And welcome to the AerSale, Inc.'s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kristen Gallagher. Thank you, ma'am. You may begin.

Good afternoon. I'd like to welcome everyone to AerSale's second quarter 2023 earnings call. Conducting the call today are Nick Finazzo, Chief Executive Officer and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's Annual Report on form 10-K for the year ended December 31, 2022, filed with the securities and Exchange Commission on March 7th, 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 metric can be found in the earnings presentation materials made available on the Investors section of the AerSale website.

Thank you, Kristen. Good afternoon and thank you for joining our call today. I'll begin with a brief overview of the quarter and provide operational updates before turning the call over to Martin to review the numbers in greater detail. Our consolidated second quarter results were behind our internal expectations, resulting primarily from current soft demand in the cargo market for our P2F converted 757 aircraft and extended repair times for used serviceable material, which you'll hear me refer to as USM. Total sales in the second quarter were $69.3 million, compared to the prior year of $139.6 million. This quarter included flight equipment sales of $13.3 million, compared to $92.5 million in the prior year. Aside from reduced flight equipment sales, revenue across most of the company's business units continued to grow, supported by a strong commercial environment and demand for our products and services. I would remind investors that the year-ago comparable period included record-high company revenue from the sale of multiple aircraft. As we have noted on each and every earnings call, flight equipment sales are an important component of our end-to-end solution, but do create meaningful quarterly volatility in sales and profitability. Further, we allocate feedstock to the business unit that can achieve the highest risk-adjusted rates of return, whether that be through whole assets, leases, or USM parts. Therefore, the sales channel can produce often the additional volatility quarter-to-quarter. With that being said, I'm pleased to report that our acquisition of feedstock through the first half of 2023 has remained robust and on track with our expectations, having acquired or been awarded over $200 million of feedstock, compared to just $50 million in 2022. We've been using our balance sheet to acquire this favorably priced feedstock and the level of inventory on hand to fuel future profitability now stands at over $300 million, a record high. This is an important leading indicator of our future performance, giving us confidence that the second quarter of 2023 should be the low point of this recent cycle. Turning to profitability, adjusted EBITDA in the second quarter of 2023 was a loss of $540,000, compared to a gain of $41.1 million in the prior-year period. The lower adjusted EBITDA margin observed in the period resulted from fewer aircraft sales, coupled with the expense of maintaining the strength of our multi-dimensional, fully integrated infrastructure at a high readiness level to support future growth. At the segment level and beginning with asset management, second quarter sales were $37.1 million, compared to $114.5 million in the prior-year period, resulting from lower flight equipment sales and no aircraft on lease. In the current quarter, we sold a total of four engines and no aircraft, compared to three engines and three aircraft in the second quarter of 2022. Q2 of 2022 included two high-value P2F converted 757s and one 747 freighter, which set a company record for a single aircraft sale in terms of both revenue and total net dollar margin. We've continued to work through P2F conversions of our 757s and our revised 2023 outlook calls for three sales and three leases by year-end, compared to our prior forecast, which included the sale of six P2F converted 757s and three leases. This reduction to our full-year outlook is the result of a significant softening in the cargo market following the pandemic surge experienced over the past few years. Cargo operators are currently suffering from reduced demand and an associated lack of liquidity has tempered the sale of our P2F converted 757s and will likely result in a heavier mix of leases versus sales in the near term. Together, these factors led us to reduce our full-year estimates for flight equipment sales on the 757 program. While this changes our forecast for 2023, it is important to underscore that we still see ample opportunity to monetize this inventory through alternative sales channels at target margins consistent with those channels. In our USM parts business, airframe and engine parts sales both grew compared to the prior year, reflecting our heavy investment in USM being repaired regardless of the extended repair cycle times. The ability to use our balance sheet to offset supply chain delays is now paying off, as over the past six to nine months, the steady stream of USM flowing through the repair process is now yielding ready, high-demand USM, which in many cases has been presold while still in the repair cycle. In the second quarter of 2023, we had no aircraft leasing revenue as we fully wound down our aircraft lease portfolio in response to market dynamics. In the prior year, we had $2.1 million of revenue from aircraft on lease, primarily related to a 737 and 747 freighter that have since been sold. Comparing the sales mix of our products over time, we'll yield varying results as we're agnostic to the type of monetization strategy we utilize in our asset management business. We steadfastly seek to maximize return on investment on feedstock through the highest return in current market conditions between USM parts, leasing or the sale of whole assets. Turning to our TechOps segment, we reported second quarter 2023 sales of $32.3 million, which was up 28.7%, compared to second quarter 2022 sales of $25.1 million. Higher sales resulted from strong demand for services at all our MROs, with additional on-airport MRO capacity at our Goodyear, Arizona facility, made available by outsourcing the 757 P2F program, together with increased utilization at all facilities. As mentioned earlier, we're seeing a favorable overall operating backdrop and we anticipate a meaningful step-up in operating tempo as our investment in feedstock works its way through the broader system. Turning to engineered solutions, we continue to work towards final FAA approval of our enhanced flight vision system, AerAware. If you recall, during our last quarter's earnings call, final certification of the system will follow the completion of five sets of flight tests proving different aspects of the system's performance and reliability. Although we successfully passed the first four, several imaging issues were identified that required minor modifications to both software and setup procedures to ensure the images projected onto our head-wearable displays, aligned within the limits prescribed by the FAA. Identifying these issues and fine-tuning the system is part of the certification process and the reason for extensive flight testing. I am pleased to report that we've made all the minor adjustments and modifications identified during flight testing, resulting in improved performance of the system and our readiness to demonstrate these adjustments to the FAA. Earlier this week, the FAA notified us that they have accepted these modifications and requested an in-person demonstration of the changes we made. This demonstration has tentatively been scheduled for the weeks commencing August 14th or 20th, subject to final paperwork and weather. Immediately following the demonstration, the fifth and final set of flight tests will commence and is expected to take approximately one week to complete. Assuming the successful completion of the final flight tests, the FAA typically issues an STC within 30 days. Turning to capital allocation, we remain in excellent financial condition to continue to fund our feedstock program and sustain business growth. In addition to over $200 million in feedstock closed under contract or LOI year-to-date, we ended the quarter with $34.6 million in cash and an undrawn $180 million revolver, which was recently upsized and expandable to $200 million, providing us with total current liquidity of $215 million. Further, as we begin to monetize the feedstock already acquired and coming available post-repair, this will enable further expansion of our acquisition strategy. Besides the acquisition of feedstock, we've been very active in pursuing M&A opportunities. While it's too soon to share any specifics, we're targeting capability-enhancing acquisitions that either complement our end-to-end solution, enhance our footprint, or increase our capabilities for engineered solutions. As is the case with feedstock acquisitions, we're extremely disciplined in our approach and will not overpay for an asset that has little post-closing synergy. To conclude, despite the disappointing short-term financial results and its impact on 2023's full-year outlook, the fundamentals of our multi-dimensional and fully integrated business model bestow AerSale with a unique and unmatched platform to achieve significant growth in sales and profitability in the backdrop of a favorable and improving aftermarket. We're encouraged by the pace of our asset acquisition program, which combined with the near-term approval of AerAware, should mark the second quarter as the low point in our future results. We've navigated through some turbulent headwinds so far this year, but the investments we've been making have provided us with a tailwind as we move into the second half of the year and into 2024. I would like to thank all our employees for their dedication to AerSale and for their efforts in delivering on our commitments to all our stakeholders. Now, I'll turn the call over to Martin for a closer look at the numbers.

Thanks, Nick. I will start with an overview of our second quarter financial performance and end with our updated guidance for 2023. Our second quarter revenue was $69.3 million, which included $13.3 million of flight equipment sales comprised of only four engines and no aircraft. Revenue in the second quarter of 2022 was $139.6 million, and it included $92.5 million of flight equipment sales consisting of three aircraft and three engines, out of which two aircraft were AerSale converted Boeing 757 freighter aircraft and the other a Boeing 747 freighter. Excluding whole engine and aircraft flight equipment, our base revenue continued to generate significant underlying growth. As we have pointed out during multiple 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 progress. Second quarter asset management revenue dropped 67.6% to $37.1 million, because of the significant variation in year-over-year flight equipment sales noted above. Outside of flight equipment sales, USM parts sales improved from the year-ago quarter as demand and availability of feedstock expanded while aircraft leasing revenue fell due to a planned reduction in the number of aircraft in the leasing portfolio. TechOps revenue was up 28.7% to $32.3 million in the second quarter from $25.1 million in the second quarter of 2022. Our TechOps business benefited from additional capacity dedicated to customer aircraft at our Goodyear on-airport MRO facility, as well as an increase in sales from our component MROs. As we have mentioned previously, the transition to third-party providers to perform the remaining 757 P2F conversions at the beginning of the fourth quarter of 2022 opened up capacity at our Goodyear facility. This transition has helped generate revenue and growth from expanding third-party services at our Goodyear MRO. Second quarter gross margin was 29.1%, compared to 39.4% in the second quarter of 2022, which was mainly the outcome of a sales mix that consisted of fewer high margin flight equipment sales. Selling, general, and administrative expenses were $27.1 million in the second quarter of 2023, which included $3 million of non-cash equity-based compensation expenses. Selling, general, and administrative expenses were $23.5 million in the second quarter of '22 and included $3.9 million of non-cash equity-based compensation expenses. Second quarter loss from operations was $7 million, while income from operations was $31.5 million in the second quarter of 2022. Net loss was $2.7 million in the second quarter compared to net income of $26.5 million in the second quarter of 2022. Adjusted for non-cash equity-based compensation, mark-to-market adjustment to the private warrant liability, facility relocation cost and secondary issuance cost, second quarter adjusted net loss was $591,000. Our adjusted net income was $31.7 million for the second quarter of 2022. Second quarter diluted loss per share was $0.08, compared to diluted earnings per share of $0.47 in the second quarter of 2022. Excluding the adjustments mentioned above, second quarter adjusted diluted loss per share was $0.03, compared to adjusted diluted earnings per share of $0.56 for the second quarter of 2022. Our adjusted EBITDA was a loss of $540,000 in the second quarter of '23, compared to a gain of $41.1 million in the prior-year period. The decline in adjusted EBITDA was largely a consequence of lower flight equipment sales, which had strong margins. Next, in terms of our cash flow metrics, cash used in operating activities was $129.2 million as a result of a gross investment of over $200 million in feedstock that will fuel growth opportunities going forward. We ended the quarter with $34.6 million of cash and an undrawn revolver credit facility, which we have recently renewed for a five-year period and upsized to $180 million with the ability to expand up to $200 million. This additional capacity, as well as more attractive advance and financing rates, will help us to continue to fuel our growth. Finally, moving to our updated guidance for 2023, we now expect to generate revenue of $400 million to $440 million and adjusted EBITDA of $40 million to $55 million in 2023. This updated guidance takes into account softer freight market demand that is anticipated to delay our previous estimates of the delivery and sale of our 757 P2F converted aircraft. This guidance for 2023 does not include any potential sales of AerAware, as the product is in its final stages of approval and will be updated once the SEC is issued, and AerSale can assess initial order and delivery schedules. Looking ahead, the long-term underlying fundamentals of our business remain robust. We are well-positioned to capitalize on organic and inorganic opportunities and generate strong returns for our internal and external stakeholders going forward. With that operator, we are ready to take questions.

Thank you. Our first question comes from Ken Herbert with RBC Capital Markets. Please go ahead.

Hey. Good afternoon, Nick and Martin.

Good afternoon, Ken.

Good afternoon, Ken.

Hey, Nick. Maybe, just to start off, as you look at the EBITDA guidance now for the full year, it still implies, obviously, a pretty substantial step-up sequentially into the second half. As we're sort of almost halfway through August here, can you just talk about the cadence we should expect maybe for the EBITDA in the third to fourth quarter and sort of anything you could say around asset activity here into the third quarter to help with confidence on the EBITDA?

Do you want to answer that? Do you want me to answer?

Yes, I'll start. I think we can say as we already have two 757s that are under contract that we'll be closing one in Q3 and Q4. In addition to that, we have several whole asset deals that are also already under contract. We noted that we are starting to see a pickup in the availability of USM material. In fact, approximately $25 million of that material has already been presold. So that is giving us confidence on the strength of the second half. We still have a significant amount of additional inventory that's being flowed through and being made available for sale. So, with that notion, with the over $200 million of feedstock that we have right now, and based on the opportunities we're seeing in the commercial market, that's giving us the confidence that we will be increasing and that the second quarter will be the low point, and then we'll start going back to a more normal trajectory for the second half of the year.

Okay, that's helpful. And if I could just on AerAware, where it sounds like the FAA is comfortable with the proposed changes. It sounds like the demonstration flight should happen here in a couple of weeks. You're still confident, it sounds like, in a sort of STC this year. But just considering some of the challenges we've had on this program. Maybe, Nick, if you can just walk through sort of how you'd characterize risk now on timing associated with AerAware, sort of relative to where we were coming out of the first quarter.

As we've previously discussed, the more we operate the airplane, the more minor issues arise, some of which are genuine concerns and some are simply questions about display preferences. Throughout the process, we've made minor adjustments to enhance the system's compliance with FAA expectations regarding its display. Recently, we identified a display issue that was within FAA limits, but they requested improvements, and we successfully addressed that, although it took a few months. Currently, we have resolved every item the FAA raised, implementing changes they requested. The last two issues were demonstrated in our lab, and we conducted flight tests to ensure they met FAA requirements. We have completed all necessary work internally, and the FAA is eager to begin flight testing. They expressed a desire to start flying this Tuesday, but we need to finalize some paperwork for them first. There's a chance we could begin flying next week, but if we can't submit the required paperwork in time, it may be postponed by a week. Based on their urgency, we anticipate they will start with the verification of the adjustments we've communicated to them once the paperwork is in order. If they confirm the changes during the initial flight hour, they are prepared to proceed with the subsequent set of flight tests that same day. We expect to demonstrate that our adjustments align with their requests, and work directly into our final flight tests. We have been informed that the FAA would like to see about a week of flying, which could begin as soon as next week or the week after.

And just finally, Nick on that final flight testing, the fifth set of tests, is that dependent upon certain weather conditions or what would be the gating factors on timing of that last set of test flights?

We don't have to chase weather anymore. So, we've already proven the system works in weather. So, this is just to operate the airplane in a normal airline type environment, start out in one city, fly to another city, go to another city, stop overnight, start the next day flying a different rotation to demonstrate to the FAA that the airplane is functioning. The pilots are able to use the system as they would if they were flying a normal airline type daily operation. It's really just to prove that over the period of time that they observe the airplane during the final set of flight testing, that everything works the way it has been working with the exception of the changes we've made and that all of that continues to work throughout the duration of the flight testing. That's just the reliability portion of it. It's really not to prove the system does what it's supposed to do. It's to prove that the system works for that period of time without an issue. The risk is, obviously, if there's a mechanical problem with the airplane, which happens, then it had nothing to do with AerAware that could delay if we have to fix it and we can't get it fixed overnight or quickly, that could delay the completion of those test flights. If something else were to come up and we put a lot of flying on this airplane, but if something else were to come up that nobody has seen at this point. And I don't expect anything to come up, but if it did, the FAA could then say, guys, we saw something else and we want to understand that. It may not even be a true problem with the system. It just could be they don't understand it. And we've seen that already, where they thought things were incorrect, and we proved to them that it was within limits, but we ended up making it better as a result of their questioning some of these issues.

Great. Thanks, Nick. I'll pass it back there.

Okay. You're welcome, Ken.

Our next question comes from Bert Subin with Stifel. Please go ahead.

Hey. Good afternoon and thank you for the question. Maybe, just following up there on AerAware, Nick, what do you think would have to happen for the FAA to reject an STC, to say ultimately that this product is still not allowed to go forward? Is that a possibility or would it just become a timing issue, where you just keep fixing problems in sort of the worst-case scenario?

Well, because we're at the stage that we're at, we've already demonstrated the system performs the way the FAA has prescribed for an enhanced flight vision system. I don't see there being a risk that the system is not certifiable. The risk would be if we continue to have issues that come up, where the FAA or whatever, maybe they don't understand how something is displaying a particular way. We see some other anomaly. We see a failure in the system that the FAA says, okay, well, hey, you guys were supposed to prove this thing would operate reliably for a week, and we had a problem. Go back, figure out what the root cause analysis of the problem is or was, and we want to see it, and we'll continue flying after we understand why did you have this problem, we don't expect it, but it is possible. In that case, what I would expect is what we've incurred thus far, which is issues come up. The FAA says, hey, explain this to me. We explain it, we show it to them, and then we keep flying. I think what it would do is, it would stop, it could potentially, depending on the nature of the issue, it could stop flying at that point, and we have to go back to the drawing board and fix the issue that was identified to the FAA's satisfaction and then continue from that point forward. I don't know what could happen at this point for the FAA to say the system is you cannot prove the reliability of the system unless we just cannot fly the airplane for a week and not have a problem. I mean if we just continue to fly the airplane with a problem after a problem, after a problem, after a problem, that could set us back quite a bit. Now, we haven't had that issue and we've put over 300 hours on the airplane. So, we have assurance. We have confidence based on the amount of time we've put on the airplane that we're not likely to have repetitive recurring problems in a short period of time. The issues that have been discovered have been discovered over a prolonged series of extensive flight testing and some of which was never noticed after hundreds of hours of flight testing. The issues were so minor. And again, it's like the better you make the system, the more perfect it is, the easier it is to identify anything that isn't as good as something else. And I think that's where we're at. I mean, we keep finding little things that even are within limits, but they're not as good as you would think they could be. And we find that there's a way to fix them, make them even better. And that's what we've been doing.

So maybe, on the flip side of that question, if we were to assume the fifth or final flight tests were to take place the week of August 21st, I guess assuming that process seems to be pretty straightforward, where you're just flying, simulating the typical pilot experience. And so after that, assuming you were to get through that final test, you would assume or your expectation is that the FAA will convene and rule on an STC. Is that fair? So, if everything were to go well through that period, you could have an STC by October 1st?

I think that's what we've been told, that no more than 30 days after we successfully complete our final flight testing, they will be in a position to issue us our STC. Could it take longer? Sure, it could take longer. Should it take longer? No.

Got it. Okay. Maybe, just shifting over to the 757. Can you just give us an update on how we should think about timing? Correct me if I'm wrong. You said three sales are expected this year and then three will be put onto, I guess, short-term leases. And the remaining five, I guess, your expectation is the first half of '24. Can you just give us an update on timing for the 757s or your expectation for timing?

Sure. So, the three sales that are projected, as Martin mentioned earlier, one of them has already closed in the first quarter. Two more are under contract to close this year. We've got deposits, we've got signed contracts. The airplanes are being basically ready for delivery in the operators' livery. So, those airplanes are committed, not to say we won't sell more, but at this point, it's unlike the last two years, where we've basically had customers that wanted the aircraft and it was our ability to make the sale was based on our ability to produce the aircraft and get it to the customer. So right now, we're hunting for customers. We're in a soft freight market. We have not anticipated or projected, I should say, more than the three aircraft we have already under contract. We're in those five months left in the year, a little over five months left in the year. Although we are talking to people, it’s not to say that we couldn't find somebody that will take all the rest of the aircraft. Because we've got multiple customers that we're talking to, that would take one or all of the remaining aircraft. Just don't have anybody that signed a contract yet, and we're not far enough along for us to have a high level of confidence that we're going to be able to do that in the balance of this year. Initially, we anticipated having nine aircraft available this year, but with one already sold, that leaves us with eight. Several aircraft are scheduled for delivery later in the year, potentially in November or December, but some may be delayed into next year, while those expected earlier could also be pushed back. Therefore, it is possible we might have as few as six airplanes available to sell or lease this year. Given how late we are in the year, we expect to receive maybe the fifth or sixth airplane, and possibly end up with seven. However, as we approach the holidays, it becomes challenging to deliver aircraft due to various factors. Many are preparing for the holiday surge in freight, and the FAA faces manpower issues related to vacation schedules and other jurisdictional concerns. Consequently, as we move into the final months of the year, particularly after mid-November, delivering an airplane in that timeframe will be tough if we manage to secure one. This is part of why demand is weak. Even with demand today, we lack the aircraft for delivery, and this softness in demand will carry into next year. Looking ahead, we foresee opportunities to lease these aircraft, aside from those we are already discussing, and potentially lease more if we don't sell them. We are also considering alternative ways to utilize this flight equipment. We don't need to limit ourselves to converting it; we have options. We can purchase conversion kits and defer deliveries, or we could sell or lease the engines and schedule deliveries when the market improves. Look, the freight market is you've heard the canary in the coal mine analogy. The freight market is soft today as a result of a very soft consumer market for goods. Consumers stopped spending really starting at the beginning of this year. So, you're seeing a much lesser demand for consumer products, which are moved typically by air freight. And other means, but a lot of air freight moves that demand is down. And as a result, the demand for these freighter aircraft today is down. However, just like freight is the first to suffer as consumer demand suffers, as consumer demand returns, freight is the first to recover. So, we expect as whether we go into any type of soft economic environment. And I don't even use the word recession or soft landing because I don't know what it will be. If it will be, freight will be the first to come out.

Got it. Okay. Just a clarification and then I'll pass it over. But as we think about the guidance you put out there, you've already sold one of the 757s. So, you're assuming the other two that are under contract, plus three that go on to lease and then the balance is USM stepping up on feedstock acquisition.

USM stepping up, continued growth on our MRO operations, both on airport and off airport component. Component MRO is growing at a very fast pace. On airport, MRO has stayed strong almost at capacity. We'll be adding more capacity with our Millington facility in January 2024. But we're looking to find ways to continue to add additional labor to our on-airport MROs in both Goodyear and Roswell to increase the throughput out of those facilities. So, we see USM picking up. We see on-airport MRO staying strong and growing. We see our component MRO business growing at a very fast clip. We see our landing gear MRO, we could be getting into an issue with the amount of demand we're seeing on the landing gear MRO side that we'll have to figure out how to accommodate the demand. How do we gear up our capacity to accommodate the demand? Now, we have used third-party MROs to do landing gear work and we'll continue to do that if we can't do it. But we're very excited about our ability to grow our landing gear MRO, not to mention AerAware, which we expect to get certified and we expect to start seeing sales. So, whether we get those this year or not, we didn't put any AerAware sales in our revised forecast or guidance for 2023 yet that is still possible. But it wouldn't be of a scale that would make a material difference.

Thank you.

You're welcome.

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

Hey, Nick, Martin. I'm on for Mike Ciarmoli this evening. Thanks for taking our question.

Hey, Pete.

First, just had a couple on the USM markets. How much did your sales of USM grow year-over-year in the second quarter? And are there any particular areas or products, where you saw relative strength for those sales?

I'm going to let Martin answer that. So, he's digging out his paper. So, he doesn't have to remember it.

Yes. Growth in USM for the quarter was up 12% overall. And that's kind of consistent with year-to-date. So, it's running around 10%. And again, that's without the benefit of the feedstock that's currently being repaired that we've had a bit of delay in. So, we expect that growth to be stronger in the second half of the year.

Let me elaborate a little further on that. As I mentioned, we've been using our balance sheet since the beginning of the year to acquire feedstock that is going through a prolonged repair cycle, often taking much longer than it did pre-COVID to get USM repaired and available for sale. We have been deploying cash to buy inventory or feedstock, pieces of which will turn into USM as they go through this extended repair cycle. Last year, we invested about $40 million in material unrelated to the 757 program. In the first quarter, we announced having $107 million under contract. We are just beginning to see that material become available for sale now. We have processed it to prepare it for conversion into serviceable USM. We have fed the repair cycle and experienced delays due to the extended repair cycle, and we are just starting to see the benefits. The modest improvement over last year in this quarter is not due to a lack of demand but rather the limited availability of feedstock coming from USM. This is why we are confident in the second half of the year and into 2024. At the current rate of purchasing feedstock, we expect substantial growth in our USM business, as the materials we've invested in during the repair cycle are now starting to emerge and will continue to do so throughout the year. I have stated before and stand by it: there is not enough good USM to meet demand. The key is whether you can acquire it at the right price and endure the lengthy repair cycle that takes two, three, four, five, or six months to yield results.

Very helpful color. Thank you. And then I just wanted to ask one on AerAware as well. Just assuming that the best case you talked about happens and the STC is issued sometime near the end of the third quarter or sometime in the fourth quarter, how quickly after that point could sales start to materialize? Are there any supply chain considerations here that would make sales initially ramp slowly? Or is there a significant inventory of shipments that you could get ready to go soon after you get that approval?

So, I can only speak for the installation kits that we have. And I can tell you that a large order from an airline will require a very prolonged installation cycle getting the aircraft ready for use of the system. If you have an airline that's got hundreds of airplanes, there's just no way we can reconfigure all those airplanes to accept AerAware in a month. It's going to spread out over the course of the year. Now, our plan was to have over 100 kits available this year. We're well underway. We'll probably do 150, 160 kits that we have this year. So, we'll be in a position by the end of this year to start installing 150 plus kits starting this year and moving into 2024. Now, that's the kits. And we can certify an airplane with a few sets of routable components from Elbit. Elbit has its own lead time issues. They're a build-to-order company as we are, but we're kind of getting ahead of it and making sure that we've got enough installed kits to prime the pump and start getting airplanes capable of flying with the AerAware system installed. Elbit, when it gets an order, a large order, it will gear up its supply chain, which is just typical of the way these large OEMs do this type of equipment. They'll gear up their supply chain as fast as they can. It's a big company, I don't know, $8 billion, $9 billion, I don't know exactly what the number is, but it's a multi-billion-dollar company that has the capability and experience to gear up their supply chain. That may or may not have anything to do with our ability to sell our portion of the kit because we've got to get the kits installed in the airplane first. And in the case of a large order, airlines are telling us, well, they don't really want to have a small group of these airplanes flying with the system installed. They don't want to start flying it until they have half their pilots, all their pilots trained, and half their aircraft equipped. So, from an Elbit point of view, that could take a while to gear up their supply chain. With respect to a smaller group of airplanes than an airline, somebody that has 10, 20, 30, 40, even less than 100, that could come relatively quickly on our part. We could satisfy that whole order. We have ordered kits. We mentioned earlier that we ordered $33 million worth of kits from Elbit this year, which we expect to take delivery of if the demand is there for this year. Again, it's going to put pressure on Elbit to produce the kits. And we've been assured that they can meet the orders that we place with them, and all we have to do is get the orders. So, I don't know if that answers your question. But for a small order, we can start delivering this year. How many? 10, 20, 30. I think you need to think in that order of magnitude.

Thanks a lot. It's a very helpful color. I'll pass it along here.

Okay. You're welcome.

Our next question comes from Gautam Khanna with TD Cowen and company. Please go ahead.

Yes. I was wondering if the EBITDA cut this year apples to apples. Can we just add that to whatever the base level was going to be next year because of the timing of P2F conversions i.e., it's just a push out? And so we'll have a disproportionately soft '23 and a disproportionately strong '24, excluding AerAware.

I think, as we noted, as we're looking at a soft freighter market, we need to reevaluate whether we'll have the opportunities to sell those P2F as full whole assets or if the most advantageous avenue will be to put those aircrafts on lease. And as you know, obviously, that has a different financial impact in the short-term overall. So, we're still evaluating that. So, it's not a direct shift from one period to the other. But what I can say, based on our value that we bought these assets are, even if we put them on lease, there'll be lucrative leases higher than the industry 1% monthly lease rate factor. So, if we have to go down the lease path, that will still be a profitable avenue for us, but it might generate a different result in the fiscal year.

Can you provide a quantification of the EBITDA monetization that is not occurring this year regarding the aircraft?

We haven't provided specific margin profiles on the overall assets. What I can say is that if you look at the midpoint of the overall decrease, it is almost entirely due to the margins on those three overall assets, without going into specifics on those assets. Martin, could you characterize for us, based on the last couple of years, what the base level of EBITDA is in the business excluding aircraft sales and engine sales? I know it's part of the mix, but I'm curious about the underlying business in terms of MRO and similar activities.

I think, as Nick has noted, that's challenging in that if you compare back to the period of COVID obviously, our component MROs, our USM business, pretty much everything that supported the kind of commercial or passenger side was off. and that was offset. In fact, we had a mix on being majority passenger driven to cargo driven kind of overall. So, we were able to react and go where the demand was, which was in the passenger overall market. And now, as we're seeing kind of a shift back into that, the passenger side has much stronger demand, we'll shift back into those overall items. So, it's kind of hard to kind of note what a traditional item are, excluding whole assets. Because again, whole assets are just one way that we monetize our feedstock. And had we not done that, we would have monetized those assets through the USM or leasing channel.

And last one from me, when you guys acquired the 757s, one of the advantages you had was they were parked at a facility you control. Do you have anything in the pipeline that's currently parked at one of your centers that could be sold and that could also offer kind of this hometown advantage, if you will, because you'll know the asset better than the competition and the like? I didn't know if anything was coming out of the desert that might be for sale that's within your facilities in the Southwest.

Not of the scale of the 757 transaction we did with American. That was a big chunky transaction. But there are aircraft that are located in our facilities, both in Goodyear and Roswell, both places that we're aware of and that we're submitting bids on those aircraft in those locations. We are closing on aircraft that are located in our facility. And we have aircraft that are flying into our facility that ultimately will end up being sold as part-out aircraft. So, we'll kind of have a first good look understanding of the condition of those aircraft as they get there. And people are flying airplanes into our facility knowing that we're interested in buying them, and they just like to know the fact that, well, at least I put it in their facility. If they're the best bidder, it's right there. It'll be easy for them to close. And I think that's an advantage that we have. Big chunky group of aircraft, not yet a bunch of individual ones. Yes.

I would add. I think definitely, our advantage now is the ability to buy equipment that needs work. I think we've noted in the Q1 call that the material that's coming out right now is not material that easily can be put back into service. So now, our competitive advantage is truly using our multi-dimensional model. And that we can extract the value much better than folks can on that type of equipment. And that is truly being our competitive advantage in this point in the cycle.

Appreciate it. Thank you, guys.

You're welcome, Gautam.

There are no further questions at this time. I would now like to turn the floor back over to Nick Finazzo, AerSale's CEO, for closing remarks. Nick sir, go ahead.

Okay. Well, thank you to everyone on the line for joining our call today and for your interest in AerSale. There are a few points that I feel should be reiterated. Our business is purpose-built and multi-dimensional, which enables us to drive growth and profitability across cycles. And even when certain parts of our business are under significant cyclical pressure. This isn't always apparent in our consolidated results, as our diversification and end-to-end solution allow us to shift quickly and efficiently into areas of strength. This was most pronounced as we navigated through the pandemic, as we were able to pivot early into the cargo market that had record demand, which drove record results through the second half of 2022, even as the commercial side of the business was significantly impaired by travel restrictions. These effects have unwound over the past 12 months, and our go-forward mix of business and growth drivers are substantially evolved as a result. But our prospects to add value to all stakeholders have never been stronger. Our commercial side of the business has demonstrated strong growth consistently as it recovers. We are entering the second half with record feedstock to support commercial demand. We have expanded our MRO capacity to enable further growth. We are working diligently on our M&A program to expand capacity and capability, and the eventual certification of AerAware will further drive our results. These are the primary factors that give us confidence into the second half and into 2024. And we look forward to keeping you updated on our progress. Thanks, again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.