Good afternoon ladies and gentlemen and welcome to the AerSale Inc. First Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, May 9th, 2023. I would now like to turn the conference over to Christine Padron, VP of Compliance. Please go ahead.

Good afternoon. I'd like to welcome everyone to AerSale’s first quarter 2023 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 31st, 2022, filed with the Securities and Exchange Commission, SEC, on March 7th, 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 for that explanation Christine. Good afternoon and thank you for joining our call today. I'll begin with a brief overview of the quarter and provide operational updates before turning the call over to Martin to review the numbers in greater detail. Our first quarter results were in line with our expectations and reflect the cadence of flight equipment sales we shared last quarter. This resulted in total first quarter sales of $78.3 million compared to $122.8 million in the first quarter of 2022. I would remind investors that the prior year quarter included the sale of a highly modified 737 aircraft that was used for AerAware testing in our TechOps segment, which added $24 million in high margin sales. The remaining decline compared to the prior year period was entirely the result of the timing of whole asset sales as we had $27.7 million in aircraft and engine sales during the first quarter of 2023 compared to $51.9 million in the first quarter of 2022. Excluding the sale of whole assets and the X AerAware 737, the remainder of our business grew approximately 8% year-over-year as strong growth in our TechOps segment more than offset a modest decline in asset management. As we note every quarter, it is important for investors to analyze AerSale on a full year basis and assess feedstock and whole asset sales to fully capture our performance as quarterly, sales volatility is common based on the size of flight equipment transactions. Further, while flight equipment sales add substantial variability by quarter, it is important to understand that these activities are an essential, profitable, and recurring component of our end-to-end solution. Specific to 2023, we continue to expect higher whole asset sales related to our 757 P2F conversion program in the second half. As a…

Thanks Nick. I will start with an overview of our first quarter financial performance and end with our guidance for 2023. Our first quarter revenue was $78.3 million, which included $27.7 million of flight equipment sales comprising of two cargo aircraft, one airframe, and one engine. Our revenue in the first quarter of 2022 was $122.8 million and included $75.9 million of flight equipment sales consisting of six aircraft and four engines. Excluding flight equipment, the companies continued to demonstrate underlying growth as our base revenue increased to $50.6 million from $46.9 million in the prior year. As we have pointed out during multiple earnings calls, flight equipment sales fluctuates significantly from quarter-to-quarter and we believe monitoring our progress based on asset purchases and sales over the long-term is more appropriate. As a result of these factors, first quarter asset management revenue was down 35% to $48.4 million, mainly as a result of lower flight equipment sales consisting of two cargo aircraft, one airframe, and one engine. USM Parts sales were close to the prior year quarter levels, but are expected to increase due to improved demand and availability of feedstock going forward. Aircraft leasing revenue was lower because of a planned reduction in the number of aircraft in the leasing portfolio. TechOps revenue fell 38.3% to $29.8 million in the first quarter from $48.3 million in the year ago period. The decrease is primarily due to the sale of a Boeing 737NG in the first quarter of 2022. The Boeing 737NG was highly modified for a US governmental agency and previously used for AerAware flight testing. Excluding the aircraft sale, which is not typical in our TechOps segment, sales grew 22.7% as a result of strong demand for MRO services, particularly at our Goodyear on airport facility. As we…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Bert Subin, Stifel. Bert, please go ahead.

Hey, good afternoon, Nick, Martin.

Hey, Bert.

Good afternoon.

Hey. Maybe onto the USM comments, I think there was an expectation coming to the year that that was going to pick up pretty substantially as your feedstock acquisitions were starting to ramp. Can you just talk about what you think the revenue tailwind from USM could be this year versus 2022? And then can you delineate between the USM feedstock acquisitions and feedstock acquisitions that were intended more for the whole asset side when you were talking about your comments on what you acquired so far this year?

You want that one? I'll do it. Okay. With regard to the revenue tailwind on USM, we started seeing a pickup of available USM at the end of available feedstock that would feed both USM and whole asset refurbishment and/or sale or lease towards the end of 2022 and into the first quarter of 2023. And as we announced in the last earnings call, we had under contract $107 million of feedstock that was -- that we were expecting to buy, which consisted really of everything. Aircraft, airframes, engines of all types. CFM -- they CFM36-5, -7, A320s, 737s, A330, I don't know if I'm missing anything, 757. And some of that equipment -- I'm not going to give you the breakdown because I don't really have it, but some of that equipment will end up as whole aircraft that will be fed into our potential aircraft trading and leasing portfolio. Some of it will be refurbished as whole engines that will be fed into our engine leasing portfolio and some of the airframes and engines will be broken down into USM parts. So, we're in very good shape based on what we've acquired thus far. We're not quite -- we're almost halfway to what we projected to buy for the whole year and we're not yet finished with the first half. The cadence of USM sales follows the purchase -- the acquisition of USM, by anywhere from 90 to 180 days. And during that time, we're acquiring equipment, we're completing the records, we're getting it refurbished or modified for ultimate resale as a whole asset or at the piece of art level. So we start seeing sales of that again as early as 90 days we find something that doesn't need much work, but it could be as late as 180 days so that if you think about what we've acquired thus far in the first half, it will start making substantial results in our second half and what we're buying in the second half, some of it, although not a substantial portion of it, but some of it will be available for sale or lease or sale at the piece part level in the second half, but most of it that we buy in the second half will flow into 2024. I think that was your first question. I don't remember your second one.

No. No. That's good. That so just to clarify, the 112 that's the year-to-date number or what was the what was the period through which that was?

125 is -- it's year-to-date as of too. So, we're not finished.

Yes. Got it. Okay. Thanks for that. And on the 757 deliveries, I think you mentioned the cadence. Could you just say what that was again? I think you had nine this year and three scheduled for the first quarter of 2024. Of those 757s, how many will you -- do you already own? How many do you need to acquire? And are you seeing any sort of impact from lower demand in the cargo market?

So, we now have all the flight equipment and we need to flight both aircraft and engines to accommodate the 12 conversions that we've committed to. First actual aircraft was converted and was sold in the first quarter. So, there's 11 left So, we still expect to have this year eight more aircraft available for -- that will become available for sale or lease. And then there will be three and two we think in the first quarter of 2024. So, we started off slow because of the delay in getting a second or third provider by our STC holder precision. But now everything is on track and we are set to have deliveries of again eight more aircraft this year and three next year.

Okay. Got it. And just my final question, and I'll turn it back over. It sounds like AerAware is getting pretty close to the finish line. Once that fifth flight test is completed, are there any additional hurdles you'd have to clear? I mean, not flight testing, but sort of otherwise with the FAA or do they become compelled, I guess, at that time to rule? And assuming this does clear that final stage, can you just talk about what steps you've taken thus far towards booking initial customer, and once you get a customer ultimately how the revenue flows? If you actually have to wait until you outfit half of the fleet or, any sort of dynamics around it?

So, actually, that varies -- it's varying from customer-to-customer. Some customers have indicated that they won't -- they don't want the system until operational until they get half the fleet. Other customers don't seem to -- it doesn't seem to matter to them. They want whatever they can get as soon as they can get it. Everybody wants to know when the system is going to become available. We're working diligently. We're definitely on track to build the number of installed kits that we indicated at the beginning of the year that we would be at 100 for the year. I think we're at 55 already, and we're not at the halfway point. So, we're, and we're increasing that now to 15 per month. So we're on track to have available the kits we need to start selling. Elbit still has, Elbit and Universal still has to produce the hardware so we can finish the installations. We've got to find a customer that is ready to take these kits now. As soon as we get this thing approved, pilots will have to do pilot training. We may have to make modifications to their simulators so that they can do simulator training with the system installed in their simulator. And, that process is going to take time. Which is why even if we have orders soon after. We receive the STC. It's going to take time before the airlines can take them into their system and start using them. But we are talking to multiple customers. It's not just one. We've got tremendous interest from all the customers we've talked to the more and more customers want to fly the airplane. When we get them on the airplane and they fly it, they're amazed, candidly, at the system. If they're lucky enough to fly it in bad weather conditions, they can appreciate what this system will do for them when they face inclement weather and potentially have to divert their aircraft to other airports. So, good customer feedback thus far. Multiple customers that we're talking to, including still, nothing's changed. The major customer we've been talking to that I am still optimistic will be our launch customer for a substantial number of aircraft, a large U.S. domestic.

Thanks a lot, Nick.

Thank you. Your next question comes from Ken Herbert, RBC Capital Markets. Ken, please go ahead.

Yes. Hey, good afternoon, Nick and Martin. Hey, Nick. Maybe initially, just on the 757s, for the eight you expect to get back this year at a conversion and then the three in 2024, how many of those are under some sort of purchase agreement or how many do you still have left to sort of get customer commitments for? And is this a risk that you see? And what would be the timing on sort of locking up contracts for these aircraft?

So one of the questions I didn't answer was, is there a softness in the freight market? And the answer is, generally, yes. There is clearly a softness in the freight market. Now, is there a softness in the freight market with customers operating 757s? And I would say the answer to that is no. Is there a supply of 757s converted freighters available to satisfy that demand? The answer to that is no. Now, airlines are tight, or cargo airlines today are tight. They're holding on to cash. So the easy ability to sell these into a market where you've got cargo carriers needing 757s that are flush with cash, it's not so easy this year. So it clearly is a challenge for us to find a way to get the customers, the cash customers that can pay cash and buy these airplanes, the preference would be selling them for cash. But the alternative is to put them out on leases. And we are talking with both cash customers and lease customers. If we put aircraft out on lease, we have historically found customers that would take the aircraft on a longer-term lease at an ROI that that was less desirable for us But very desirable for a financial buyer. So we have sold aircraft when we put them on lease to financial buyers so if we go the lease route because we've been unable to find the number of purchased customers at the time these aircraft get delivered, we will seek to put them on a lease. We're not going to sit on aircraft if we can help it. We will place them one way or the other and there are multiple ways to sell an aircraft. It doesn't just have to be one you sell naked. Matter of fact, the first aircraft we sold were aircraft that we sold on lease. I think there's another question I could answer.

Well, I guess maybe how many of the eight this year or 11 total then are currently under contract? Or it sounds like maybe none of them are?

No, no, I'm not going to say that. We have some under contract, not all of the ones that we had put in our forecast. That is clearly a risk factor for us. We're working hard on it. Again, good thing is, is that we've got pretty much the balance of available 757s that can be converted to freighter. The remaining ones, we've got them all. So we've got some work to do. And yes, it is a risk, I'm not going to deny it, that finding a purchaser for all of these is something that we've got to continue working on. But we're still optimistic that we will. And if we don't, we'll put them out on lease, and maybe we'll sell them with lease attached. So nothing has changed as far as our view on how we will perform on that package. It may slip to the right a little bit, how we will perform on that package. It may slip to the right a little bit, but we don't know that yet. I mean, we still have plenty of time left in the year, and we have a lot of aircraft that, some of which are committed, that are early deliveries, and the later ones are the ones that we've got to work on. And I'm not going to give you the specific numbers. I don't think that that's -- I think that that's not something that's worth -- that we should be discussing at this point.

Okay. No, that's fair, Nick. So, I think you indicated, I mean, last year you did in asset sales, excluding, the 737, the AerAware test aircraft you sold, you did about $200 million in asset sales. It sounds like the second quarter, an asset sale standpoint looks to be similar to the first quarter, and then you see a pretty significant step up in the third and fourth quarters. Are the third and fourth quarters similar with your visibility today, and how do we think about sort of this progression through the year for whole asset sales? I can appreciate there's risk around what gets leased and timing, but how does it look under the current plan?

Well, it's definitely back end loaded to the second half of the year. I think that we'll only have one additional aircraft that's available in this next quarter. And it would be late in the, we think it's going to be late in June. So even delivering that airplane to a customer this quarter is going to be problematic because of how late it is in being delivered. That changes a lot once we get into the third and fourth quarter where just everything is on track. It's already in work, or most of it is in work. They're all in position. They all are where they need to be to get converted, so there's no delivery delays in getting equipment to where it needs to be. And things are on track as far as how -- getting the aircraft input and getting them out.

Okay. I think you -- I think, okay, I think you, that capture, I think obviously 125, you've got agreements or committed for, what's the full year target for capital deployed for whole asset or asset acquisitions? I think you indicated 250 million. I wanted to make sure we got that correctly?

Correct, correct, 250.

Okay, perfect. All right, I'll pass it back.

We think at the rate we're going, that is a reasonable expectation.

Are you starting to see --? Go ahead. Thank you.

My apologies, thank you. [Operator Instructions] Your next question comes from Michael Ciarmoli, Truist Securities. Michael, please go ahead.

Hey, good evening, guys. Thanks for taking the question.

Hi, Mike.

Nick, just... How are you?

Good.

Just on AerAware. -- good, good. You, you mentioned software modifications were, was something that the FAA came back with. Can you maybe give some details, if you can, on what they were looking for? And I'm assuming because it's software, your existing inventory that you're building up, that should be too complicated to make upgrades there. And then, just really, what needs to happen after that fifth flight, assuming everything goes well?

So, we've already -- we -- between us, the FAA, and Elbit Universal, we've already identified a very minor software switch to get the system to perform better than we observed on some of the flights. Not all the flights, but on some of the flights. So we've reviewed that with the FAA. We've all agreed on it. As a matter of fact, they came up with the same solution we did independently. It's been tested now in the lab, so we know that it works in the lab. We are installing it in our aircraft, so we're going to make the software patch in the aircraft. It's really just changing an input from one source to another. We think it solves -- we're confident it solves the problem because we saw it in the lab. Once we test it and we see that it works in the airplane exactly like it works on the lab, which is our expectation and we have high confidence of that because of what we've done, it's not complicated. We'll tell the FAA, hey, we're ready to start the last sets of flight tests. What will the FAA do? That's about 20 hours of flying, I think they've given us. 20 hours. That they wanted. It could be less. Basically, they just want to fly the airplane with multiple pilots and see how reliable it is over a 20-hour period. That will be scheduled. We -- I'm pretty confident that once we get on their schedule, we'll finish that in a week. I don't think it should take more than four or five days. And that's pretty full days of flying. Now that assumes that everything that we expect to perform forms as it does and that they see the reliability of the system,…

Okay, okay, good. I think you said you're at 55 kits doing 15 a month, but it sounds like Universal and Elbit still need to produce hardware. I mean, everything -- component supply chain. What's the confidence level that, let's just say, you get the FAA approval, everything goes well. Are they going to be able to meet kind of your demands?

It depends on the first order we get and how quickly that airline will start installing them. A number of the carriers that we're talking to are smaller. The big one, no, no way, I mean, if we get that one first, Bill, it's going to take a while to staff up for the several hundred 737NGs and MAXs that they've got in their fleet. So that will take years to build up to supply that customer. Again, I've said this before and I've continually been reassured by Universal and Elbit that they build an order as soon as they know what the requirement is, they'll build for it. They've got the capacity to do that. So I am optimistic that they will deliver on what they've committed.

Got it. Okay. And last one, I'll jump back in the queue here. On the commentary I think Ken was talking about on the 757s. The guidance -- your revenue guidance assume all sales for the 757s presumably, there'd have to be some tweaking of guidance if you had more of those customers opt for leases?

No, right now the guidance has a mix of leasing and us and write out sales.

Right now there's not seeing any need to change that. But like Nick said, obviously, we're working on that. And we'll -- we see a need for adjustments, we'll come indicate that. But for right now, our projections already have that included.

Okay, perfect. Thanks guys. I'll jump back in the queue.

Okay. You're welcome, Mike.

Thank you. Your next question comes from Ken Herbert, RBC Capital Markets. Ken, please go ahead.

Yes. Hey, Nick. I just wanted to follow-up on your comments regarding the sort of the market opportunity for feedstock and asset acquisitions. The 125 year-to-date, obviously, we're early in the second quarter, but how's the environment changed in the last maybe three months in terms of airlines and lessors desire to maybe move some older assets. I mean, we continue to face delays in new aircraft deliveries And there seems to be traffic coming back strong and there certainly seems to be increased utilization of some of the older aircraft. So how has that market evolved? And how do you expect to sort of play out over the next few months?

So I can talk about why we're winning more deals that we bid on than we have historically. Our hit rate is higher. I got to give you the exact number, but it is substantially higher than it has been. And why is that? And I've said this before, but it's worth reiterating. Airlines need more flight equipment than what the leasing companies and the owners and the airlines are not doing is taking aircraft that need heavy work, landing gear overhaul, engine overhaul, heavy airframe checks, structures work, and they're not investing the money to refurbish those airplanes, because they're still hoping that they'll eventually get the new aircraft and they don't want to invest and refurbishing these older maintenance intensive pieces of equipment, because unless they're going to keep that for the long-term, they're not going to get the return on that investment. So those are the assets that are coming our way. And the reason we're winning more of those assets than many others is because of very, wholesome integrated multi-dimensional infrastructure we have where we can do the things necessary to refurbish those aircraft at the whole level and at the peace part level including the engines. So the financial buyers out there, they can't do that. So they're stepping away. They can buy an aircraft on lease and they can pay a price at which getting much lower IRR than we would seek. So we're not getting those deals. But pretty much if it's something that needs a lot of work or only has it's an airframe and an engine or just engines. That's right up our alley. We've got the machinery to process that and extract maximum value and that's our market today. And occasionally, we pop an airplane that, wow, this was the better than we thought we picked up a good airplane with decent equipment on it. But that's rare and for the most part because other people can buy that and they can find a place to put it if they don't have to do much work on it. But the stuff that needs a lot of work, that's our cup of tea.

Yes, if I could add, I think our multi-dimensional model also has allowed us to get better returns than a lot of our competitors. I think we've noted in the past that we target IRRs of 25% and greater. And with the cost of capital and some of our competitors that have !re much more levered than we are and do not have the ability to monetize the way that we do. That's really taking a big bite of the apple of their profits and that's going our way. Because again, we have been used to operating an environment where we target a high IRR.

Just let me further elaborate on that. I mean, we've seen deals where we feel and this has been the last several years that investors are acquiring assets with the expectation to get a low double-digit or even a very high single-digit return. Well, that just got wiped out almost completely by an imputed interest rate that for people that have to go out there and acquire capital or look at alternate uses of the capital that they have, as you're approaching a 10% hurdle rate, a deal that's high single digits doesn't work and even low double digits doesn't work when you factor in the effort and the risk adjustment. That's another reason why we're waiting deals.

Okay. Very helpful. Thanks, Nick. Thanks, Martin.

Okay. Welcome.

Thank you. Ladies and gentlemen, as a reminder -- I apologize for you. There are no further questions at this time. I will now turn it back to Nick, AerSale CEO for closing remarks.

Okay, Bert. And Ken and Mike, thanks for the good questions. And for everyone listening today, thank you for listening to our AerSale’s first quarter financial results. We will continue to work hard and smart to deliver on our full year guidance. I hope you'll listen in on next quarter's call to get an update on our progress as we go forward. Have a good evening, everyone.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.