Good day, everyone, and welcome to today's AerSale Inc. Third Quarter 2024 Earnings Conference. [Operator Instructions] Today's call is being recorded. It is now my pleasure to turn the conference over to Ms. Christine Padron, Vice President of Compliance.

Good afternoon. I'd like to welcome everyone to AerSale's Third 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 our 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 to 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, Christine. 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 closer look at the numbers. Underlying business trends continue to improve in our core business, and we remain focused on the factors we can control. This included the following drivers and key takeaways from the quarter. We expanded our lease pool, which drove a meaningful uptick in our leasing revenue, which will recur through the balance of the lease terms. This is consistent with the strategic priorities we discussed last quarter. Second, as a result of increased feedstock availability, our USM business performed well, and we have sufficient stock remaining throughout the next 12 months as we navigate a challenging used aircraft backdrop. Third, our MRO business continued to improve in the quarter and was the primary driver of an 18% growth year-over-year in the segment. And lastly, we remain on track with our MRO expansion projects, which will drive increased revenue incrementally each quarter in 2025 and improve margins as the investment period concludes. Turning to our consolidated results. Third quarter revenue of $82.7 million trailed the prior year of $92.5 million as a result of lower flight equipment sales in the quarter, primarily related to the sale of a 757 freighter that occurred in 2023. Excluding flight equipment sales that tend to be volatile, the underlying trends were positive year-over-year across our business and revenue increased 26%. Improved underlying performance resulted from stronger USM sales as volume from feedstock acquisitions worked its way through the system, additional assets in our lease pool compared to the prior year and continued strength in demand for MRO services. Flight equipment sales in…

Thanks, Nick. Our third quarter revenue was $82.7 million, which included $22.6 million in flight equipment sales, consisting of five engines and no aircraft. Revenue in the third quarter of 2023 was $92.5 million and included $44.8 million of flight equipment sales, consisting of seven engines and a P2F converted Boeing 757 aircraft. As we have pointed out during all of our 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 our progress. Third quarter gross margin was 28.6% compared to 25.4% in the third quarter of 2023, primarily driven by sales mix that included higher-margin engine leasing and flight equipment sales. Selling, general and administrative expenses were $21.7 million in the third quarter of 2024, which included $1.2 million of noncash equity-based compensation expenses. Selling, general and administrative expenses were $25.4 million in the third quarter of 2023 and included $3.2 million of noncash equity-based compensation expenses. The decrease in selling, general and administrative expenses were primarily driven by lower payroll, research and development costs and repair and maintenance expenses during the quarter. Third quarter income from operations was $2 million compared to a loss from operations of $1.9 million in the third quarter of 2023. Net income was $0.5 million in the third quarter compared to a net loss of $0.1 million in the third quarter of 2023. Adjusted for noncash equity-based compensation, mark-to-market adjustment to the private warrant liability, facility relocation costs, inventory reserves and secondary issuance costs, adjusted net income was $1.8 million in the third quarter of 2024. Adjusted for the same items, the third quarter of 2023 had an adjusted net income of $0.9 million. Third quarter diluted earnings per share…

[Operator Instructions] And we'll take our first question from Gautam Khanna from TD Cowen. Please go ahead.

Hi. Thanks for taking the call. My first question is on AerAware and sort of how close are you, do you think, with maybe getting a customer to onboard? And what is sort of the pushback or what is the hesitancy you've seen over the last year to get them over the line?

Okay. So Gautam, I've been asked that question multiple times in given my opinion of when I thought things would happen. And based on prior experience, I think it's not prudent to give another opinion on when this will happen. I can tell you this much. We have been diligently working with multiple customers to help them figure out what it will take to get this system over the line for them. It's not simple. It'd be simpler for a small carrier but for bigger carriers, it's much more complex and requires much more planning. So there hasn't been pushback yet other than the complexity of dealing with, in the case of a large carrier of what it takes to get the system implemented. And just to give you just a little heads up of what are those complexities, it's pilot training, simulators, updating training manuals, the logistics of when you can get aircraft to be available to have the system installed in it. It's future planning. It needs to be included in the budgetary process besides the economic analysis that comes with looking at it from the perspective of does it save flights for travel into inclement weathers, what's the economic benefit of that? And how do you put a cost on the safety benefit of it. So, all of those things go into an airline's decision on whether to take this. And in the cases of almost across the board, that is taking time. One of the things that I think well, clearly, I didn't get right was and fully understand was the long commercialization phase of this. Since we've gotten this product certified and we've talked to a number of airlines, the only pushback has been, guys, this doesn't happen overnight. This is going to take us time to figure out how to implement this system. And we're working through that. I think in the prior earnings call, I said that we expect the commercialization phase from start to finish with the carrier from the day we first talked to them about it would be 18 months. We've actually been talking to our kind of the airline that we started with for more than 18 months by now. And I think we're in advanced phase with them, saying that they're committed to take it, saying that they continue to be interested in taking it. And so, we're working there. So, the only pushback we've received from people is they don't have the money for it. So, they don't have the money for it. It doesn't matter whether they could use the system or not or they're operating in an area that they don't have a need for it. They don't appreciate the safety aspect of it, and they don't fly into areas that have weather.

That’s helpful. And then on the feedstock bids, a couple of quarters now, you guys have been pretty disciplined and not prevailing and at a high percentage. But maybe could you talk about who are you seeing pursuing a lot of these bids? Is it the engine OEMs? Is it private equity? Or what is the competitive marketplace comprised of in the USM pursuits? Who are you going up against?

Yes. It's a good question because I ask it every day, how are we losing these deals and to who. So, it's a combination of everybody. Typically, we would acquire flight equipment from airlines that are retiring flight equipment and from leasing companies that have taken back flight equipment off lease, and they don't have a home for these assets. In today's environment, with the A320 engine problems and the 737 MAX delivery problems, airlines are holding that midlife flight equipment, that's our bread and butter, the midlife flight equipment. They're holding that flight equipment. And airlines that would otherwise might turn an airplane back to the lessor are buying the aircraft directly from the lessor and they never get to us. Lessors have gotten very smart, and they realize that the best way to sell an airplane is with a couple of years of lease revenue attached to it. And we've not been successful in winning deals where you're just buying paper because the residual values that somebody can put on an asset, assuming two to three years could be dramatically different than what we view the residual value would be. So, we have to be disciplined because we know what the stuff is going to be worth in the near future. And we're going up against companies that may not know that as well as we do or are more aggressive than we are, and we're going to continue to stay disciplined. Then we have other leasing companies buying equipment if it comes off lease and is a ready-to-lease asset, which are very few, by the way, from the leasing companies that are parting with them. Then we have a whole host of new money that's come into the space, whether it be from private equity, hedge funds…

Well, that's very helpful context. Thank you, guys.

You're welcome.

And next, we're going to go to Ken Herbert with RBC Capital Markets. Please go ahead.

Hi, good afternoon, Nick and Martin. You typically enjoy sequentially a nice step-up in terms of revenues and EBITDA from the third to the fourth quarter. You've typically had seasonal benefit there. I'm wondering if you could just help us at all sort of how the fourth quarter looks now as it's shaping up? And at least maybe, Nick, any guidepost you can provide as we think about that typical seasonal benefit you get or how we should be thinking about the fourth quarter, just maybe in terms of the EBITDA run rate or anything else you're comfortable to comment on?

I don't think there's any seasonality associated with where the quarter is going to end up. I know it may feel like that looking at the fourth quarter over a several year period. But if you look all the way back in the history of the company, it doesn't really feel like the fourth quarter is better or worse than any other quarter. It really just depends on what have we purchased with respect to feedstock in the year to 1.5 years that preceded the fourth quarter. Generally, we do see an improvement in purchasing in the first quarter, and you'll start realizing the benefit of that by the time you get into the third and fourth quarter. That may play some part of it. But right now, the market is in flux so much that we're just not seeing any consistency to any historical patterns. So, I don't really feel like I can give you good guidance on that to say, is the fourth quarter going to look like the fourth quarter of last year where I assume we had an uptick in the fourth quarter?

Yes. I mean, Ken, as a reminder, fourth quarter of last year had the sale of 2757 P2F that were in that overall quarter. So, I think when you've seen an increase in the fourth quarter, it's been related to the timing of flight equipment sales. Having said that, we do have good line of sight on some engine whole asset sales that will occur in the fourth quarter, but that seasonality has really been just the timing of that equipment.

Okay, thanks Martin, that's helpful. Well, just to add that not to say we don't expect improvement in the fourth quarter. We're just pointing out that there's no seasonality to that.

Got it. Helpful. And Nick, you called out with the MRO investments you're making, you expect to get to sort of sounded like an incremental $50 million run rate through the three or the few programs you identified, two in Miami and the Millington facility. Maybe today - you could just maybe, where is the MRO business today as we think about sort of the revenue run rate? What should be a good sort of normalized EBITDA margin or EBITDA number on that base business as we then start to layer in the incremental revenue opportunity from the programs?

Martin, you want to answer that?

Yes. So right now, as you noted, Ken, we anticipate an increase of about $50 million in run rate when the three expansion projects come online. We mentioned Millington. Millington went online during the actual end of the second quarter overall, and that's starting to kind of pick up momentum. Unfortunately, not enough volume to cover overall cost. It was actually a negative contributor for the quarter, but we expect that to get back into profitability as we get additional customer base. The two other projects are going to come online pretty much by the end of the year, so really start generating a revenue profile in the first quarter of next year. And that $50 million will be kind of incremental through 2025 and into 2026. And we believe based on kind of the margin profile of those units, those will contribute about 20% to 30% margins depending on what kind of work we'll be doing at those facilities.

Okay. Very helpful. And the sort of the run rate today of the base MRO business, is it possible to give any commentary on that and sort of what kind of growth you've seen in that business across this year?

I think right now, we're probably running around an $8 million to $10 million EBITDA contribution in those overall units, and we expect that to, again, not only improve because of the new additions, but we also have additional capacity that's existing, both on our on-airport MROs as well as our component and accessories shop. So as we continue to kind of fill those units, we also take advantage of the new contracts that we won in both our accessories and landing gear shops and have those that additional volume flow through, that will improve our margin profile with better absorption of fixed costs and labor utilization. So we expect that number to significantly increase through 2025.

Perfect. Thanks, Martin. I appreciate the detail.

Thank you.

And next, we're going to go to Sam Struhsaker with Truist Securities. Please go ahead.

Good evening, guys. Thanks for taking the questions. I am on for Michael Ciarmoli. I guess building on the MRO line of question and those new kind of build-outs. You guys mentioned that Millington was a little low on volume to start. How are you guys thinking, do you have, I guess, contracted business that you're expecting to kind of dive right into once the other projects come online? Or how are you sort of thinking about the timeline with new work in those facilities once they are operational?

The Millington is operational.

The incremental ones, sorry.

Well, we are actively soliciting customers to do for their on-airport MRO work, and we expect that we'll start filling that facility up until we get to the point where it's only two base. So it's not that we've got a lot to fill up. But it is a new location. We do have an existing customer in there. It's a regional customer. We have had a large airline in there that has 737s. We were doing some landing gear work for them. This is our typical customer base. It's just getting them familiar with that location. It's a good one because it's kind of mid-country and rather than one out west like our Roswell or Goodyear facilities are. So just introducing the customers to that facility, we've spent a lot of money on that facility. Candidly, it shows better than any of our other on-airport MROs. It looks about as good as you would expect an MRO to look, an on-airport MRO. So just introducing customers to the facility and ramping up just like we have at the other facilities is coming naturally over time, but we just started, and we did have ramp-up expenses because we're paying, we're having to bring in, mechanics train them, bring the tooling in, getting them experienced and you have to do that before you have any revenue. So that's the reason for the upfront ramp-up loss. With regard to our component MROs, the good thing about our aero-structure shop is we already have the opportunity for more business than we can get out of our current facility. One, we're space constrained. The current facility we have is about 30,000 square feet. The one that we've been paying for over a year is 90,000 square feet. It's a little less, but approximately 90,000…

Got it. Understood. That's very helpful color. I appreciate it, and it makes good sense in terms of the demand trends there. If I could just sneak in one other. You guys mentioned that it sounds like the USM feedstock availability and supply is trending a little bit better. Could you just give any kind of detail on exactly what within USM you guys are seeing more supply of, and kind of puts and takes there?

I'm not sure you either stated that correctly or didn't understand it correctly. USM availability today because of the win rate of what we're bidding on because we're in a very competitive market with a very limited amount of feedstock is not as great as it was at this time last year. It doesn't mean that we won't end the year. I mean there's only a little less than two months left in the year. It doesn't mean we can't end the year on a very positive note, but hitting $150 million purchase of feedstock by year-end is probably unlikely. Last year, we did over $130 million something?

Yes, over $130 million.

We did over a $130 million and we're at $40-something million already. So, we have lesser feedstock available at this time. In all likelihood, we'll have a lesser amount of feedstock that we'll have closed on by the time we get to year-end. So with the lesser feedstock, obviously that going to, at some point in time, that has to work its way through the system and becomes feedstock that we'll sell next year. So we've got a lot of work to do to make that up in a competitive market. And we've got to stay disciplined because if we pay too much, we're not going to make any money selling it and we're going to lose money selling going to take write-offs. So for us, it's just a balancing act between how aggressive are we going to be in buying feedstock. Are we going to chase the market? The answer is no. How aggressive are we going to be, no more aggressive than we've been historically. Because one of the things that we've learned over a long period of time is that if you could become too aggressive on things, if you pay more than you think you should pay, the likelihood is you're going to own that stuff, you're going to get stuck with it and you're going to take a loss. And that's what puts a lot of companies out of the business. So I'd rather make lesser margin today, be a little more conservative and live to fight tomorrow because overpaying today is just the death of the company tomorrow, and we're not doing that. So the discipline, in my opinion, is not an option, it's required, and we'll continue to stay disciplined, which affects the amount of acquisition. But it doesn't matter buying feedstock isn't…

And just to add, as Nick noted, as we wait for the market to recover, we are in a very good inventory position, having deployed over $130 million last year of material that required work and was serviceable. And that's why it's taken some investments to get that inventory marketable, and we're starting to see the benefits of that through the P&L. So again, following that very, very strategic and very disciplined approach we were able to deploy last year. So we definitely have a good line of sight, at least for the next 12 months and able to support our USM business.

Thank you. And I'd like to turn it back over to Nick Finazzo for any closing or additional remarks.

Thank you. Many thanks, everyone, for listening to our call today. We have a lot to look forward to in the year ahead. Our heavy investment in inventory and infrastructure is beginning to yield results, and we believe that will accelerate over time. Our business is strong, and we have ample liquidity to continue our growth trajectory. Have a good evening, everyone.

Thank you. And that does conclude today's conference. We thank you for your participation. You may now disconnect.