Good day and welcome to AerSale, Inc.'s Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to hand the conference over to Kristen Gallagher. You may begin.

Good afternoon. I'd like to welcome everyone to AerSale Fourth 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, 2023, filed with the Securities and Exchange Commission to be filed on March 8th, 2024, 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 found in the earnings presentation materials made available on the Investor 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 today with a recap of the year and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. The final months of the year deviated meaningfully from our expectations headed into year-end, which entirely stemmed from lower-than-anticipated flight equipment sales in the fourth quarter. If you recall, in the prior quarter, we noted a significant number of flight equipment sales that were slated for delivery in December, which would account for the bulk of our EBITDA for the year. As noted at the time, the schedule of these deliveries is subject to change due to customer acceptance and delivery requirements, which were expected to occur in the fourth quarter. In total, we had 28.8 million of flight equipment sales that did not close in 2023, that have thus far closed in the first quarter. We expect the remaining sales that did not materialize in 2023 to close in the first half of 2024 or be returned to available inventory for subsequent sale or lease. Importantly, this is common in our business and as a public company, we have had quarters that have demonstrated a significant deviation from our original expectations, both on the upside and the downside. As we have discussed, we operate a purpose-built end-to-end solution which is unique in the industry and gives us a competitive advantage to extract value from assets that our peer group is unable to achieve. This ecosystem allows us to direct assets to the most attractive ROI for our equipment. And we're agnostic to the end use, whether it'd be through part sales, aircraft and engine leasing or flight equipment sales. With this complex ecosystem comes a significant fixed cost hurdle…

Thanks, Nick. And I will start with an overview of our fourth quarter financial performance, followed by our expectations for the business in 2024. Our fourth quarter revenue was $94.4 million, which included $47.4 million of flight equipment sales. Revenue in the fourth quarter of 2022 was $95.1 million, which included $51.4 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $47 million and $43.7 million in the fourth quarter of 2023 and 2022, respectively, an increase of 7%. As we have discussed 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 4.9% to $64.6 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. Fourth quarter USM part sales improved from the year-ago period by 27% because of higher demand and availability of feedstock. If we exclude flight equipment sales, asset management revenue would have been $17.2 million in the fourth quarter compared to $16.5 million in the prior year period, an increase of 3.6%. Technical Operations or TechOps, revenue was $29.8 million in the fourth quarter, which was an improvement of 9.7% compared to the fourth quarter of 2022. TechOps benefited from better performance from landing gear activities and Roswell on airport MRO activities. Revenue growth from our Roswell facility within TechOps was offset by lower revenue at our Goodyear facility due to our greater percentage of intercompany work being performed during the quarter. In the fourth quarter of 2023, gross…

Thank you. [Operator Instructions] Our first question comes from Bert Subin of Stifel. Please go ahead.

Hey, good afternoon, Nick and Martin. Thanks for the questions.

Good afternoon.

Good afternoon, Bert.

Nick, can maybe start on the delays, I guess, the last three quarters have been sort of things just keep moving to the right. I mean, I think from a lot of your peers, we're hearing a pretty good story in the aftermarket on demand, sort of seems like an environment where if you have assets, they can be monetized pretty quickly. Can you just talk about what's happened? Maybe what your visibility is? Does the guidance change, indicate your visibility has become lower? And it seems like you're still acquiring quite a bit of assets, like how does that play into your view here?

Okay, well, I got to break those questions down. As far as delays in the assets that we were expecting to close in the fourth quarter that have shifted. Do you want me to explain that?

Yeah. I mean, I guess, you've seen some consistent shift. So I'm just curious that -- and why you've seen delays and maybe what happens from here.

It's not one thing, it's a whole number of factors. Some of the things that we've seen that have extended the purchasing and sale time of these assets are the condition of the records that we're getting from various operators. As we've seen from some recent events where there has been fraudulent paperwork produced on records, the scrutiny that goes into these aircraft records is just increasing. It does not necessarily comes from regulatory requirements today, but it comes from just a much higher level of scrutiny, in back-to-birth trace. And what's good for an airline to operate an airplane and maintain records that's suitable to the FAA or to their local CAA. Local regulatory agency may not be suitable if we acquire the aircraft and then we're trying to sell it to somebody else or going to another airline. So the condition of records has been a mess. Airlines are selling equipment, even leasing companies are selling equipment to us, the records are a mess. It's taking a lot of time to clean it up. And candidly, nobody has enough resources to clean it up. It's just very, very, very time-consuming and it's just gotten worse. So that's one reason. The other with respect to deliveries as we approach year-end, it's always tough when you come up on holidays to get everybody focused on what it takes to get a closing. Now, we had our entire team focused on it and made sure that nobody took -- nobody went home for the holidays. If there was any possibility that we could get any one of these assets delivered, as we had scheduled to be delivered in the last quarter of the year. Unfortunately, that doesn't always -- we don't always get that same level of cooperation when somebody's buying…

Got it. Okay. I guess, as we think through '24, sort of limited information out there, but I guess the MRO business you're expanding, USM is doing very well. I mean, those businesses together should generate something north of $20 million of EBITDA, I would think. And then I guess, you're still investing in AerAware, so that's maybe slightly down from that. And you're already selling some of your whole assets and have a lot for sale. Is there any sort of parameters that you're not giving guidance but is there any way to think about EBITDA? I mean, you did over $87 million last year and around $12 million '23. So it's a big jump in terms of trying to hammer out expectations.

Yeah. I understand. And as you see, the amount of revenue we need to generate to cover kind of our fixed overhead. Once we hit that, that's where it becomes everything falls to the bottom line. And we just don't know that at the beginning of the year, we can estimate it based on our prior experience. And we look back five years and we said, well, geez, how did we perform previously where we didn't know exactly what we were going to buy, we had assumptions. We didn't know exactly what we were going to sell, and that's not new to us. I mean, we've been in that situation every year since we've had this company. But as we look back five years, we actually did pretty well on our estimates of where we would end up at the end of each year, based on a lot of information that we didn't have at the beginning of the year. This year was worse. This year for all -- this year was worse as far as our ability to predict where we would end up. For a number of the factors I just mentioned on why some of these delays occurred in closing, but there are other factors that exist in the industry today. This is a very different. We haven't experienced an industry with this level of problems. I don't know when I don't recall it. I mean, when you look at all the issues Boeing is going through with the certification, recertification of the MAX, other issues that have come up recently regarding 737-9 issue or the MAX 9 Airbus with the problems it's having on its geared turbofan, and that just seems to be prolonging. We have an expectation there'll be over 600 A320s grounded. So what…

So maybe just to clarify there, and one last question. In terms of the clarification, I know there is a lot of uncertainty, but if I just look at the assets you have for sale and the things that are happening in the MRO and USM side of things, is there a plausible outcome where your EBITDA could look like '22 in '24?

I don't even -- I'm not going to answer that. I don't know. Martin, do you have an answer?

Yeah. I mean, I think, Bert, I think the best place to note, and we've noted this in all the calls, is to look at that inventory balance, it's $329 million, that's almost twice what we had at the beginning of last year overall. That's going to give us opportunities to do several things. Not only can we support the USM side, of which demand is robust, but we can also look in putting assets back on the leasing pool, specifically on the engine leasing side of which, with the issues on the geared turbofan, there's very high demand overall. So we're going to have an opportunity to deploy capital and start making revenue in that side. And as always, we'll continue to see opportunities to do whole asset trading as it's opportunistic and as that becomes the highest use of the overall asset. The real challenge that we have from forecasting is we have all of these great avenues to monetize these assets. And sometimes we need to make a determination on, hey, based on the current factors, this is really the best approach from a long-term return aspect. That's what really gives us difficulty in trying to forecast specific overall numbers to give you the analysts and the investors. But pointing at that amount of capital deployment in a market where this material is in high demand, I think gives us some pretty good confidence and belief that we'll be able to improve our performance in 2024.

Got it. Just my last question on the AerAware side. Nick, you said there was five proposals out there. Can you just tell us what that means? And is your expectation that revenues may be more a $25 million plus set up?

Okay. So we have demonstrated our system, whether it be through live flights or through looking at our video or in-person meetings and giving them a good explanation to five different airlines. And all five of those and made a written proposal as to, here is how we would go about, here is the pricing, and here's what we could do for delivery. And we're negotiating with those. And one continues to be the big boy airline that we've been talking to from the very beginning.

Got it. Thank you.

You're welcome.

The next question comes from Gautam Khanna of TD Cowen. Please go ahead.

Hey, guys, how are you doing?

Good afternoon.

Good.

So I was curious if you could talk about the AerAware customer traction. At one point, I know it was a while ago, we were talking about maybe a 250-unit order from one of the customers that was deeply involved in your development of the product. I was just curious, like is that -- within your five proposals that you have out there, are there any like big kind of elephant orders that are part of that five? And maybe what is kind of the status of that one launch -- potential launch customer we thought we had? What's the hold-up at all?

Okay. This is Gautam, right?

Correct. Yeah.

Okay, good. I had thought so. Okay. So, yes, the customer that I referred to as our big boy that has a lot of 737NGs, is we are still talking to, and we're working them. We've given them more than one proposal. We're getting feedback from them on what they need. We're trying to get to a point at which we can figure out how they can integrate this in their system, the fastest and most economical way. Not there yet, but that's what it takes. When you get to a point where customers indicated that they want the system, it's one thing to say you want it, but it's another thing to actually place an order. So we've heard that they want it. All five of these, by the way, have indicated they want this system. And one's the big boy, one is another relatively large international airline, and then there are some smaller ones. So we're still working with them. We're still trying to help them figure out how they're going to get their simulators modified. We know how to do that now, get our flight training manual in their hands, so that they can do their own flight training program, which will come from, basically flow from our flight training program. And then the delivery schedule it's going to meet and how are they going to put them in the airplanes? Is it going to do it while the airplanes are in a maintenance check? Are they going to bring them to our facilities? Are we going to go to their facilities? So all of these are details that have to be worked out as we get to the point before we get a firm order.

Interesting.

We're working on all of those.

It is that same -- I mean, I imagine that same process applies to even some of the smaller potential customers, right? I mean, they're going to have to figure out how to get the simulators and all that. So is it a similar lead time, do you think, in terms of closing on some of these orders, whether it's a larger airline or a smaller one, or is it just a lot simpler with the smaller airline?

You know, it’s probably will be slower with a large airline because more pilots that have to be trained with a smaller airline, they actually could do flight training in the airplane. It's expensive. But for a small airline, it may not make sense for them to pay to have a simulator modified with our system. So we don't know the answer to that yet. That's going to depend on whether -- or how many airplanes does the airline have, and can they justify the cost of modifying a simulator. And whether a simulator operator would be willing to modify their simulator. So if you're going to do, and if you recall when we did flight training for the FAA, during our flight testing, we took five pilots who had never received training on our Enhanced Flight Vision system. We put them through a ground school, and we actually took them in the airplane and did flight testing in the airplane and trained them in the airplane. Now, that's expensive, but we were able to do that successfully with those five pilots.

Got you. Okay. And just to follow up on some of your earlier comments on the increased documentation standards of maintenance history, and the like. Have there been any -- is it obtainable? I mean, I just wonder, like is there -- is it one of those things where it's just a matter of time to dot the I's and cross the t's, or is it -- I'm just curious, like, it's something different where it's just much harder to even obtain the information. And that might extend when these assets are actually available for sale if you will.

The information is generally available. If you can get somebody to go through their archives, go through their records archives and pull the data. And what's really frustrating is when we go to buy an airplane or an engine and it's been in the hands of multiple airlines and the airline still exists and it has records, or we have the records. And there are some gaps in the paperwork, whether it would be a non-incident statement or back-to-birth traceability on an LLP Life Limited Part. And we go back to the airline, would say, hey, would you guys, this is what we need you to sign. And they just say, no, guys we're busy doing other things. And we sold this airplane a long time ago, and no, we're not going to fix it. Now, you've got a gap in the records that for most customers, they won't buy it. Some will, because it wasn't -- some of these are not even regulatory requirements, they're just requirements that the industry has imposed to make the records impeccable, perfect. No gaps, no questions. And -- but it's also very frustrating. So I believe that all the records can be fixed if you get cooperation from the various parties who operated the flight equipment. And we've been successful for the most part. I mean, rarely do we have something that we say, we give up. And by the way, and when we're doing our pricing, if we see an engine that has or whatever aircraft landing gear that doesn't meet the standards, and we look at it and we say, there is no way we can fix that. Then we adjust the price, we say, okay, look, these parts aren't going to trace, they're not sellable. So I'm not going to -- you want those parts back? I'll give you those parts back when we take the engine apart, but I'm not paying for them. And we've done that where we've not paid for parts that don't have life-limited traceability. And I don't know what they do with them because if you don't have the paperwork that goes with them, the parts are just -- they're scrap metal.

That's a helpful answer. I appreciate it. And I may have missed this if you did address it, but can you remind us how many 757 aircraft you still have kind of in the hopper to potentially monetize? And where we are in some of those? Which negotiations are closer at hand and which are a little further out?

Yeah. I wish I would -- I could report that we were in great shape on the 757, as far as customer demand. Right now, the cargo market continues to be very soft. There seems to be more available aircraft than the cargo operators need at this point, and that applies to the 757. We do have seven airplanes that are uncommitted at this point. We are talking to airlines for both the lease and potential sale, including customers that we've already sold aircraft too. But nothing is, we have no contracts at this point on those airplanes. And that's another very difficult thing to project for the balance of this year because I don't have any real strong understanding of where the freight market will be, as the balance of this year unfolds. So at this point, seven airplanes either have been converted or finishing conversion. We're looking for homes for them in a tough market. The market will recover and those airplanes will be viable again for leasing and sale. And we're going to have to wait it out.

Thank you. The next question comes from Ken Herbert of RBC Capital Markets. Please go ahead.

Hey, good afternoon, Nick and Martin.

Good afternoon, Ken.

Hi, Ken.

Hey, I just maybe wanted to start. You've got -- Martin, to your point, you've got almost $330 million sort of in inventory or assets you can monetize on the balance sheet. It sounds like you've got agreements for an incremental $83 million to purchase. And you've already sold maybe $30 million or so this quarter, in the first quarter - data if I got that right. I know it's hard to predict and there is obviously a lot of customer issues, but really two questions. One, can you give any more granularity, aside from maybe the 757s, on what sort of broad buckets or what type of assets you hold? Because are these maybe engines where there just isn't much near-term demand or airframe? And how much could that 330, you know, how much lower could the inventory balance be exiting '24 if everything goes according to plan, considering you're obviously still committing capital to feedstock.

So the majority of the inventory that we have on hand is engine-related and we have engines that are in demand. We have CFM56, CF6-80s, RB211. So I think that's really going to put us in a position to not only support USM sales, but opportunities in the leasing market to do the customized type of leases that we do short term in nature, getting a much higher return than the typical sub-1% monthly lease rate factors, that a pure play leasing company would be able to obtain. You know, a smaller portion of that inventory is airframe material, again supporting the 737 and 757 overall platforms. And again, that material is in high demand to continue to service those overall fleets. So we feel good about those opportunities. Ken, as I mentioned earlier, the real challenge is here -- what avenue do we take to monetize these? We're seeing a pretty good leasing market, and when we look at that from a long-term perspective, those returns are attractive, obviously with the availability or with limited kind of assets being available for sale. These assets are also demanding a premium from a trade perspective. So again, we're always looking at what is the best long-term kind of view and objective. And that's really what's driving us kind of pulling that overall guidance because we want to be opportunistic, we want to be able to maximize that and not be kind of triggered to meeting a specific quarterly or year-to-date number.

Okay. Thanks, Martin. I mean, I can appreciate the desire to sort of maximize the return, but just considering sort of the EBITDA in '23 and a question we get a lot. I mean, maybe -- at what point would you maybe have just -- maybe a bit of greater sense of urgency around some of this monetization of these assets to just make room for more inventory, maybe just accelerate the push-off the balance sheet a bit?

Yeah. I would say --

Let me answer that. So, we sell what we have more or less 757s aside. We sell what we have available when it's ready for sale. So the demand is there. It's very strong demand in the marketplace for USM, for engines. The issue is getting it through the system and getting it available for sale and dealing with all of the dynamics in the market today about long lead times for any type of work, whether it'd be repairing an engine, repairing a piece part, overhauling an aircraft. So the -- there is a sense of urgency, I can assure you, Ken. I'm getting this -- getting whatever we have made ready for sale. And the issue isn't that we're not prioritizing the make ready nature of whatever it takes to get these assets available for sale. We are prioritizing it. Some of the decisions we make, however, could be longer, such as taking engine parts that we pulled out of an engine or aircraft that we bought and deciding that, yeah, we could turn this, and by the way this is a struggle that we have every day. And we could sell it as USM to somebody else that's overhauling an engine. And would love to get their hands on the coveted life-limited parts that we have, that we were able to pull from an engine we bought for part out, and some of the other parts out there to get a low-cost engine that they would then build and supply their customer. So we'll pull those. And now we lose a short-term sale, and that goes into work, and it goes into an engine. And then we run that through the whole process of getting the engine overhauled. And instead of having an immediate sale from a part that we had ready, now it's in the repair process of getting an engine done, and then we're done with that. Then we're fighting with, well, do we sell it? Because the market is really red hot on this engine type today, and we can get a premium over what we think we could get in the short run, or do we go the long route, which is to put the engine on lease. So it's not that there's not a sense of urgency. It's that the quickest return is not always the best return. And we have a long-term view of building up this company's profitability and not taking -- and not doing things in the short term that will impact the business over the long run. Now, I know that that's not what investors want to hear, because everybody wants to see short-term returns, as do we. But we consistently look to do what's best for the business, and we don't focus on just the short term.

Yeah. No, Nick, I appreciate that. And I guess, it's your -- as a public company, you're obviously having to walk a very fine line between sort of managing near, mid, and long-term expectations. So definitely, appreciate that. I guess as I think about, again the carrying value or the inventory on the balance sheet as you -- as this becomes available, and as you look to monetize it. Back to one of the earlier questions, is there any reason to think that this value wouldn't support the kind of gross margins we saw in '21 and '22?

Well, some of the margins we saw in '21 and '22 related to our 757 program, which really -- which had a pretty exceptional margin. So I wouldn't expect you're going to see the same 40% plus margins that we were seeing on some of the -- Martin, correct me if I'm wrong, as to what the margins were, but --

That's right. They average around 40%.

Yeah. Pretty exceptional margin on our 757 transactions. That was -- we were able to take advantage of a very unique time in the market, and we had the assets available. So I don't think at that level. But consistently, margins that we have seen over the history of the company, and we target a 25% margin, also coincidentally targets 25% IRR. Those continue to be our minimum target thresholds, and we've been successful over time in reaching those.

Perfect. Thanks.

We can't continue that.

Okay, perfect. Thanks, guys. I'll pass it back there.

Okay. You're welcome.

Thank you. Our final question comes from Sam Struhsaker of Truist Securities. Please go ahead.

Hey, good evening, guys. On for Mike Ciarmoli, this evening. Thanks for taking the question. I guess thinking about all of the inventory that you guys have on hand. I'm just kind of curious, I guess, first of all, how much of that you mentioned, a lot of the issues that you guys have been facing in terms of getting those things fully through and sold to customers. So I guess, first of all, how much of that inventory would you say is just ready to go right now versus might still have some things you need to overcome? And then in addition to that, are the kind of issues you guys have discussed so far really the only thing, or is there anything else going on that might kind of lead to delays in getting it out the door?

Martin, do you have the numbers on what's available?

Yeah. Overall.

What's already available today?

Yeah. Overall available that we have that potentially will go into leasing, USM or whole assets would be about -- almost about over $200 million of that overall inventory. Again, the notion will be whether it goes into the leasing portfolio, or it goes into trading or ultimately it goes into the USM bucket overall. But that's what's already available, the rest of the material is obviously in inventory being processed. And as Ken noted earlier, we have an additional $80 million of inventory that's been awarded that is going to close in the first half of the year.

Okay, that's very helpful. And then on the engine inventory, do you guys have any metrics on, I guess, how much of that is parts versus full engines?

That's part of the -- again the challenge of kind of doing the overall forecasting, these old asset opportunities. And Nick gave a perfect example. We can get an engine that we can sell some of these fast-moving parts, and the market would love and take them out of our hands extremely quickly. But the right decision there is to really get the engine and rebuild it. But again, as we've noted kind of earlier, we're truly agnostic on how we monetize that overall asset. It's just looking for the highest return.

Understood. Yeah, that's helpful. And then one more would be, I think you guys mentioned, you were seeing some potentially longer-term contracts, more stability. Was that really just the landing gear and the accessory contracts that you guys alluded to, or is there some more there that you guys are looking at?

Yeah, that comment was specifically related to our component MROs. We've had some pretty significant wins in '23, both with airlines and one particular OEM, on giving us pretty much a line of sight on specific overall business. So that is going to improve our volume that we're running through those units. It's also going to allow us to use the greater capacity that we have available in those units. And we've noted earlier, we've actually been making investments to increase capacity at a lot of our businesses. So all of those investments are starting to bear fruit. These contracts are going to start using that capacity and that capability. That's also going to improve efficiencies in us operating those units. So we're going to have a good strong start in 2024. As these contracts start maturing, that'll also give us greater visibility into kind of recurring revenue patterns. But as we did note, those were wins in 2023, so we'll start seeing exactly how those contracts perform in '24.

Great. That's very helpful. Thank you, guys.

You're welcome.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over to Nick Finazzo for closing remarks.

Okay. Well, thank you again for listening to our call today and for your interest in AerSale. We look forward to updating you again next quarter. Good evening.

Thank you. Ladies and gentlemen, that concludes today's event. Thanks for attending and you may now disconnect your lines.