AerSale Corp Q4 FY2022 Earnings Call

Greetings. Welcome to the AerSale Corporation Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Jackie Carlon. You may begin.

Good afternoon. I'd like to welcome everyone to AerSale’s fourth quarter and full-year 2022 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 laws, including statements regarding our current expectations for the business, and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission, SEC, on March 7, 2023, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP 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 brief overview of the quarter and year and provide operational updates before turning the call over to Martin to review the numbers in greater detail. By nearly every measure 2022 was an excellent year for AerSale. We reported record company revenue and made significant progress in the FAA certification of our enhanced flight vision system AerAware and its subsequent commercialization. Strong operating results were driven by broad market success and strategic execution on our 757 passenger to freighter, which you'll hear me refer to as P2F conversion program, which was well timed with elevated demand for freighter aircraft. Our solid financial performance was only achievable due to our unique end-to-end solution, which enabled us to secure the necessary aircraft and perform the conversions in a timely manner to have these aircraft customer ready. The year was also supported by a strengthening commercial recovery, which kept our on-airport MRO facilities at capacity all year and drove demand for our used serviceable material, which you'll hear me refer to as USM part sales business. Taken together, these factors led to a year-over-year increase in full-year revenue of 20% to $408.5 million. GAAP earnings per diluted share was $0.83 with adjusted EBITDA of $87.4 million, compared to the prior year GAAP earnings per diluted share of $0.76 with adjusted EBITDA of $89.3 million. Higher margins in the prior year were almost entirely attributable to CARES Act proceeds of $14.8 million, which were not excluded from our adjusted EBITDA numbers. As such, our underlying business performed at a similar margin level relative to revenue when considering CARES Act funding. As we do every quarter, we believe it's important to remind investors that our financial results are typically uneven quarter-to-quarter and we advise investors to analyze our performance over a full-year based on the patterns of expected feedstock availability and whole asset sales. The pacing of our revenue in 2022 is no exception to this as the timing of flight equipment sales created a record first-half followed by a lower third quarter. In the fourth quarter, our results included significant flight equipment sales, but to a lesser degree than the prior year period. As a result, our fourth quarter revenue in 2022 was $95.1 million, including $51.4 million of whole asset sales, compared to $116.8 in the prior year period, which included $73.1 million of whole asset sales. Fourth quarter earnings per diluted share was $0.17 with adjusted EBITDA of $17.7 million, compared to the prior year period earnings per diluted share of $0.21 with adjusted EBITDA of $28.6 million. Turning to segment performance and beginning with our asset management segment. In the fourth quarter, sales were $67.9 million, compared to $93.6 million in the same period in the prior year as a result of lower whole asset sales during the period. A reduction in aircraft and engine leasing in the quarter also contributed to the decline partially offset by higher sales of USM material during the period. In the fourth quarter of 2022, we sold six engines and three aircraft, which included one 757 P2F converted aircraft. This compares to the prior year period in which we sold three aircraft and four engines, which included two 757 P2F converted aircraft. The decrease in revenues is due to the decrease in 757 P2F aircraft sales, which command a higher sales price. Looking to the year ahead, we expect another busy year for our 757 P2F conversion program. As Martin will detail in our guidance, we have subcontracted for an additional 12 conversions from multiple providers of which nine are expected to be completed in 2023 and three in 2024. Due to contractual delays by one of our conversion providers, the delivery of these aircraft will be more heavily skewed toward the second-half of the year. In our USM parts business, airframe and engine parts sales were both up, compared to the prior year period, mostly as a result of an improving commercial backdrop. As we look out beyond the next couple of quarters, we expect to continue on this growth trajectory as feedstock availability improves. Overall, in our leasing portfolio, revenue was down compared to the prior year period, mostly as a result of fewer aircraft on lease during the period. Lower aircraft leases were from aircraft that came off lease during the year that we were able to either resell or part out at more attractive economics, which again speaks to our ability to maximize asset return on investment regardless of the discrete sales channel conditions. These moves focused our leasing activity to short-term engine leasing where we're able to continue to achieve more attractive high margins. In our tech ops segment, sales increased by 20.8%, driven by greater on-airport MRO availability as we were able to free up capacity by subcontracting 757 P2F conversions to third-party providers. This allowed us to benefit from increased demand for on-airport MRO services. In addition, our landing gear and component MROs improved as a result of increased demand from passenger airlines. Turning to an update on AerAware, I'm pleased to report that we began FAA certification flight testing in February and so far, have successfully completed two of five stages of flight testing. The third and fourth set of flight tests are scheduled in March with a final set scheduled in April, subject to FAA staffing and weather. That notwithstanding, we're now in the red zone with the FAA on achieving our supplemental type certificate, which you'll hear me refer to as STC, which will allow us to begin commercialization of this STC product. Next, I'd like to touch on capital allocation and our plans in 2023 and beyond. We ended the year in an excellent financial position with more than $147 million in cash on our balance sheet and an undrawn $150 million revolving credit facility. We intend to deploy this capital to the highest risk-adjusted returns available to our shareholders, which in our case generally falls within two categories: Aircraft feedstock acquisitions and capability enhancements. 2022 was a challenging year regarding the availability of properly priced aircraft feedstock. This was not a result of an absence of deals as we bid on over $1 billion of flight equipment during the year. We won over $50 million of properly priced flight equipment in 2022, despite our disciplined approach to asset acquisition requiring a strong risk-adjusted ROI. However, when we announced our initial 2022 guidance, we had expected to win over $200 million in properly priced deals, which would have made a positive contribution to our second-half of 2022 financial results and would have carried into 2023. That notwithstanding, I am pleased to report a substantial improvement at the start of 2023 and through February, we have already been awarded $107 million more than double the feedstock deals we were able to close during all of 2022. This success has been across all the narrow and wide-body aircraft and engines we typically invest in. The improving backdrop of properly priced asset availability sets us up well into the second-half of ’23 and into 2024 and could represent a significant upside to our current financial outlook if we're able to maintain this level of buying throughout the balance of the year. As I noted earlier, our facilities are busy and near capacity across the AerSale system. We have an opportunity to expand our total capacity, footprints and capabilities through MRO facility expansion to drive further growth. This effort is already underway and while it is too early to detail all the specifics, I can share that we have added a third on-airport MRO facility in Millington, Tennessee to increase capacity on narrow body aircraft, which is expected to come fully online by the first quarter of 2024. This 100,000 square foot hangar in Millington is just 20 miles from our expanded USM distribution hub in Memphis. We're also adding pneumatic capabilities at our Miami-based accessories MRO, which we expect to be online in the second-half of 2023. We look forward to sharing the outcome of these additional efforts, as well as new opportunities in the coming quarters. In summary, I'm extremely pleased with our financial performance in 2022, despite the challenging market for feedstock acquisition. We delivered multiple company records throughout the year, executed strategically well on our 757 P2F conversion program and crossed meaningful milestones in obtaining our STC for AerAware. We hit the upper range of our adjusted EBITDA guidance, despite diminished feedstock acquisitions and no AerAware sales. As we look to the year ahead and as Martin will detail in our guidance, we expect 2023 to demonstrate another year of growth for AerSale, driven by continued progress on our 757 P2F conversion program and a supportive commercial aerospace recovery. In the second-half and into 2024, we're positioned to benefit from increased feedstock availability, the commercialization of AerAware and facility expansion opportunities. I would like to thank all of our employees for their dedication to AerSale and for their commitment to our stakeholders. We look forward to providing incremental updates throughout the year. With that, I'll turn the call over to Martin.

I will start with an overview of our fourth quarter financial performance and end with our guidance for 2023. Our fourth quarter revenue was $95.1 million, which included $51.4 million of flight equipment sales. Revenue in the fourth quarter of 2021 was $116.8 million and included $73.1 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $43.7 million in the fourth quarter of 2022 and 2021. In addition, as we mentioned on our last earnings call, the delivery of one 757 P2F converted aircraft, which was initially anticipated to close during the third quarter of 2022, was delivered at the beginning of the fourth quarter. As we have noted 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 27.4% to $67.9 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 as we determined market conditions would not support our historical return on investment for these assets. Fourth quarter USM parts sales were similar to levels seen in the fourth quarter of 2021. Technical operations or tech ops revenue was $27.2 million in the fourth quarter, which was an improvement of 17.2%, compared to the fourth quarter of 2021. Tech ops benefited from better performance from landing gear activities and Goodyear on-airport MRO services. Revenue growth from our Goodyear facility within tech ops was offset by lower revenue at our Roswell facility due to fewer customer aircraft in storage, as compared to prior periods. Fourth quarter of 2022 gross margin was 36%, compared to 37.8% in the fourth quarter of 2021, mainly on account of the sales mix, flight equipment sales, which generally have higher margins were lower in the fourth quarter of 2022. Fourth quarter selling, general and administrative expenses were $25.1 million with higher payroll expenses, including $4.5 million of non-cash equity-based compensation. Selling, general and administrative expenses were $24.4 million in the fourth quarter of 2021, of which $3.8 million were non-cash equity-based compensation expenses. Income from operations was $9.1 million in the fourth quarter, compared to $19.8 million in the fourth quarter of 2021. Income tax expense was $4.1 million in the fourth quarter versus $2.9 million in the fourth quarter of 2021. Fourth quarter net income was $9.2 million, compared to $11.2 million in the fourth quarter of 2021. Adjusted for non-cash equity-based compensation, inventory write down, mark-to-market adjustment to the private warrant liability, gain on an aircraft insurance claim and secondary offering and facility relocation costs, fourth quarter adjusted net income was $12.3 million versus $22.3 million in the fourth quarter of 2021. Fourth quarter diluted earnings per share was $0.17 and $0.21 dollars in the fourth quarter of 2021. Adjusted for non-cash equity-based compensation, inventory write downs mark-to-market adjustment to the private warrant liability, gain on an aircraft insurance claim and secondary offering and facility relocation costs, fourth quarter adjusted diluted earnings per share was $0.23 versus $0.41 for the fourth quarter of 2021. Fourth quarter adjusted EBITDA was $17.7 million and $28.6 million in the fourth quarter of 2021. Adjusted EBITDA and related margins were adversely impacted by lower flight equipment sales, which generally have higher margins. AerSale did not receive any payroll support program proceeds during the fourth quarter of 2021 or 2022. Cash used in operating activities was $0.1 million, primarily due to the application of $18 million in customer deposits associated with the sale of a 747-freighter aircraft that closed during the year, for which the sale proceeds are reflected under investment activities. In addition, we continue to invest in advanced vendor payments of $13.3 million, primarily associated with the 757 P2F conversion program. We also invested an additional 37.6 million to increase inventory available for sale. AerSale ended the year with $147.2 million of cash, as well as an undrawn $150 million credit facility. Finally, moving to our guidance for 2023 and summary. We expect to generate revenue of $460 million to $490 million and adjusted EBITDA of $70 million to $80 million in 2023. Revenue growth for the year is driven by improvements in USM, Engineered Solutions and Components MRO as the company benefits from an increasing demand for passenger air travel. Margin levels are expected to see some pressure in 2023, primarily as a result of 757 deliveries generating lower margins. Combined with higher SG&A costs related to an increase in payroll, which includes higher executive compensation amounts as a result of the CARES Act limitations expiring on April 1, 2023. In addition, the company is investing $2 million in research and development costs in order to continue to create innovative products that will impact future years. This guidance reflects AerSale’s expected whole asset sales during the year and anticipated volume in our ongoing operations. As noted earlier, due to delays in the 757 P2F conversion program and lower feedstock acquisitions in 2022, we expect revenue and adjusted EBITDA to be weaker in the first-half of the year and increasing during the second-half as the company benefits from increased feedstock and 757 P2F deliveries. Our guidance for 2023 does not include any potential sales of AerAware as the product is in its final stages of FAA approval. We will provide an update once the SEC is issued and we have initial orders. Further, we have not assumed the rate of feedstock acquisitions will continue as we have seen during the first two months of 2023. And if it does, it could represent upside to our 2023 guidance. In summary, aside from the variability in the timing of flight equipment sales, our business has continued to gain strong traction and the underlying momentum remains on a robust growth trajectory. With a strong balance sheet and liquidity, we are well-positioned to capitalize on increasing feedstock availability, as well as other internal and external opportunities in order to continue generating high returns for our stakeholders going forward. With that, operator, we are ready to take questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Bert Subin with Stifel. Please proceed with your question.

Hey, good afternoon and then thank you for the time.

Hey, good afternoon, Bert.

So, I just had maybe a question on 4Q to start. On your last earnings call, which was in November, you're anticipating sales just if I look at the guidance about $30 million higher at the midpoint for the quarter, you just sort of walked us through maybe what drove that discrepancy just because it seems pretty large and maybe how you are still able to outpace the midpoint of EBITDA guidance, despite those contemplated sales?

Yes, I'm a little confused when you say we had projected for the quarter to have another $30 million in sales, what specifically you're referring to?

So, you had $420 million to $450 million for your guidance, right?

Correct.

And came in below that. So, I'm just sort of wondering what drove that discrepancy, were you expecting higher flight equipment sales and things slipped into ‘23? Or was there something unexpected that happened?

Yes, I mean, I would say we were projecting, we were hopeful to have more whole asset sales happening in the overall fourth quarter. Fortunately for us, we were able to generate strong margins off the equipment we were able to sell, that's what we offset that overall revenue shortfall.

Okay. And maybe just on the AerAware side of things, based on sort of the commentary you have in the call and in the release, it sounds like, you know, if everything went as sort of as well as it could based on the scheduling right now. You could in theory have an STC granted in May. If that were to happen, if that schedule were to play out, I mean, do you think it's conceivable by July or sometime in that timeframe you could be earning sales again if that were to play out as in that sort of best-case scenario?

I believe it's possible, but it's difficult to predict. We do have kits available, but we cannot forecast when we will receive our first order. Until we get the STC approval and have an initial order, we won't speculate on potential sales. We haven't included any sales in our guidance, not because we don't believe it's feasible, but rather we find it somewhat irresponsible to project sales of AerAware before securing the STC or an initial order.

Yes, that makes sense. And just a final question, Nick, maybe this is more just like a high-level question on the industry. If we look at aviation aftermarket demand, it's been pretty robust and it looks like the strength is not really slowing. Could you give us maybe just some thoughts around what inning you think we are with regards to the cycle? Having seen a lot of these cycles play out? And sort of how you're thinking about positioning the company to capitalize on that demand? Sounds like USM is maybe easing a little bit, but still expected just to remain in a challenge. What's the best way for AerSale to capitalize on, sort of, the way the market is today?

I don't believe there's ever enough quality used serviceable material to meet the market's needs. This was particularly true during the peak of COVID when many aircraft were parked and there was nearly no demand for used serviceable material. However, as the narrow body market has significantly rebounded and we are on track for a similar recovery in the wide body sector, demand for used serviceable material is increasing. Currently, there simply isn't enough quality used serviceable material to meet the needs, as aircraft are flying and consuming it. Airlines have cannibalized engines from parked aircraft to keep others operational, leading to a depletion of many engines' usable life, creating a backlog in repair shops. This shortage of good used serviceable material affects both narrow and wide body markets, although wide body hasn't been impacted as severely due to stronger demand in the freighter segment. The demand for used serviceable material remains exceptionally strong, influenced by delays in new aircraft deliveries from Boeing and Airbus. This delay means older aircraft remain in service longer, resulting in fewer used aircraft entering our market to increase the availability of used serviceable material. On the positive side, the continued operation of these aircraft drives more demand for that same material. Consequently, I believe we are currently facing a shortage of good used serviceable material for both the A320 and 737 narrow body engine markets. In the first two months of this year, we achieved a very high level of used serviceable material acquisition, doubling what we managed last year during the same period. We're trying to understand what has led to this surge. One potential reason could be the rising cost of funds impacting investors in this sector, which may be discouraging some from participating. Additionally, a number of investors who have been overpaying since 2018 might have lost their funding sources and can no longer acquire assets. These factors could explain our significant success in the initial months of the year, alongside a notable increase in demand, which surprised us. If this trend continues, we may elevate our guidance for the rest of the year. Overall, if we can secure the right feedstock at competitive prices and effectively extract value from it, AerSale is well-positioned for substantial growth in feedstock this year and in the future, and we are looking forward to it.

Really good color. Thanks so much, Nick.

You're welcome.

Our next question comes from the line of Ken Herbert with RBC. Please proceed with your question.

Hi, Nick. Hi Martin. Good afternoon.

Good afternoon.

Hi, Ken.

Hey Nick, to start off, could you update us on the 12 757s? It seems there have been some delays with the PDUFA process. Does the guidance assume that nine of the 12 will be sold or added to your lease pool this year? Also, how should we view the completions on some of these conversions and where you currently stand in the process?

I believe we currently have three or four aircraft undergoing conversion. One of them commenced in December, although it was initially scheduled to start in October. The delay was due to our SEC provider not being able to secure contracts with one of their partners. We initially anticipated handling three conversions, but now we only have two. Together with the STC provider for the 757, we have booked all 12 slots. Some slots were taken as cargo kits, and we contracted another provider for the installations. AerSale will not be managing any of these conversions. This has postponed the second and third aircraft, which were supposed to go in October and December, by several months. I don't have the exact dates available at the moment.

It's supposed to be delivered in those periods.

Well, the October 1 would be delivered in the first quarter, so deliveries that we expected to happen in the first quarter, I don't even know if we may get one in the first quarter. As you previously asked and we mentioned, when we thought we would get all 12 in the year, we thought those would be fairly evenly spaced throughout the year. Now with the exception of maybe one in the first quarter, I don't even know if it's possible to get maybe two; the balance will come in the rest of the year and we've got a pretty full line at this point on a go forward basis. But that whole thing shifts back a couple of months, so think aircraft that we expected to have delivered in the last quarter, three of those will push into the early first quarter and will be available in the first quarter of ‘24.

Okay, that's helpful. Are you finding with the delays that the cost for the conversions has significantly changed? It sounds like you're doing more maybe of the kit purchasing relative to outsourcing that. How should we think about your costs associated with the conversions here on these next 12 aircraft, it sounds like there's been a number of changes in your strategy around that?

So, the actual cost of doing the conversions is actually better for us or by us buying the kits and having the vendor, our own vendor do the installation. It actually lowers our cost over having the SEC provider do the conversions for us. So, the actual shift where we had to buy kits and get them converted ourselves actually is a benefit to the conversion cost itself.

We are seeing increases in the 757 conversion program due to the overall cost of engines. We benefited from a robust spare engine inventory balance during the first two years. However, the engines we currently have require more work, which is raising the cost, and for some of these assets, we may need to enter the market to secure them. This has been factored into our guidance, which is why we are projecting a lower margin profile for this year compared to last year.

Okay. Thanks, Martin. Just finally, on the flight test associated with AerAware, you commented you've completed two of the five that are outlined. Can you provide any indications of how those first two, sort of, flight test packages went? Was there anything you learned that either positively or negatively that was significantly incremental to expectations and how have those gone?

They've gone well. When the FAA began testing the airplane, they were impressed and favorable towards it. This is consistent feedback I’ve shared before. The current FAA personnel are different from those who previously assessed the airplane. Overall, we performed as expected, and there were no negative outcomes. The only downside is that during the initial phases of flight tests, we've logged less than 10 hours of flight time. It’s disappointing for us and for our investors that this testing is taking longer than anticipated. In February, for instance, we only managed to fly for seven hours. The lengthy intervals between flight sets are concerning. However, with the FAA involved, there are several parties and areas of assessment. In our upcoming flight set, we will have various pilots on board, including commercial pilots, who will demonstrate how new pilots are trained on the system. Additionally, FAA pilots and human factors experts will be evaluating the performance of pilots who have not previously flown the airplane with this system. While the process is frustratingly extended, the level of scrutiny we’re facing from the FAA is unprecedented, but it reflects their commitment. We're not altering the aircraft’s basic characteristics; instead, we’re enhancing its vision capabilities. This thorough review might be a consequence of the increased scrutiny following the MAX issues. The positive aspect is that when we complete this system, it will have undergone rigorous FAA scrutiny, and the agency is fully supportive and cooperative. I have only positive remarks about the FAA’s approach to getting this certified. They recognize the advanced technology we offer, which is currently non-existent, and I believe they will be diligent in their work. Ultimately, we will have a robust, safe system that has the full backing of the FAA, and we will secure an STC.

This is the first primary flight control system being certified by the FAA since the 737 MAX at primary flight display. We are venturing into new territory with this novel technology, which has led to the FAA conducting more thorough screenings, which is appropriate.

Great. Thanks, Martin. Thanks, Nick.

Okay, welcome.

Our next question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question.

Hey, good evening, guys. Thanks for taking the questions. Nick maybe just to stay on AerAware. Can you tell us how many kits you've gotten in inventory? Are you still building up finished kits? And do you know what the launch customers' potential volume requirement will be once this does get certified? And maybe even presumably customers behind the launch customer?

I won't specify the exact number of kits we have, but I can say that I have instructed our team to produce at least 100 kits by the end of the year, and we are making good progress towards that goal; I believe we will surpass it. Regarding the launch customer, it is too early to discuss who that will be, but I can share that the potential customer has worked with us on multiple occasions during the over 200 hours we've flown our airplanes. They operate a fleet of more than 500 737NGs and MAXs, which would represent a significant opportunity. If we complete 100 this year, we aim for a minimum of 250 next year and another 250 the following year, along with 25 A320 kits. It would take several years to equip a 500-airplane fleet for one customer or one aircraft model.

Got it. Yes, on that customer, I realized the 500 plus 737s. But do you have an idea of what their initial take rate might be? You get the STC, are they going to take five right out of the gate? Do they take 10? I guess, I'm asking what kind of cadence you see from them?

We are uncertain about the exact timeline. However, we have been informed that the airline intends to begin using the system, aiming to install it on at least 50% of their fleet. Therefore, it is reasonable to expect that they will want these installations to happen as quickly as possible. If it takes a year or longer to produce the 250 kits, they will be unable to utilize the system during that time. Hence, they will want us to deliver the kits as swiftly as we can. This is why we have been preparing the production of kits ahead of their needs, as it will take time for us to manufacture the kits and for Elbit Universal to increase their manufacturing capacity to meet this level of demand.

Got it. Helpful. And then you talked about kind of potential revenue accelerating second half ‘23 into ‘24. Obviously, AerAware, you talked if obviously the feedstock purchase conversions continue and then some of your capability expansion. I'm not going to ask you for specific revenue numbers, but if we were to look second half this year even into next year. Can you maybe size or kind of rank order what you think would be the bigger growth driver? And I guess, AerAware into next year would be a big one, kind of, based on what you just said. But any color as you, kind of, think about maybe the contribution from those growth drivers?

It would be too speculative at this point for me to answer that question.

Okay, okay. That's fair. What about last one on kind of the feedstock? I mean, are you guys seeing kind of hinted at it? Do you know how many kind of entities you're competing against for purchases? Are you seeing less competition out there? And then I guess with, sort of, all the airlines running all of their assets burning all of the green time. Do you think that's potentially driving the need for more USM?

The increasing utilization of flight equipment is driving the demand for more used serviceable material, but our challenge has been getting the material out of the shop. We were proactively putting USM into the shop even when demand was low, and I’m pleased we did because we are now witnessing strong demand. This optimism about increasing USM sales is largely due to having more products available. As long as we can move our inventory out of the shop, we don’t face challenges in selling to those who need it. The availability of our ready USM is directly tied to our increasing demand. The main issue continues to be the availability of feedstock. Regarding our competitors, we bid on over $1.4 billion in deals last year. We could have captured hundreds of millions more if we had decided to increase our bids and reduce our margins, but we remain disciplined. I would prefer to forgo bad deals worth hundreds of millions than to win $50 million worth of poorly priced deals. Last year, we won $50 million in properly priced deals while choosing not to pursue the rest. The companies that acquired those other assets likely won’t be able to extract more value from them than we could. There’s an increasing number of competitors in our space funded by firms that don’t understand the market, which has resulted in poor decisions and overspending. We won’t follow that path. I don’t feel the need to apologize for only winning $50 million worth of deals last year, as those were honestly priced. In our view, the rest were not. It appears many who bought those assets may not have a cost threshold or are willing to accept lower margins, raising questions about the sustainability of their acquisitions. Competition has decreased; I estimate we now face about half the number of bidders we did previously. Our success rate is improving because those remaining bidders are adjusting their bids based on experience. Previously, we had around two dozen bidders, and now we may only have about a dozen. While they still have ample funding, they might accept lower margins than we would, but whether that proves to be a wise investment will become clear in time.

And temporarily those single-dimensional players have an uphill battle with those lower margins.

Yes, absolutely. That's great color. Thanks guys. Love that disciplined commentary. I'll jump back in the queue.

Okay. Welcome. Good talking to you.

Our next question comes from the line of Gautam Khanna with Cowen. Please proceed with your question.

Hey, guys. This is actually Jack on for Gautam today. Thanks for the question. Just back to AerAware and I know you guys provided really good detail about one specific customer kind of talking about some interest here. Just wanted to kind of hear your perspective on incremental customers just other than this one that you're highlighting? And I know you talked about the 100 kits potentially getting up to 250. Just what do you have to see in regards to their orders to actually like pick up production and start to monetize this further? Thanks.

Okay. Hi, Jack. We have a lot of questions, so let's return to the first question.

Overall, beyond our launch customer. Other customers…

We are in discussions with several airlines interested in our system, with fleet sizes ranging from just a couple to 20 and up to several hundred, though not typically 500. If we receive an offer, delivering kits to all those companies simultaneously would be a challenge. However, increasing our kit production is manageable. We are enhancing our own production capabilities, but our kits include multiple sub-components, such as modifying the radome and manufacturing installation brackets for the camera. The wiring harness consists of eight separate packages, and we can outsource the manufacturing of radomes and brackets to other companies or use multiple vendors to boost our manufacturing capacity. We are learning the most efficient and cost-effective methods to build these kits as we aim for a minimum of 100 this year. Should we receive a larger order of around 500 kits annually, we would either expand our internal capacity or find several external vendors to help produce them while we maintain quality control. Our first 10 kits were made by an outside party, but significant rework was necessary because they didn’t fully understand the wiring harness's requirements. We’ve gained valuable experience, and we are positioned well to meet this year’s minimum target. If demand exceeds our capabilities, we will contract out production. On the other hand, manufacturing the Elbit hardware may take longer, and we might face delays in fulfilling larger airline orders until Elbit can ramp up their production to meet our needs.

Okay. That's very good color there. Just one last quick one, just going back to your comments on feedstock in USM and how it's pretty strong in January and February. If you could just provide some context where you're seeing the greatest strength. I think you alluded to more on the engine side. Given the issues there at the OEM level. Just would love to hear your perspective on some of the green shoots there? Thanks.

As engines are being serviced and requiring materials, USM is struggling to keep up. On the engine side, good USM is hard to come by. When an engine is disassembled, you might have 500 parts, but not all of those will be used since many can be refurbished during repairs. The valuable USM I mentioned refers to limited or hot section parts, which are affected by heat and wear, and once they reach a certain condition, are discarded. There's always a high demand for these hot section and life-limited parts from engines that are actively in use and undergoing frequent repairs. When I talk about good USM, I mean this specific type of material, which is always in short supply. As repair shop activity increases, there isn't enough USM available, leading customers to either purchase PMA parts or buy new parts directly from OEMs. So, to address your question, that's the situation at hand. What else would you like to know?

Yes, just kind of where you're seeing the most strength it seems like it's broad-based, but specifically just whether like wheels and brakes landing gear, just any other broad color would be helpful. Thanks.

I think it's everything. It's component repair, now it's accessories, its wheels and brakes, avionics pieces, structural pieces, components landing gear. Of course, that's not USM, it's more on the overhaul side of the business. Airframe parts that, that we work on, structural parts that need to be replaced, rotable components, again accessories, it’s across the board.

Okay. Thank you, I'll pass it on.

Okay. Thanks, Jack.

And we have reached the end of the question-and-answer session. I'll now turn the call over to Nicholas Finazzo for closing remarks.

Alrighty. So, Bert, Ken, Michael and Jack, thanks for the insightful questions, which I think they're all helpful for our audience to better understand AerSale’s unique fully integrated multi-dimensional business model. So again, thanks guys. And for our listeners today. Thank you for your interest. AerSale was purpose-built for these market dynamics. We're a strong and resilient company that can fly through any turbulence along the way as we continue to our final destination. So just sit back, relax and enjoy the ride. Have a great evening, everyone.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.