Good day, and welcome to the AerSale, Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jackie Carlon, Vice President of Marketing and Communications. Please go ahead.

Good afternoon. I'd like to welcome everyone to AerSale's third 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 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, 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 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, Jackie. 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 consolidated third quarter results improved notably over the second quarter and the prior year. In total, we reported sales of $92.5 million, an increase of 81% against third quarter 2022 sales of $51 million. This increase was largely the result of flight equipment sales in the period, which included $38.9 million of engine sales. Sequentially, sales increased as we were able to monetize the strong levels of feedstock acquired over the past 12 months, which included both engine and aircraft flight equipment sales during the period. While we are pleased to see the increased volume, third quarter results trailed our internal forecast expectations as several additional flight equipment sales slated for the third quarter are now expected to close in the fourth quarter. As we do each quarter, I would like to remind investors that our quarterly results tend to be lumpy because of the timing of flight equipment sales. Therefore, assessing full year time periods and feedstock acquisition rates are both better analytical tools to our performance than year-over-year or sequential revenue patterns. Turning to profitability. Adjusted EBITDA in the third quarter was $1.9 million, compared to a loss of $0.5 million in the year-ago period. The improvement in EBITDA performance was the result of higher flight equipment sales during the period and better USM volume. At the segment level and beginning with Asset Management, third quarter sales were $65.1 million compared to just $20.6 million in the prior quarter -- in the prior year's quarter. Higher sales compared to 2022 reflected the monetization of feedstock acquisitions with…

Thanks, Nick. I will start with an overview of our third quarter financial performance and end with our updated guidance for 2023. Our third quarter revenue was $92.5 million, which included $44.8 million in flight equipment sales, consisting of 7 engines and a P2F converted Boeing 757 aircraft. Revenue in the third quarter of 2022 was $51 million and included $2.7 million of flight equipment sales consisting of only 2 engines and no aircraft. As we have pointed out during multiple earnings calls, flight equipment sales may significantly vary from quarter-to-quarter. And we believe monitoring our progress based on asset purchases and sales over the long-term is a more appropriate measure of progress. Third quarter Asset Management revenue rose to $65.1 million because of the increase in flight equipment sales I just mentioned. USM part sales were up from the year ago quarter because of higher demand and availability of feedstock, which was partially offset by lower revenue from leasing. TechOps revenue was down 9.8% to $27.4 million in the third quarter from $30.4 million in the third quarter of 2022. Our TechOps business was adversely impacted by fewer customer aircraft and storage as compared to prior periods and weaker contributions from our aerostructures and landing gear facilities. This was partially offset by greater revenue associated with increased on airport MRO capacity dedicated to customer aircraft, which was enabled by outsourcing the P2F conversions of our 757 aircraft. Third quarter gross margin was 25.4% compared to 30.4% in the third quarter of 2022, primarily driven by the mix of flight equipment sales. Selling, general, administrative expenses were $25.4 million in the third quarter of 2023, which included $3.2 million of noncash equity based compensation expenses. Selling, general, administrative expenses were $24 million in the third quarter of 2022 and included…

[Operator Instructions] The first question comes from Bert Subin from Stifel. Please go ahead.

Hey, good afternoon and thank you for the question.

Good afternoon, Bert.

Martin, you just -- hey, Nick. Martin, you just said you could see some rollover into the first quarter. I know visibility has been sort of challenging this year. And that's led to some timing delays. Can you just give us I guess some commentary on what your visibility is in the fourth quarter? Have you sold any of those, I guess, through today in the quarter. And as we think about 2024, you've had about $65 million of sales slippage just based on your guidance update, which seems to be mostly on the whole asset side. Can you give us any way to think about how that gets, or at least how you're thinking about that showing up in '24?

Yes. So as far as overall guidance at this point, we actually have anticipated delivery schedule. So that gives us better visibility into the potential flight equipment sales that we have scheduled for the remainder of the year. As we did know, there's a lot of different factors including the customer and their ability to deliver or to take possession of those assets, which is why we make the comment that potentially some of those assets could move into the fourth quarter. However, right now, they all have contractual agreements to end and to close this year, and we're moving forward to get those closed, kind of overall. On a positive note, these contracts -- these assets are under overall agreement. So if we're not able to close those in the current year, we do expect to those to close in the first quarter of 2024.

Okay. And then just on the, I guess, on the '24 side of that, or I guess, just to clarify, can you say I guess, how many of the 757 you have under contract. And then, in terms of sort of teeing up expectations for '24, just where things stand. Just because there's been so much movement in the timing of asset sales.

Yes. As of right now, we have 1 757, it's under contract to be sold in the current year. And then we have the remaining 757s that are still being marketed for potential lease or sale.

Okay. And then just as a follow-up, it seems like positive commentary on the AerAware front. I know people seem like they're probably biting their nails, trying to figure out when that's going to happen. It seems like when you got through the final tests, and to August, it was going to be -- expected to be a pretty quick process. Can you just walk us through what's happened over the last 6 or so weeks. And I guess what your best visibility is into what happens between now and hopefully an STC being granted.

So what typically happens is, as you're going through the whole process of obtaining an STC in anticipation of doing flight testing, you submit reports to the FAA, all the testing that you've done, how you -- how the flight testing is going to demonstrate that the product that you're trying to certify complies with whatever the rules are. So you've got a number of reports. And if I recall, I think we submitted over 50 reports to the FAA for their review and ultimate approval. Typically, that is all finished by the time you start your flight testing, but that did not occur in our case. It took the FAA because of the complexity of this certification. It took the FAA many, many days to return documents to us, in some cases, as much as 6 months to get documents back to us because there was -- there wasn't certainty as to what type of test we would do. That would be -- that would satisfy the FAA. So a lot of back and forth with the FAA on the type of testing that dragged on slightly past completion of flight testing, but not much, because by -- within -- shortly within several weeks after completion of flight testing, the balance of testing that we had to do was completed satisfactorily. And now we're just in the documentation phase now. And the documentation phase, it's every document is reviewed, every word is looked at. If [indiscernible] doesn't like the way you described something in a sense that I should review it, we will go back, we'll fix it, send it back to them, they have to review it again and it's just taken incredibly long. There's a lot of people involved at the FAA, a lot. And, again, because…

Thanks, Nick, and thanks, Martin. Appreciate the time.

You’re welcome.

And the next question comes from Ken Herbert from RBC Capital Markets. Please go ahead.

Yes. Hi, good afternoon, Nick and Martin.

Hi, Ken.

Hey, Nick, maybe just wanted to follow-up on the asset -- the asset sales. If I understood correctly, you've committed to $200 million. I think you've done $130 million of that year-to-date in terms of deploying capital. Do you expect much upside to that $200 million as we get into the end of the year, and maybe you could just comment on sort of where you're seeing the opportunities and how's the pricing environment out there for the feedstock?

So we do anticipate to grow that $200 million in the balance of the year. It hasn't really changed much. The type of feedstock that we're acquiring requires a lot of work. It continues to be I think, it favors us because we have the capability to extract value out of flight equipment that needs a lot of work versus others that are more financial buyers, that they don't have that capacity, they just -- they could buy an aircraft on lease, but buying an aircraft off lease with two engines that need to be repaired, heavy checks, et cetera, that they don't have the capability to do that, they have to farm [ph] it out, their costs are higher. So that -- so the opportunity to continue buying feedstock of the type we've seen all year remains. And even though this was a little bit counter to this, but even though the OEMs with the geared turbofan problem and even still, how long it's taken to get all these maxes delivered, even though that is keeping the older flight equipment in service and depriving us of a big [indiscernible] of flight equipment -- technology flight equipment that we expect it to see by now, it will come and it will come when the OEMs catch up. But in the interim, we're still getting the kind of stuff that fits our business model that we can extract value out of. So I don't see any change in that. We, as we -- as we're thinking about, we just finished the Board meeting as we're thinking about our acquisitions into '24. At this point, I don't see any change over what we've seen thus far in 2023. I see that continuing and accelerating as the OEMs resolve their problems and start delivering more new aircraft that have reliable engines.

Yes, I wanted to follow-up on the geared turbofan issue, because it sounds like on the one hand that would restrict availability of feedstock to your comments. But on the other hand, it's probably really strengthening demand for material to support legacy engines, the CFM56 and the V25, in particular. How does the net factor of the geared turbofan issues affect you? And are there opportunities that arise from that, that you can maybe call out?

We purchased quite a few CFM56-5Bs, that power the A320 deal. And we bought most of those at parts value thinking that, eventually, that the amount of engines that went into the shop would increase and the demand for USM parts for the engine specifically on the older technology A320, would come back very strong. And that's a fact, we're seeing that. The issue we're having is a lot of the engines that we thought were going to end up as parts turned out to be engines that have good service life left. And we have customers that are interested in taking those engines, whether it be for purchase or for lease that are going to deprive us from having the USM to sell the piece part level and we don't care. I mean, as long as the net value we receive out of that is the same or greater than we would get going the long haul for part up, we will sell or lease an engine that we bought at part up value. But I do see that that market is continuing to be strong. The question is can you get engines today? Where are they going to come from? And as I said, finding good serviceable engines today very difficult to do. I mean when you're taking low time remaining parts engines and you're selling him his whole engines or leasing this whole engines to people because they can't -- they don't want to spend money on putting engines through the shop. That's telling you that there's going to be less USM available to support all the engine shop visits that are coming or that are already here as a result of these older technology aircraft staying in service. So yes, there is an upside for the supply of USM parts for the supply of whole engine -- the whole engine trading and leasing, But there's a limited demand of that equipment. And so I don't know that we've quantified the offset to that. What -- what's better for us to have more USM available for sale? Or more full assets to lease or sell? And I know that necessarily answer your question. But …

No, no, that's helpful. I appreciate that. There's a lot of moving pieces there. And if I could just one final question and maybe for Martin. As we think about sort of the implied adjusted EBITDA in the fourth quarter, is virtually much of the sort of sequential increase expected to come from whole asset sales? Are you expecting maybe more contribution in the fourth quarter from TechOps, from USM under the parts of the business?.

Yes, I think it's twofold. We definitely expect to see a continuation of improvement in the USM side of the overall business, but definitely to the visibility that we have from flight equipment sales, that will be the bulk of the overall increase that we have factored in into the guidance number overall.

Yes. And I want to add to that, because I think it's an important thing to note. When we're buying engines at pardot value, and we then turn around and lease or sell them as a whole asset. It really does skew your perception of what our USM business is doing. If we could, we would just be reporting whole asset sales of parts that we -- of engines we bought for USM as part of our USM line, but the reality is, it's not USM, it's still a whole engine. But don't be confused by the amount of whole asset sales when we're telling you that most of these assets were bought for parts. And just because we're selling them as whole assets or whole flight equipment, it doesn't mean that we don't have the opportunity to grow the USM business. It's just -- it's popping up in a different segment, its popping up as flight equipment sales rather than USM sales.

Got it. Thanks, Nick. Thanks, Martin. I'll pass it back.

Okay. You’re welcome.

The next question comes from Michael Ciarmoli from Truist. Please go ahead.

Hey, good evening, guys. Thanks for taking the questions. Just to stick with that final thoughts -- how are you guys. Just to stick with that final thoughts, Nick, what's better for you? A whole asset sale or individual Piece Park sales? I mean, where do you think you can get better returns? I mean, obviously, you can move inventory faster with a whole asset sale. But given this kind of tight market, look at that equation of individual parts and pricing on parts. I mean, what I guess, simple question, what -- what's more valuable for you what generates better returns.

Well, we don't necessarily look at IRR because a short-term sale of an engine versus a longer term, heart out process may produce a greater IRR, but the quantum of the net revenue would be much smaller. So we have to weigh, forget put IRR aside for the moment. So if you forget the IRR because we make a much, much higher IRR, if we quickly flip an engine. What we look at is well, what's the dollar value of what we would get if we went long and we parted out the engine? And then we had sales of USM versus what can we get today, net of no additional time or acquisition costs, what dollar value or dollar volume can we get today. We then may factor in a small interest carrying factor in that. And if the net result of that is that we feel that with or without interest, because I don't think that makes a big enough difference. But even with interest, if we feel that we can get the same or more money today, selling it as a whole asset versus going to the longer route and selling it as parts, we will almost always choose to sell the asset today, and then be having -- and be struggling with you guys, as to the amount of whole asset sales we have. Because I think that just skews everybody's view of the [technical difficulty] when we -- when you see a lot of whole asset sales which produces a lot of volatility. And I could straighten that out if I went the longer route. But I don't think that's the right answer. I think the right answer is we get the same or better money on a short-term basis. That's where we go with. That's where we go with the asset.

Okay. Got it. That’s helpful. And then just looking at the feedstock purchases, looking at the inventory of kind of aircraft frames parts, you're up to, I think $326 million on the balance sheet. How should we think about that? I mean, it sounds like that could grow potentially into the fourth quarter. And then just trying to get a sense of how that that inventory winds down and maybe drives cash flow next year, and also helps the top line. Can you give us any color there?

Yes, I would say from the USM side, we're already starting to see a pickup in overall sales volume, probably kind of approaching closer to about $8 million in overall monthly sales, a run rate of about $100 million. Based on the volume that we have, again, if we keep the assets that we have identified as piece parts, that we can increase that overall volume to $120 million to $140 million of annual sales on the USM side, based on the level of inventory and historic kind of disposition rates, kind of overall. We're also seeing opportunities to increase our leasing portfolio, again, taking demand on strength in certain platforms, such as the CFM56. And again, we have those assets, a lot of them are being repaired and being ready to be put on lease. So with that feedstock, you're going to see increases in USM, you're going to see increases in the leasing portfolio. And again, there will always be opportunities to do whole asset sales as well. And you'll start seeing those benefits flowing through '24 and beyond.

Okay, got it. And then Martin, you kind of hit on it. I think you said the $100 million run rate for USM. What was the actual USM dollar amount in the quarter? Or even if you can give us kind of the year-over-year. I think you did close to $20 million in USM last quarter.

Yes, I think overall for the quarter, for USM sales, we were running around, let me see -- give you that by around $20 million overall.

Okay. Okay, got it. Last question, Nick. Just as it relates to AerAware, I know you had pre-built some inventory. But how are you thinking about your kind of hardware supplier, Elbit, what's going on over there? Obviously, they're having a lot of reservists call ups and just maybe frame sort of what the -- any kind of supply chain choke points or getting product?

Elbit, we've been in contact with Elbit. They've got their own contingency plans in place for events like this, but it's not I guess the tragic part of this is they've never experienced this in the recent -- in recent times. But they've got their contingency plans in place. They are currently manufacturing product for us. We expect to get product delivered here. Imminently they've got products sitting on the shelf for us, and we want it. so. So they're continuing to manufacture and deliver. Now there's no way for me to be able to guess, happen in all the eventualities and I don't think it's even appropriate for me to comment on that. But at this point, we're not seeing any effect on our ability to get product, but who knows.

Okay.

Who knows depends on what [indiscernible] in Israel.

Yes. No, of course. Got it. All right. Good stuff, guys. I'll jump back in the queue.

Okay.

The next question comes from Jack Ayers from TD Cowen. Please go ahead.

Hey, guys. This is Jack on for Gautam. Thanks for the question here. Hey, yes, just kind of honing in here on the Q4 guide and I know you mentioned you're kind of just baking in that one sort of asset sale in Q4. I just wanted to see kind of how customer sort of campaigns are going. I know, you've talked in the past that you are having active discussion. So maybe, like, at first glance, it seems like there's more downside or sort of more risk to a push out. But could there be incremental upside, if demand sort of strengthens here? Like do you have the ability to basically monetize those 10 in inventory you've got or the magnitude you can do in Q4.

So we identified there are 18 individual pieces of flight equipment that went and so I think I'm answering your question that we have scheduled -- actually planned and scheduled to close between now and the end of the year. So all of those have dates associated with them have delivery conditions. And we're working towards putting that equipment in the hands of our buyers who have to go through their own due diligence process and inspection. We have taken into account the time that we have remaining and are confident that if everybody does what they're supposed to do, we'll get those assets delivered this year. Some of them invariably will fall out of this year. And they'll -- they won't close this year for who knows what reason. We had a closing in one of the quarters where the customer that was going to send us the money is bank closed on the last day of the quarter when we were kind of close. And we closed ended up -- we end up closing the first business day, the second of the next quarter. So we don't anticipate anything like that this quarter. And when identified 18, that doesn't take into account additional assets that keep popping up as opportunities to sell in the near-term. I mean, even before the end of the year. So it may -- we may end up closing on 18, we may end up closing on more than 18, we may end up closing on less than 18. What we're telling you is that we've got 18 schedule to close this year. What's the probability of some of those will move out? I think that the probability is some of those will move out. How many, I can't tell. Will we replace that with others? The probability is yes. How many? I can't tell.

Okay. Yes, I was kind of asking just specifically the 757 [indiscernible].

I'm sorry, the 757 is under -- has been under contract. We had a delivery issue with one of the engines. We thought it would be delivered already. We've rectified the delivery issue on the engine, giving them a substitute engine. And they're in the final phase of the acceptance of the aircraft.

Okay, got it. So is that incremental to the one you've already got under contract? I guess like …

No, that is the one, yes. Guidance only has 1 757 P2F sale.

Okay. So, okay, no that's helpful. And are there any other campaigns because I think you've got those, I guess now 10 remaining 757s? Like is there any chance those discussions are progressing well, or with any color, there would be helpful.

So we've got -- we are negotiating with one to two aircraft today. One is available and next one is not, but it's close to delivery, to be leased. And then we have the prospect with the customer that's taking the aircraft this quarter, that they want a second aircraft, but they're not going to talk about that until they get their first aircraft in operation. Beyond that, we don't have anything that's pending. We have discussions with multiple customers, but we have nothing pending, where I can point to and say, okay, we've got that accounts for potentially leading 7 of the aircraft uncommitted. But at this point, I would tell you that, it's 8 aircraft on committed. And well -- no, it's 10 aircraft on committed with discussions on 2 more leaving 8 aircraft that we have yet to find homes for. And we're working on, but we don't have customers like that [indiscernible]

Yes just to get a little color that fourth quarter there will be -- there's -- before deliveries of the 757. So those aren't available right now. They're being delivered in this floor into deliveries from cargo conversion.

Yes. That will become available.

Yes.

Okay, got it. Yes, from your third-party supplier, okay. That makes sense. And then just one last one on AerAware. Just conviction there with the FAA and whether a government shutdown, and in any case here in the next couple of weeks could have any impact on potential timing there. Any color would be helpful. Thanks.

So we've already been told by the certification branch that they will be shut down if the government shuts down. So I can only speculate that based on the last time, there was a government shutdown. Government can only hold out a couple of weeks. So if that happens, and that's an another 9 days if the happens on the 17th and that net lasts all the way through the end of November. It still leaves December for them to finish up the paperwork and issue the STC. But that would clearly delay it until December and potentially longer if well, I can't imagine the government will say shut down longer than that. But then we get into the unfortunate part which is once you get into December, you've got FAA guys taking vacation, you got two holidays between then, certainly Christmas and New Year. And -- yes, I mean, I'm just hoping we're not caught up in that as we're just so close at this point. With our [indiscernible] are like, who knows?

Yes, I hear you. Okay. That's it for me. Thanks, guys.

All right. You're welcome.

We have a follow-up question from Bert Subin from Stifel.

Hey, thanks for the follow-up. Just on the AerAware front, I guess just two real quick questions. Nick, is there any sort of possibility in your mind right now the way things stand that you think there's an STC approval or granting in 2023? And then aside from the STC question, can you give any color about how conversations are going with the future customers of those kicked off? Are you waiting for STC?

Okay. That's the first question. Possibility of STC approval in '23. Possible, I've identified what we're going through at this point. It's out of our control how long the FAA takes to respond to the -- to respond to the revisions that we sent back to them, you'd think that they could -- when they're asking us to make a minor change, they could look at it in a couple of days and get back to us. In some cases, they have and some cases, the guy is on vacation, the guy is sick, he's not in, he's too busy. We're dealing with that and I'm not complaining about the FAA, because they've been -- really they have been great to work with in this complex program. So I can't tell you that, I have any reason to believe that we will get this certified in '23? Neither do I have any reason to believe that I won't get it certified in '23. It's just out of our control. We've done everything that FAA has asked us to do and continues to ask us to do. But it's in their hands as to the pace and then add potential government shutdown, and then the end of the year holidays to it. It is a possibility, we will not get certified in '23.

Okay. And then [multiple speakers] …

On definitive, because, because it could.

I think it's probably customer outreach.

Oh, customer outreach. So we have been continuing to fly with a number of customers, both customers that have expressed an interest and have been flying with us all along and some new customers that are interested. We, continue to get very positive feedback. All of the customers, we press them and push and some gets set up a little bit and say, guys, come back to us when you have your STC. So we are getting a little bit of that pushback. It's like, okay, we've been talking about this for a long time, as we've been telling you guys for a long time. And customers want to see it. So okay, got approval, great. Now, it definitely changed the attitude of the people we were -- we've been dealing with when we got -- when we finished our flight testing. Because that led everybody realize that okay, maybe we don't have the STC yet. But we better start figuring it out because a lot of work has to be done once the STC is approved, before airlines are going to start taking it. They're going to have to do revise their flight training manuals, potentially changing their simulators, they're going to have to be discussing with their FAA. The implementation of this new technology. So they know that they're interested and they want it. And that's what we've heard from a number of customers, that now's the time to start working on it and they are. I mean, we're getting a much higher level of activity from our customers. And ever since we finished the flight testing, then we've had in the entire time we've gone through the certification process, With the exception of one customer that's been with us from the very beginning. And that's the one that we think is, I call them our big boy customer because it's a big airline.

VERY helpful. Thank you, Nick.

You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Nick Finazzo, Chief Executive Officer for closing remarks.

Okay, guys, and everyone listening, thanks for all the good questions. Look, thank you for everyone on the line for joining our call today and for your interest in AerSale. With the third quarter, we're beginning to see positive results from the investments we've made in feedstock over the past year. We've judiciously used our balance sheet to overcome supply chain delays and organically build out our infrastructure of people and facilities. These investments have positioned us well to accelerate growth in this fourth quarter and into the future. We have confident in our purpose built, multi dimensional and fully integrated business model, and we're not discouraged by short terms earnings volatility. We're leaning into our future and are perfectly situated to thrive in a growing aftermarket. We are continuing to look at M&A opportunities to cost effectively expand customers, capacity and capability. Certification of AerAware will come and we expect its commercialization will drive a steady base of recurring revenue well into the future. We're excited about all the opportunities ahead of us and we're convinced the future is bright for AerSale. We look forward to keeping you updated on our progress. So everyone have a good evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.