Good day, and welcome to the AerSale First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [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 first quarter 2024 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 law, 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 on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission, SEC, on March 8, 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 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 recap of the quarter and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. We're off to a good start in 2024, driven by stronger feedstock acquisitions in the back half of 2023. This facilitated whole asset sales and increased USM volume and was supported by continued strength in our TechOps segment as commercial MRO demand remains robust. This translated to first quarter revenue of $90.5 million, which was up $15.7 million from the first quarter of 2023 and also led to stronger profitability as adjusted EBITDA grew 80% year-over-year to $9 million. As we remind investors every quarter due to the nature of our business and the impact of whole asset sales, our revenue levels tend to be volatile quarter-to-quarter, and we believe our business is best assessed based on aggregate performance over a longer period of time with a focus on MRO activity, feedstock levels and our unique business model that enables us to extract significant value from our inventory. At the segment level and beginning with Asset Management, first quarter sales were $59.3 million, which increased 22.4% year-over-year. Stronger revenue in the first quarter of 2024 stemmed from higher flight equipment sales of $38.6 million compared to $27.7 million in the year ago period. Excluding whole asset sales in a period, segment level sales were relatively flat as lower leasing revenue offset gains in USM volume. In the quarter, we sold one aircraft and four engines compared to two aircraft and one engine in the year ago period. Commercial demand remains strong and is particularly elevated for USM. Airline traffic and capacity continued to operate above pre-pandemic levels, which is a strong…

Thanks, Nick. First quarter revenue was $90.5 million, which included $38.6 million of flight equipment sales comprising of one aircraft and four engines. Our revenue in the first quarter of 2023 was $78.3 million and included $27.7 million of flight equipment sales, consisting of two aircraft and one engine. Excluding flight equipment, the company continues to demonstrate underlying growth as our base revenue increased to $51.9 million from $50.6 million in the prior year. As we have pointed out in the past, flight equipment sales fluctuate significantly from quarter-to-quarter, and we believe monitoring our progress based on asset purchases and sales over the long term is more appropriate. First quarter gross margin was 31.8% compared to 31.2% in the first quarter of 2023, largely due to the sales mix in the first quarter, which included additional higher-margin flight equipment sales. Selling, general and administrative expenses were $24.1 million in the first quarter of 2024, which included $800,000 of noncash equity-based compensation expenses. Selling, general and administrative expenses were $25.2 million in the first quarter of 2023 and included $2.7 million of noncash equity-based compensation expenses. First quarter 2020 income from operations was $4.7 million, while loss from operations was $800,000 in the first quarter of 2023. Net income was $6.3 million in the first quarter compared to $5,000 in the first quarter of 2023. Adjusted for noncash equity-based compensation, mark-to-market adjustment to the private warrant liability and facility relocation costs, first quarter adjusted net income was $5.5 million, while adjusted net income was $3.3 million in the first quarter of 2023. First quarter diluted earnings per share was $0.12 compared to zero earnings in the first quarter of 2023. Excluding the adjustments mentioned, first quarter adjusted diluted earnings per share was $0.11 compared to $0.07 for the first quarter of 2023. Our adjusted EBITDA was $9 million in the first quarter of 2024 compared to $5 million in the prior year. The increase in adjusted EBITDA was primarily due to the increase in flight equipment sales. Cash used in operating activities was $21.5 million, primarily as a result of cash deployed to increase inventory availability. As we look to the balance of the year, we expect to see continued demand in our TechOps segment driven by a healthy commercial backdrop and several contract wins that will allow us to benefit from our available capacity. We also remain focused on monetizing the inventory we have on hand from a stronger feedstock environment in 2023. While the current supply side for feedstock remains challenged, we have a healthy pipeline of deals recently completed or in process to drive volume through 2024 and into early 2025. We continue to make progress on our go-to-market with AerAware and anticipate AerSafe will be supportive to our results as the year progresses. With that, operator, we are ready to take questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Gautam Khanna from TD Cowen. Please go ahead.

Hi, good afternoon, guys.

Good afternoon, Gautam.

I had a couple of questions. First off, I was wondering if you could comment on whether you see any used equipment monetizations in the second quarter? And what your visibility is for that in general for the remainder of the year? And if you could just update us on like the 757s in particular as part of the answer.

We have no pending sales or transactions involving the 757s for the second quarter. And as far as other equipment sales, I mean, we are selling other -- we are selling engines. I mean, that's typical for us.

Yes, Gautam. We're seeing a very supportive overall market. We are definitely already in negotiations for several engine sales that we've acquired overall in the overall portfolio. So we expect to see continued growth in whole asset opportunities in Q2. And again, we're also working on opportunities in Q3 and Q4. We're also starting to monetize inventory through the USM line. So we saw some modest increases in the USM sales in Q1, and we expect that to continue through Q2 and then start getting even better through the latter part of the year.

Okay. That’s helpful. And just curious on the AerAware product and the customer consideration of it. Is it -- like it worked with the hoped for a launch customer, while it was being developed, what do you think is sort of a hesitation on the side of customers pulling the trigger? And maybe do you think it's a function of price? Is it a function of ability to train, like what is sort of the sticking point?

Well, I would characterized it -- yes, I don't think we had a sticking point. I just think it's a process. It's very complicated. It involves multiple facets of the airline from pilot training, FAA, finance, operations, planning, engineering. And if you look across the industry today, the things that are going on are very distracting to pretty much everybody we're talking to, it's certainly all the domestic airlines that we're talking to, which, on the one hand, is a little frustrating. But on the other, I think that the safety aspect of our system could be a catalyst to get a number of these domestic airlines that are focused on things that they can do to improve safety, to accelerate the process of getting -- of organizing all their people together at the same time to take advantage of a system that will actually enhance their safety and potentially avoid some of the issues that airlines are having today.

Have your pricing expectations for the product changed just given what you've learned over the last several months? Or do you still think it's going to confer the level of unit price and gross margins you guys have spoken about in the past?

So we previously -- 2.5 years ago, we previously stated that our list price for our system was about -- a total of about $770,000. That included our portion, which was about $300,000 in Elbit, which is about 370. We -- our list price today is $1,495,000 I think. And obviously, that's for both Elbit's portion or Universal's portion and AerSale's portion. Now the -- obviously, we feel that if we get a launch order, that will -- and we get a multiple aircraft order, we can discount that price. So we we've got room there. As I've mentioned previously, our cost in the system is still in line with our original expectations. So we're optimistic that we can deliver this product at a price that the airlines will find attractive. And we don't think there's a competitive system out there that's, a, they're available today that does what our system does and when they become available, we believe they're going to be much higher priced than the system we have.

Okay. That’s helpful. I appreciate. I’ll get back in the queue. Thank you.

Thanks, Gautam.

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

Hi, good afternoon, Nick and Martin.

Good afternoon.

Hi, Nick. Maybe just wanted to first start on AerAware. You've indicated that you're waiting for some of the manuals and the training documentation to be published by the FAA, do you have any update on timing on that? Or can you give us any more expectations around sort of how that maybe could play out over the next few months?

Yes. Actually, that's very -- it's a very short end process. So we finished the demonstration, which included, again, ground school training for 10 pilots and the flight training, we were going to do -- that's 5=five sets of crews. I think we ended up doing four and then they were satisfied that we passed. And so the process is the FAA reviews that whole, our flight training manuals, the whole process, the ground school training, and they recommend basically, they -- it's called validation. They recommend validation of our system. And verbally, we've been told our system meets the requirements, and they're going to send it for publication. I don't know if it's been published yet, and I'm not exactly sure where it gets published, but it gets published. Then there's a comment period for anybody who wants to make a comment about the publication of the validation of our system and then it just automatically becomes validated. So I think that will likely occur within the next 30 days.

Great. And then do you see -- beyond that, do you see any other sort of significant roadblocks to a potential initial order? Or is there anything else that the airlines could be waiting for?

I don't think the airlines waited for that. That was something -- we always told them that we were going to work on. More -- larger airlines could have done that on their own. We just made it easier for them. Smaller airlines, it's more difficult. That's actually why we did it, spend the money to do it. So impediments to getting this system in across the board, everyone we're talking to is how are we going to implement it into our simulators and how long is that going to take? Okay, we've got your FAA validated flight training program subject to publication. The -- lots of questions across a number of airlines on the safety aspect of the system. And again, I think that, that's a little bit being -- there's a -- the catalyst here is, what's just going on in the industry and the heightened amount of attention the industry is getting from things candidly that happen every day and have been happening every day for a long time as they're just getting a heightened level of security due to a few events. So everybody is focused on that and that -- we've had customers -- potential customers, one of the three that I mentioned earlier and new customers actually came to us because they heard about the system, and they're interested in the safety aspect. So I don't think there's any impediments to moving forward other than the process of getting it installed in the system and they're getting it installed in their simulators and integrating it into their flight manuals, flight training manuals and figuring out when and how long it's going to take for the system to get up and running. Price has not been an issue in our discussions at this point.

Okay, great. Very helpful. And I guess that was just my final question. With what looks like almost basically a doubling in your list price, so to speak, at that higher price, does that -- how much of that drops down to your gross margins? And how much of that reflects just maybe higher costs than you envisioned when you first started to talk about this to bring the system to market?

Our customers would love to know that information. So I'm sorry I can't. I can't answer that.

All right, Nick. Appreciate that. All right, thanks. I’ll get back in the queue.

You’re welcome.

The next question comes from Bert Subin from Stifel. Please go ahead.

Hi, good afternoon. I appreciate the questions.

Hi, Bert.

Hi, Nick. Maybe just to start out, I guess, if we go back three months, you guys stopped providing guidance. It seems like you're sort of off to a good start here in 2024, and you're acquiring feedstock maybe the less than you'd like, but you're acquiring it. And it sounds like you're starting to get a handle on sort of monetizing a good portion of the inventory outside of the 757s. So with that in mind, I guess, would you agree that maybe relative to three months ago, your visibility is improving? And is there anything in terms of forward-thinking commentary you can provide about how to think about the rest of the year? I

I think our -- definitely our -- it's an overall improving. We feel strong on the inventory position that we have. We have $350 million of inventory. We have another $50 million of feedstock. So that's definitely giving us some support on kind of the forward projections. We still have the variability and timing of flight equipment sales and whole asset between whole assets, USM or leasing. So we're still trying to kind of have a better grasp on that kind of overall. We're also very optimistic on what we're seeing in the TechOps side of the business. We have a lot of capacity that we're starting to utilize at our component MROs, our aerostructures, landing gear facilities. We're getting new contracts that are starting to give us more of a backlog of work. And once that becomes more established, we'll have a greater visibility into that overall unit we have initiatives to increase our heavy MROs by adding additional labor and also kind of reconfiguring some of the facilities to have more assets flow through those facilities. So we feel really good on the overall dynamics. I think this year, we're starting to capture all of that and get that better visibility. So we expect to definitely have improvements. As far as providing guidance, we probably won't return to that until the business kind of grows. We see more establishment in some of these new aspects and frankly, whole assets becomes a smaller part of the overall business.

Got it. Oaky. On the -- I guess the other piece of that inventory that the freighter side [indiscernible] posted their earnings call yesterday and called out sort of the weakness in freighters as a result of what they are seeing in belly capacity. How does that make you think about those assets, is it still just sort of a wait and monetize those as cargo rebounds or have you started to think about other alternatives?

So once we made the investments in the airframes to convert them to freighter and basically take them, do heavy checks in landing gear etc that there really is no better options for those airframes at that point than to wait it out and put them in the freighter market. Now to mitigate the delay associated to when the freighter market returns and again 757 is a niche freighter, we are looking at placing the engines off those airplanes which is in very, very high demand; putting those engines on lease with different carriers. The risk that we face with that is we put the engines on lease and then for whatever reason we can't get them back in the time that we need then it would impair our ability to put the aircraft out. So we are doing a little bit of a balancing act because we have seven airplanes that will be available this year. We feel we can take that risk with some of the later deliveries until we see we get let's say we get three or four delivered than if we have aircraft engines on lease we should have sufficient time to pull them back to accommodate any future requirements.

If I could add, what we're seeing right now in kind of some of the increase that we're receiving, market information that we have, providing estimated values on the 757. We have a good book value position on those assets. And definitely, at this point, we can afford to wait for the highest use or the highest monetization strategy, which we deploy in those as passenger freighter assets into the cargo market either through lease or through sale.

Got it. Oaky. I've got one final and then just a clarification. But I guess, for my last question here, Nick, just as you think over time, you've been in this business a long time, and you've seen a lot of different cycles. And it seems like right now, the aftermarket cycle is really looking favorable and sort of a consensus expectation of extending out. As you think about that in the context of your USM business, that's maybe not performed as well, just broadly across the industry because it's tough to get feedstock and that feedstock gets priced at a higher rate. Where do you think we are in the USM cycle? Do you think that is countercyclical and gets better and aftermarket starts to weaken because of retirement. So like what do you expect out of that business over the next few years?

I think the USM availability will continue to be constrained because we're seeing so few aircraft today that things that -- like what do we want? A320, 737s. We're not seeing any 767s reaching the retirement age where they're being parted out. We have acquired some 747s for their engine value that's wide body, and that is primarily those engines will feed 767 freighters and passenger aircraft. But we're not seeing -- unless an airline is retiring a fleet of aircraft, like, as an example, we're buying -- we're buying four 747s now. We closed on the first one. We don't -- I don't expect to see any significant improvement in the availability of aircraft for -- that will eventually become USM parts unless, and I've said this multiple times over the last several quarters, unless the flight equipment is so run down that you need to do everything to it. Landing gear overhaul, IP overhaul, airframe overhaul, engine overhaul. And then what we're finding is we're buying an aircraft with multiple of those problems or just an airframe or just an engine that needs to be fixed. What we're doing with that is we're -- because we're buying in volume, all of these things and because of our ability to extract value in multiple ways, we cobbled together engines and airframe using the best engines and aircraft, using the best pieces from the inventory that we -- from the feedstock that we acquire. So that's our advantage, and that's why we're able to continue to buy in a very, very competitive market. Candidly, when we -- it's, by the way, and it's not that we're not bidding, we're bidding. But we're very careful on our bidding. I think we bid on -- I think we bid on over $500…

Thanks, Nick. Just a clarification on some of your earlier AerAware comments. Have you started the process for approval with international regulators and for the A320?

Not yet on the A320, but yes, on the international regulators in multiple jurisdictions.

Thank you.

You’re welcome.

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

Hi, good evening, guys. Nice quarter. Thanks for taking the question here. Nick, you just said I think you bid on $500 million in the first quarter. How is it looking quarter-to-date? I mean are you still as active?

Well, we're still -- yes, we are still active on looking at everything. And I would tell you that our hit rate is no better.

Okay. How is the documentation issue? I know that came up last quarter and even at the MRO Americas show, a lot of guys were saying, you don't even much buy the equipment, you really are paying for the accurate documentation. So what's sort of the update there?

It's the same. We continue to assess the records condition of pretty much everything we look at and in almost every case, the records that we see have deficiencies. And we have developed an AI tool that we've been working on for a year where we can take a record package now and what would normally take us a week to do in about four hours, we can take an engine, we can run it through our system. And the four hours, we could get a full summary of everything we need to know about that engine. And what does that do for us? That one, it allows the limited amount of resources that are available to review records to instead of assemble the records and figure out what the condition of the records are and what's missing. I take a week to do that, a computer could do it in four hours or AI does it in four hours, spits out the report, would otherwise take one of our people a week to do and that person can now focus on solving the problems that exist immediately rather than spending a week just to understand what the problems are. So that's a significant investment we made to facilitate the rapid review of records and to help solve some of these records issues. They exist. It's just -- they're always going to exist. And the key is how quickly can you get through them and can you get your people focused on fixing them.

And like we noted in the meeting, if anything, that's a competitive advantage that we have. So we have the expertise, we have the records team that can actually go through this material and make sense of it. Other competitors might just move away from it, but we can work with counterparties to clean up those records and come through it. And if we can't, we adjust the pricing fairly. So if we cannot do not have the records, we do not pay for those that material. And subsequently, we continue to work on it to see if we can fill in the gaps and sell that material. So if anything, that is a competitive advantage. And in this market where feedstock is more limited, having that ability is absolutely something that we are proud of, and we're making investments to continue to support.

Got it. That’s helpful. And then I don't know if this is Nick or Martin, and I don't know how much intel you want to give us here. But out of this inventory, the $350 million, significantly higher than it's been, and you've got $50 million of feedstock added to that. Can you give us any color in terms of how much is readily available for sale right now versus something like the 757s, can you even slice it in terms of do you have x amount of value or percentage in whole assets versus more sort of USM piece parts or components? And then I guess would just -- I mean, an update on how many AerAware kits you have and kind of how much of that is reflected in the inventory?

So overall, from a -- let me try to go through all the overall points. AerSafe kits, we have 150 kits overall, can't provide you an overall exact inventory value for that for competitive reasons, but there are 150 kits in that overall number. 757s, we've noted we have nine assets that are -- well, sorry, we have seven assets, one with fetch ready and another six that are in process, that those inventory costs are there. That's a mixture of the airframe value and the engine value. I can't give you those specific amount either for competitive reasons as we've given out the numbers. So giving you a dollar value would nearly [indiscernible] what our net book value is there. But I think we made the comment earlier. We feel confident in the position that we have in the book value based on what we're seeing in the market that we can monetize those assets going forward. As far as the breakdown of overall inventory, as a reminder, our whole assets are pretty much assets that are being evaluated to either be monetized through USM, full asset opportunities or leasing. But I can tell you about three quarters of that inventory value is engine material that's readily available. We have a variety of engines, CFM56, CF6-80, PWs, [indiscernible] engine materials not ready [indiscernible] 2,500 overall engines, flight equipment material, overall --

A lot of that is still --

-- of material. That is being processed. And as Nick is noting some of that is being processed through the USM channel. In engines, we're definitely seeing a slowdown in our ability to monetize that, which is a good sign. That means that there's a lot of demand for that material, which is why it's taking longer for us to get that through the system overall. But we also have bought with the amount of feedstock that we bought last year, inventory to replenish our inventory portfolio. So we already have opportunities of various engine types to add those into the leasing portfolio. We're starting to deploy those out. We've added a couple already in the current quarter. We have more that are available, and we're starting to see demand. We have about 10 additional engines that are in repair that will come into the leasing portfolio. So what I expect to see in the remainder of the year is you're going to see growth in our engine leasing portfolio as we start monetizing some of those assets. From a USM perspective, we're also going to be monetizing at a faster rate. We started seeing a pick up during March. We expect the second quarter to be comparable to Q1 and as you start seeing a stronger growth in the second half of the year.

Got it. That’s helpful. Last one for me. I know you don't want to disclose the margins on AerAware with the updated pricing. But I know you've been building these kits for quite some time. I mean, assuming we get an order, is it realistic to think that the drop-through is significantly better on these first 150 kits? I mean it seems like they're ready to go. You just have to have the labor for the install? Is that -- should we get maybe a disproportionate margin benefit when these first ones go out the door?

I think we'll get a better margin profile for the ones that are made after the first one because I think -- I don't think we did it. I'm very happy with our cost, by the way. But I think that there's -- it can be done more efficiently than we did it in-house. I'm not concerned about the margin -- the gross margin that we can make off the sale of the kits. As far as -- and again, we're not going to reveal drop-through at some point when we start -- you start seeing AerAware sales, we'll talk about how many AerAware cells did we make? And I guess, yes, I guess, we'll talk about -- we'll disclose gross dollars. But we -- and margins you are probably not going to see. I think you'll see the margin in our TechOps side, maybe you'll see the dollar margin. But just that's really tough to start disclosing that type of level as we're negotiating with the industry. Q - Michael Ciarmoli Understandable. All right, perfect. Thanks guys. Appreciate it.

And we have a follow-up question from Ken Herbert. Please go ahead.

Yes. Hi, Martin. I maybe just wanted to follow up on a comment you made earlier in the call. We're sort of five to six weeks here into the second quarter. I can appreciate you don't want to give any sort of full-year guidance, but it sounds like you were just commenting the second quarter EBITDA. It wasn't clear if that was for the company or a particular segment. But second quarter EBITDA looks very similar to first quarter EBITDA. Did I get that correctly with maybe a more pronounced step-up in the second half over the first half?

No, that comment was specifically to USM sales overall [indiscernible] activity improving, probably Q2 will be similar to Q1 activities. And then as more material flows through, specifically engine material, we'll see an acceleration of that through the remainder of the year.

Okay. But are you -- any sort of high-level views on EBITDA in the second quarter and sort of maybe expectations relative to first quarter? Or just anything you can help with as we think about sort of the setup here near term?

Yes, I think we won't provide any specific financial guidance overall. What we can say is we are seeing good opportunities in all sides of the business. We're starting to see AerSafe sales that Nick mentioned in his remarks. So we're starting to see that contribution flow through the P&L. We're seeing a pick-up in our component MROs that we've talked about with some of the new contract sales. So we're expecting improvements there. And then from the asset management side, we've already have done some deals related to engines, so we expect whole asset sales in the second quarter and USM, as I noted, being overall. And you will start seeing some increase in leasing, but that also will be a stronger acceleration starting in Q3.

Perfect. Thanks, Martin.

This concludes our question-and-answer session. I would like to turn the conference back over to Nick Finazzo, CEO. Please go ahead.

I want to thank Gautam, Ken, Bert and Michael, for the good questions because it really does help our investors better understand our business. So thank you, guys. For everyone else, we appreciate you listening to our call today and for your interest in AerSale. And I hope everyone has a good evening -- good night.

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