Good day and welcome to the Aerosol Second Quarter 2024 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 Kristen Gallagher, HR Director. Please go ahead.

Good afternoon. I'd like to welcome everyone to Aerosol's Second 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 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 on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission 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 metric can be 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. I'd like to begin today with a summary of the quarter and a review of our strategic objectives before turning the call over to Martin for a review of the numbers in greater detail. Our business continued to outperform prior year levels driven by stronger feedstock acquisitions in the back half of 2023. This improvement notwithstanding, our overall operating performance is well short of our plan as we have much greater capacity to output sellable inventory than we are inputting through the acquisition of feedstocks. In total, we reported second quarter revenue of $77.1 million, which was up 11.2% year-over-year from $69.3 million. This included $17.9 million of whole asset sales in 2024 compared to $17.6 million in the prior year. Excluding whole assets entirely, our revenue improved 14.3% driven by a steady inflow of sellable material post-repair, increased volume at our MRO facilities, and incremental sales of AerSale. Adjusted EBITDA also improved to a $3.2 million gain compared to a $0.5 million loss in 2023. 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 feedstock levels and the value our team is able to extract from these investments. Before turning to our segment-level discussion, I'd like to take a moment to zoom out and assess where we are in our traditional core business, putting aside prospects from our revolutionary enhanced flight vision system, AerAware. I'll also provide some color on what we're doing to address challenges and how we intend to maximize current opportunities that are…

Thanks, Nick. Second quarter revenue was $77.1 million, which included $17.9 million of flight equipment sales comprising of five engines. Our revenue in the second quarter of 2023 was $69.3 million and included $17.6 million of flight equipment sales consisting of four engines and two unserviceable airframes. Excluding flight equipment, the company continues to demonstrate underlying growth as our base revenue increased to $59.2 million from $51.8 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 purchase and sales over the long-term is more appropriate. Second quarter gross margin was 28.2% compared to 29.1% in the second quarter of 2023. As a result, the sales mix and reduced margins at the company's component MRO facilities as the units gained efficiencies on recently awarded contracts. Selling general administrative expenses were $23.6 million in the second quarter of 2024, which included $1.1 million of stock-based compensation expenses. Selling, general administrative expenses were $27.1 million in the second quarter of 2023 and included $3 million of stock-based compensation expenses. Second quarter 2024 loss from operations was $1.9 million, while loss from operations was $7 million in the second quarter of 2023. GAAP net loss was $3.6 million in the first quarter compared to $2.7 million in the second quarter of 2023, with a decline cost from a lower mark-to-market benefit on the warrant liability and higher interest expense. Adjusted for non-cash equity-based compensation, mark-to-market adjustment to the private warrant liability, and facility relocation costs, second quarter adjusted net loss was $2.6 million, while adjusted net loss was $0.6 million in the second quarter of 2023. Second quarter diluted loss per share was $0.07 compared to $0.08 in the second quarter of 2023. Excluding…

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

Hey, good afternoon, and thank you for the questions.

Good afternoon, Bert.

Nick, maybe just to start out on the inventory side, can you just give us some more color there, just trying to understand? We've seen sort of continued sequential increases in inventory. It seems like a market where there's certainly demand for USM and demand for whole assets. Can you just talk about why that's going up and not down right now?

Some of it relates to completing the conversions on our 757s. So, I mean, you're looking at the total inventory, right? As we complete those conversions, costs of those conversions are being added to our inventory value. We are taking delivery of AerAware kits that are coming out of Universal, so that's adding some to our inventory as well. And we continue to be opportunistic in finding feedstock that we're acquiring for future sale as whole assets, leases, or breakdown to USM. The timing continues to take a while to turn that into sellable inventory. So it's a combination of those three things as to why the inventory is growing.

So maybe as we think about it, I know you guys are not giving formal guidance right now, but I feel like expectations have been a little all over the place as we think about sort of your revenue and EBITDA. But as you sit here almost, now I guess a month and change past halfway through with the year, like what are you seeing in the second half? I mean, is the second half shaping up better than the first half? Are you starting to see some of the challenges you had sort of unfurl? And what's sort of the, just I guess the broader viewpoint for the second half of the year?

I think as we look at the second half overall, we're seeing good prospects from ability to sell engines. In fact, we sold three engines in the first month alone at very good margins. So we're seeing opportunities there. As you noted on the inventory kind of pickup, a lot of that is also we're preparing inventory, including whole assets for either lease or overall sales. So that's contributing to that. We're starting to add assets into the leasing portfolio, which is also, again, one of our long-term strategies to start increasing that overall business. And then lastly, we're seeing improvements in our MRO side of our business. We've talked about some of the investments that we're making on the component MRO side and also that we've won some significant contracts at the end of the year. So we're starting to get that volume to flow through. We're improving our utilization of our labor, so improving our margin profile in that side of the business. So we're seeing a pickup on that side as well. And also, as Nick has noted in his remarks, some pickup on AerSafe sales as well. So all of the things are definitely in a forward projection and looking more favorable in the second half than in the first half.

Got it. Okay. Just one more, and I'll pass it back over. On AerAware, it seems like you guys have moved down this path in sort of marketing. It seems like the pilot testimonials are really positive, and obviously it's an interesting product. Can you give us just an update of -- I think it was STC was received in December, and so here we are in August. Where are we from an inning perspective, you think, in sort of landing that first customer? Is that something that you're thinking about as like a 2025 outcome? You said it's when, not if, so I'm just trying to understand sort of what your confidence level is now that you've been through several months of the marketing process for the product.

We're talking to both very large and very small customers. The easiest one to get equipment delivered would be a small one. A larger customer is going to take much longer to be able to start spooling a large customer too, reconfigure their airplanes, do simulators, get all their flight training done, etcetera. It doesn't mean we won't have an order. It just means that if it's a larger customer, it may be a while before they can actually start using the equipment. In the case of the customer that we've been dealing with for, I don't know, it seems like since the very beginning we started this whole certification process, they remain interested. We've got four different customers that will be flying our test aircraft starting this week, starting two this week, one next week, and I think one right after that. Two of those are large. Two of those are small. It's so hard for me to predict which one of those will be the first to place an order and when we'll be able to deliver product. However, we have product. We've built up an inventory, as I mentioned before. We've got 150 kits of our own in stock, and we're receiving kits that we ordered from Elbit Universal. Those kits are now being produced and delivered. And inventory to kind of make sure that we've got enough to fulfill any initial order that we get. When will we get that? I'm not going to commit to that because it could be as soon as in the next several months. It could take us six months or longer. And I hate giving you that kind of answer, but I just really have no way to know.

But maybe just a clarification there. You don't think this is a situation where it's like multiple years? You think it's still measured in months?

I don't think it's going to be multiple years, correct. I think the sale of this product will go out five to ten years, and I think this is a five to ten year delivery to the industry. It doesn't mean it's going to take five to ten years, but it will, from the day we start delivering, I think that's probably going to be at least five years to ten years of deliveries, if not longer, especially as the product evolves and is upgraded.

That's helpful. Thanks, Nick.

You're welcome.

[Operator Instructions] The next question comes from Ken Herbert, RBC Capital Markets. Please go ahead.

Hey, good afternoon, Nick and Martin.

Good afternoon.

I wanted to, Nick, first ask you about sort of you're making some investments in your MRO capability. It looks like that business today is on sort of an annual, call it 110-ish million sort of run rate. But what's capacity utilization at with your existing MRO footprint, sort of ahead of the expansions you're making in the new facilities?

I don't know that number off the top of my head, Martin?

I'll tell you right now that our utilization, we have a lot of capacity still available, even without the overall improvements that we've made. In our landing gear facility, again, as a reminder, that was pretty much a new facility, opened up about a year and a half ago. We've made inroads with new customers, bringing in new kind of contracted gears that will be coming in. So we're going to start filling up that business. We're already seeing other prospects that potentially we can even exceed, kind of, our current capacity at that unit. At our accessory shop, one of the investments that we did on adding pneumatics is that it will also bring customers that would take advantage of hydraulic and other types of activities that we do. So we've been successful there in being able to gear up, being able to get the overall qualified staff. And we absolutely have the ability not only to grow the existing facilities, but also based on the investments that we've made, have an additional revenue stream, which is the $50 million that Nick noted in his remarks.

Yes, I guess what I'm getting at is, I mean, as you fill the existing footprint and you layer in the new capacity, I mean, could the MRO footprint alone sort of exiting 25 be potentially a $200 million business? And if we're looking at those kind of numbers, maybe just rough ballpark of sort of normalized, what kind of EBITDA margins you think the MRO business should support?

I think absolutely. Our plan, and as Nick noted, part of our strategic plan has been to grow the overall MRO business and to more than double that. And we're in a very good position with the Millington Additions having a very good location in our Goodyear OnAirport MRO to be able to do that. As far as margin profiles, obviously that will vary depending on the actual customers that we bring in overall. So that's hard to kind of estimate at this moment. What I can say is we are right now in our P&L kind of absorbing a lot of these incremental costs to be able to bring in the business. So when it comes to facilities, we already have the expanded facilities. We're incurring those higher facility costs. When it even comes to personnel, we've had to make sure that we have qualified mechanics and technicians so that when we showcase the facilities, people can see that we have the talent and not only the equipment to be able to do the work. So what we're confident is as we start filling in those units, margin profiles will improve not only from a gross margin perspective but from an EBITDA perspective as well.

Okay. That's great. Thanks, Martin. Just one final question. As you look at the build of sort of inventory and all the acquisitions you're making in terms of whole assets and flight equipment, is there any risk that the carrying value of some of this inventory might not match the market value as you look to eventually sell some of it? I'm just trying to get at sort of potential balance sheet risk as you look at what you've built and as you market test sort of what you've acquired over the last few years.

No, we don't feel we have any risk. We look at our inventory cost-carrying basis all the time, whether it be fixed assets, assets held for lease or sale or USM inventory, and we don't feel we have any issue with the actual value of the equipment being less than our book value.

Yes, Ken, if I could add, we're very cautious when we allocate capital. We have a proprietary model. We look at a 25% IRR. In fact, that's why probably in the last couple of -- probably the last 18 months, we haven't bought as much feedstock as we would like, which is Nick's comment on we could process a whole lot more. But we always have exactly what you're talking about as a risk in our mind, which is what we always value the inventory, understanding how the market dynamics could change, and we're staying disciplined in that overall. I mean, just to give you an example, we bid in the current quarter almost $600 million of feedstock, and we had a win rate of around 6%. So that's lower than our historical, and we're okay with that because, again, we want to make sure that when we deploy capital, we are comfortable that we're going to recover the investment and make our expected returns.

Perfect. Thanks, Martin. Thanks, Nick.

You're welcome.

The next question comes from Pete Osterland from Truist Securities. Please go ahead.

Hey, good evening. I'm on for Mike Ciarmoli [ph]. Thanks for taking the question.

Hi, Pete.

So first, I wanted to ask on AerAware. I was just wondering how many kits you currently have in inventory and whether you're still building more inventory there. And just in general, how quickly can your supply chain ramp up delivery of kits if a major order comes in?

As I said before, we've built 150 kits. We are not producing any more kits right now because we feel realistically it probably would take a year to put 150 kits in an airplane or in airplanes to start. But we have the capacity because we have the infrastructure, we have the people to basically ramp production of kits back up using our existing facility at the rate of between 10 to 20 kits a month, depending on how many people we want to put on it. And as I've also said before, Pete, that we don't think we do it the most cost-effective and efficient way. We think that people who do some of the kit pieces that we work, that we've been working on, which are wire harnesses, complex wire harnesses, we think there are other companies that could do that maybe faster and more cost-effective than we can. We've not taken advantage of that because we wanted to understand completely what it would take to build a kit, doing it our way, which again, that may not be the most efficient way. So we know we were able to produce roughly 15 sets a month, and we know what our cost is, and we're very satisfied that our cost is in line or lower than our original expectations. And candidly, we'd like to think that if we had to double or triple that capacity, we could farm that out to third parties and that they would do it for a better price than our internal cost would be.

That's helpful. Thanks. And then I wanted to ask one on AerSafe as well. What does the competitive landscape look like there? Are there alternatives in the marketplace, or is AerSafe the only option in order for operators to comply with this FAA requirement?

So the option for AerSafe, it comes from the OEM, which is a nitrogen system that removes oxygen from the fuel tanks. Boeing and Airbus incorporate that in new aircraft deliveries, and we have one competitor that produces a kit that also puts foam in fuel tanks to comply with the various regulatory requirements. That's a company we've been in litigation with now forever, and litigation has not gone well for that company. But regardless, we've spent money defending it. And I don't think that company produces or sells as many kits as we do, but we do have competition.

Very helpful. Thank you.

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

Everyone, I hope this discussion today has given you a better understanding of what we've been doing to position the company for substantial growth. The things we do are not easy. They take time and money, and as we've suffered through this period of building, our investments will reap financial benefits in both the near and long-term. Our experienced management team is committed to the long-term growth and success of the company and will continue to work hard and smart to create value for our shareholders. Thank you for listening today, and thank you, Bert, Ken, and Pete, for your thoughtful questions. Good evening, everyone.

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