a quality basis, the kits that third-party to me. Matter of fact, the first 10 kits that we did were manufactured by another party and we had to do a lot of rework on those ourselves, because they didn't really understand how to build the kits, the wiring harness kits. So, we've learned a lot along the way and we're in a good stead to build to do the 100 minimum kits this year. And again, if we get an order for something significantly more than that, we'll subcontract that out if we can't build a capacity fast enough ourselves to do it. Now the flip side of that is that's the installation kits. Manufacturing the Elbit Hardware is a little different story, I don't know that their supply chain can spool up as quickly to manufacture 100s of kits within a short period of time. I think that, that typically takes longer. And so, airlines ultimately for the large order, we're going to have to wait until Elbit can produce their side of the kits.

Okay. That's very good color there. Just one last quick one, just going back to your comments on feedstock in USM and how it's pretty strong in January and February. If you could just provide some context where you're seeing the greatest strength. I think you alluded to more on the engine side. Given the issues there at the OEM level. Just would love to hear your perspective on some of the green shoots there? Thanks.

So now that engines are going into the shop and being repaired and demanding material, USM is not able – again, USM on the engine side is never able to -- good USM. Now if you part out an engine and you have 500 parts from an engine, you're not going to consume 500 parts, because a lot of those parts when an engine goes to the shop can be reworked. The good USM on the engine side that I referred to are the material that either is like limited parts or hot section parts. These are parts that were out due to heat and fatigue and you end up throwing them away once they get to a certain point. You can never get enough of the hot section parts or the life limited parts on an engine that's in service and consuming -- and having a lot of shop visits. When I refer to good USM, that's what I'm referring to on the engine side. There's never enough of that. So as the shops are picking up, there's not enough USM to supply all that customers are forced to buy PMA parts or they're forced to buy brand new parts from the OEMs. So, again, I guess that's part of your question. What's the other part?

Yes, just kind of where you're seeing the most strength it seems like it's broad-based, but specifically just whether like wheels and brakes landing gear, just any other broad color would be helpful. Thanks.

I think it's everything. It's component repair, now it's accessories, its wheels and brakes, avionics pieces, structural pieces, components landing gear. Of course, that's not USM, it's more on the overhaul side of the business. Airframe parts that, that we work on, structural parts that need to be replaced, rotable components, again accessories, it’s across the board.

Okay. Thank you, I'll pass it on.

Okay. Thanks, Jack.

And we have reached the end of the question-and-answer session. I'll now turn the call over to Nicholas Finazzo for closing remarks.

All righty. So, Birt, Ken, Michael and Jack, thanks for the insightful questions, which I think they're all helpful for our audience to better understand AerSale’s unique fully integrated multi-dimensional business model. So again, thanks guys. And for our listeners today. Thank you for your interest. AerSale was purpose built for these market dynamics. We're a strong and resilient company that can fly through any turbulence along the way as we continue to our final destination. So just sit back, relax and enjoy the ride. Have a great evening, everyone.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.