Good day and welcome to AerSale, Inc.'s Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. It is now my pleasure to hand the conference over to Kristen Gallagher. You may begin.

Good afternoon. I'd like to welcome everyone to AerSale Fourth 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, 2023, filed with the Securities and Exchange Commission to be filed on March 8th, 2024, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investor section of the AerSale website at ir.aersale.com. With that, I'll turn the call over to Nick Finazzo.

Thank you, Kristen. Good afternoon and thank you for joining our call today. I'll begin with a recap of the year and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. The final months of the year deviated meaningfully from our expectations heading into year-end, which entirely stemmed from lower-than-anticipated flight equipment sales in the fourth quarter. If you recall, in the prior quarter, we noted a significant number of flight equipment sales that were slated for delivery in December, which would account for the bulk of our EBITDA for the year. As noted at the time, the schedule of these deliveries is subject to change due to customer acceptance and delivery requirements, which were expected to occur in the fourth quarter. In total, we had $28.8 million of flight equipment sales that did not close in 2023 but have thus far closed in the first quarter. We expect the remaining sales that did not materialize in 2023 to close in the first half of 2024 or be returned to available inventory for subsequent sale or lease. Importantly, this is common in our business and as a public company, we have had quarters that have demonstrated a significant deviation from our original expectations, both on the upside and the downside. As we have discussed, we operate a purpose-built end-to-end solution which is unique in the industry and gives us a competitive advantage to extract value from assets that our peer group is unable to achieve. This ecosystem allows us to direct assets to the most attractive ROI for our equipment. And we're agnostic to the end use, whether it be through part sales, aircraft and engine leasing or flight equipment sales. With this complex ecosystem comes a significant fixed cost hurdle that we must clear annually, at which point we begin generating significant EBITDA on each incremental dollar of sales. In the short term, flight equipment sales generate significant revenue and therefore EBITDA drop through, as we have already reached our fixed cost hurdles. In the longer term, to the extent that we deploy more assets to USM, it will have a similar effect on our financials, but over an extended period of time. Following the lessons learned in 2023, we recognized the need to provide investors with accurate and insightful inputs to our go-forward performance. Therefore, we're discontinuing our practice of numerical full-year guidance but will continue to provide qualitative detail as possible about opportunities and outcomes expected over future periods. Our change in guidance policy should not be interpreted as a change in our bullish view about 2024 and future years' performance, which we are confident we can drive from the diversified AerSale platform. Turning to a summary of full-year results, our sales declined 18.1% to $334.5 million. Lower full-year sales were attributable to lower feedstock acquired in 2022, combined with significantly lower flight equipment sales throughout the year, particularly in the first half of '23. Excluding flight equipment sales and the sale of a 737 aircraft in TechOps in 2022, which is not expected to recur, full-year revenue increased 5.6%, reflective of the strong commercial demand environment we're operating in. Turning to our profitability for the full year, we reported adjusted EBITDA of $12.3 million compared to $87.4 million in the prior year. The decline in EBITDA year-over-year stemmed from reduced volume in the first half of 2023 due to lower feedstock availability, substantially fewer flight equipment sales during the year, and the absence of stronger margins generated in the prior year related to our 757 P2F conversion program. At the segment level and beginning with asset management, our full-year sales came in at $215.2 million compared to $277.6 million in the prior year. Lower full-year sales almost entirely stemmed from a reduction in total flight equipment sales and fewer aircraft and engines on lease. Our full-year USM sales partially offset these factors with a 26.1% growth year-over-year, as we benefited from strong demand and improved feedstock in the second half of 2023. For the full year, we sold 17 engines and four aircraft, compared with 15 engines and 12 aircraft in the prior year. Turning to our end markets, commercial demand remains robust, as a result of strong airline traffic and capacity, which has now exceeded pre-pandemic levels. This is a formidable tailwind to our business and provides significant demand for our equipment. Importantly, this is a compelling indicator as we've ramped up our asset purchase program in 2023 after a weaker purchasing environment in 2022, which unfavorably impacted our first half of the year. Simply put, with sufficient demand and favorable pricing, our current ability to drive revenue and EBITDA stems from our ability to acquire, service, and deploy equipment back into the market. In the cargo market, conditions remain challenging. As we've reported throughout the year, we have seven remaining 757s that are being converted and continue to actively market these aircraft to potential customers. In our USM parts business, airframe and engine parts sales both grew substantially year-over-year, driven by the success of our feedstock program. For the full year of 2023, we acquired $132 million of feedstock and had an additional $72 million under contract at year-end. The availability of feedstock continues to be negatively impacted by the delay in new OEM production, which has forced the operators to retain older equipment for longer than is typical. Despite this environment, we've been successful in continuing to acquire feedstock as our purpose-built model was made to extract maximum value from aircraft in any condition, allowing us to execute purchases of unserviceable equipment, that requires investment and expertise to monetize. In addition, the condition of records for these assets has been challenging, as they have not met the robust requirements of the industry for full back-to-birth trace. This is again where our industry know-how and experienced team can add value where others cannot. But it has also delayed the timing of closing on some of these feedstock acquisitions. Finally, in our leasing portfolio, full-year sales declined by approximately 50% as we had fewer assets under lease during the year. We had no aircraft in the lease portfolio in 2023 compared to three aircraft in the prior year that were sold at very favorable prices. In 2024, the company plans to increase the number of engines available for sale and lease based on engines that we purchased in 2023, as well as from engines that are returning to service after maintenance or repair activities that have been completed. Turning to our TechOps segment, we reported full-year sales of $119.3 million compared to $130.9 million in the prior year, which included the sale of our 737 AerAware demonstrator aircraft to a government entity for $23.7 million. Excluding this asset sale, segment sales were up roughly 10% year-over-year as a result of strong demand for our MRO services, particularly at our Goodyear facility. Turning to Engineered Solutions and AerAware, I'm very pleased to report that on December 6th, we received our STC from the FAA for AerAware, which marks the conclusion of a multiyear development and flight testing process. With the approval, the FAA also determined that AerAware provided a 50% visual advantage over the naked eye, which will be instrumental in helping our customers assess and model the financial returns for the product. Importantly, AerAware is now the only Enhanced Flight Vision System that the FAA has approved for this degree of visual advantage. The addressable market for AerAware is substantial, with more than 6,000 737NG aircraft actively flying that would benefit from this product and qualify under the FAA certification. This market includes very large passenger carriers that represent hundreds of units, Boeing business jet operators, as well as cargo and government operators. As we concluded the certification process, we also ramped up our go-to-market activities in an effort to secure a launch order and build an order backlog. We're in active discussions across these categories. And as we've detailed in the past, many of the largest players are already familiar with the product through demonstrations and flight testing. Further, I'm pleased to announce that as of today's call, we have written proposals out to five potential launch customers, which span from small to large passenger and cargo carriers. While we expect formal orders to take some time as customers fully assess the benefits and return profile of AerAware, the proposition is clear and compelling that the installation of AerAware will both substantially enhance aircraft safety in suboptimal weather conditions while providing a compelling ROI to customers through reduced delays, diversions, and fuel consumption. In closing, while 2023 was a challenging year that fell short of our expectations, we remain confident in the long-term prospects for our business. Our unique end-to-end solution provides a durable competitive advantage. The recent FAA certification of AerAware was a major milestone that unlocks a large and exciting growth opportunity. And we have a robust pipeline of potential launch customers actively evaluating the system. By continuing to execute on our strategic priorities, acquiring attractively priced feedstock, maximizing returns across our asset management channels, and driving adoption of AerAware, we are positioned to generate significant long-term value for our shareholders. I want to thank our dedicated employees for their hard work and our investors for their continued support. We look forward to updating you on our progress in the future. 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 fourth quarter financial performance, followed by our expectations for the business in 2024. Our fourth quarter revenue was $94.4 million, which included $47.4 million of flight equipment sales. Revenue in the fourth quarter of 2022 was $95.1 million, which included $51.4 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $47 million and $43.7 million in the fourth quarter of 2023 and 2022, respectively, an increase of 7%. As we have discussed 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 4.9% to $64.6 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. Fourth quarter USM part sales improved from the year-ago period by 27% because of higher demand and availability of feedstock. If we exclude flight equipment sales, asset management revenue would have been $17.2 million in the fourth quarter compared to $16.5 million in the prior year period, an increase of 3.6%. Technical Operations or TechOps, revenue was $29.8 million in the fourth quarter, which was an improvement of 9.7% compared to the fourth quarter of 2022. TechOps benefited from better performance from landing gear activities and Roswell on airport MRO activities. Revenue growth from our Roswell facility within TechOps was offset by lower revenue at our Goodyear facility due to our greater percentage of intercompany work being performed during the quarter. In the fourth quarter of 2023, gross margin was 25.9% compared to 36% in the fourth quarter of 2022, due to a decline in flight equipment sales, which generally have higher margins and were a lower part of the mix in the fourth quarter of '23. Fourth quarter, selling general and administrative expenses were $25.5 million, of which $3.1 million were from non-cash equity-based compensation expenses compared to $25.1 million in the fourth quarter of 2022, of which $4.5 million were non-cash equity-based compensation expenses. Losses from operation was $1.1 million in the fourth quarter compared to operating income of $9.1 million in the fourth quarter of 2022. Income tax expense was $2.1 million in the fourth quarter of '23, compared to $4.1 million in the prior year. Fourth quarter net loss was $2.7 million compared to net income of $9.2 million in the same year period. Adjusted for non-cash equity-based compensation, inventory writedowns, mark-to-market adjustment to the private warrant liability, gain on legal settlement, secondary offering, and facility relocation cost, fourth quarter adjusted net loss was $0.1 million versus adjusted net income of $12.3 million in the fourth quarter of 2022. Fourth quarter diluted loss per share was $0.08 compared to diluted earnings per share of $0.17 in the prior year period. Adjusted for stock-based compensation, inventory writedowns mark-to-market adjustments to the private warrant, liability, gain on legal settlement, secondary offering, and facility relocation costs, fourth quarter adjusted diluted loss per share was $0.02 versus adjusted diluted earnings per share of $0.23 for the fourth quarter of 2022. Fourth quarter adjusted EBITDA was $6 million compared to $17.7 million in the fourth quarter of 2022. Adjusted EBITDA and related margins were adversely impacted by lower flight equipment sales, which generally have higher margins. Cash used in operating activities was $174.2 million, primarily due to inventory investments of $168.6 million. AerSale continued its investment in feedstock opportunities which consumed most of the available cash, as of December 31st, 2023. AerSale ended the year with $136.9 million of liquidity consisting of $5.9 million of cash and available capacity of $131 million on our $180 million revolving credit facility, which can be expanded up to $200 million. As Nick noted earlier, due to the inherent variability in our asset management segment, specifically as it relates to the timing of flight equipment sales, we have decided to discontinue our practice of providing numerical full-year guidance. We remain confident that the first half of 2023 was a low point and that 2024 will show improved recovery. This confidence is driven by a strong balance sheet that has over $320 million in inventory that will be deployed in support of leasing USM and flight equipment sales in a favorable aftermarket that has benefited from robust passenger demand and delays in production of new aircraft. In our TechOps segment, we have been awarded several service agreements with airlines and OEMs at our component MROs that will help increase the volume at these shops and will also help us improve operational efficiencies and begin to monetize the capacity expansion investments we have made. Our on-airport MROs continue to remain strong, fueled by demand for maintenance work, supporting the robust passenger demand. Lastly, with the STC in hand, we have entered the commercialization phase of AerAware and we are working on securing orders that will provide revenue predictability over many years. In conclusion, excluding flight equipment sales, our business volume increased in 2023 as commercial markets continued their recovery and demand remained robust. We were successful in closing on $131.9 million of feedstock in 2023 and have agreements to acquire an additional $83 million to-date, which marks a sharp recovery from the low volume of acquisitions completed in 2022 that partially contributed to softer 2023 revenues. While we were disappointed more of the flight equipment sales did not close at the end of 2023, it is important to note that all of these assets are still available for sale or lease. With $28 million of sales that have already closed in 2024, the rest is expected to generate revenue later in the year. Our balance sheet remains healthy with more than $136.9 million of liquidity available to fund our business, and we will continue to direct capital to the highest risk-adjusted returns for our shareholders. And with that operator, we are ready to take questions.

Thank you. Our first question comes from Bert Subin of Stifel. Please go ahead.

Hey, good afternoon, Nick and Martin. Thanks for the questions.

Good afternoon.

Good afternoon, Bert.

Nick, can maybe start on the delays, I guess, the last three quarters have been sort of things just keep moving to the right. I mean, I think from a lot of your peers, we're hearing a pretty good story in the aftermarket on demand, sort of seems like an environment where if you have assets, they can be monetized pretty quickly. Can you just talk about what's happened? Maybe what your visibility is? Does the guidance change indicate your visibility has become lower? And it seems like you're still acquiring quite a bit of assets, like how does that play into your view here?

Okay, well, I got to break those questions down. As far as delays in the assets that we were expecting to close in the fourth quarter that have shifted. Do you want me to explain that?

I’m curious about the consistent shift you've noticed, the reasons for any delays, and what the outlook looks like moving forward.

It's not just one issue; there are several factors at play. One significant reason for the extended time in purchasing and selling these assets is the state of the records we receive from various operators. Recent incidents of fraudulent paperwork have resulted in increased scrutiny of aircraft records. This enhanced focus does not stem solely from current regulatory requirements but rather from a higher general level of examination throughout the back-to-birth trace process. What is acceptable for an airline to maintain its aircraft records for FAA or local CAA compliance may not be adequate when we acquire an aircraft and later attempt to sell it to another airline. The condition of these records has been problematic. Airlines and leasing companies selling equipment to us have provided records that are poorly organized. It's a time-consuming process to correct these issues, and frankly, no one has enough resources to do so efficiently. Additionally, as we approach year-end, it becomes challenging to maintain focus on completing transactions due to the holiday season. Our entire team prioritized this effort, ensuring everyone stayed on task during the holidays to facilitate any asset deliveries that were scheduled for the last quarter. Unfortunately, we don't always receive the same level of engagement from sellers during the buying process. Many deals we hoped to close last quarter could have been finalized with better attention from our buyers. While I don't want to fault them entirely, both parties need to collaborate for a successful transaction. This collaboration can be particularly difficult around the holidays when many people prefer to attend to personal obligations. However, our team did their part to ensure timely deliveries. Other issues arise, such as discrepancies found in borescope reports. When multiple inspections of engine components are conducted, sometimes an inspector may check areas of the engine not specified in the service manual. If an anomaly is detected, it can lead to complications with the OEM. For instance, an engine that was considered serviceable can be rejected if it fails to meet standards based on parameters that were not even specified. This doesn't always derail a deal for us, as we have replacement engines available, but cooperation from the lessee or buyer to review records promptly and accept an alternate asset is necessary. These examples illustrate some of the reasons that caused delays in closing deals at year-end, and the situation often worsens during this busy period, leaving no time for recovery.

Got it. Okay. I guess, as we think through '24, sort of limited information out there, but I guess the MRO business you're expanding, USM is doing very well. I mean, those businesses together should generate something north of $20 million of EBITDA, I would think. And then I guess, you're still investing in AerAware, so that's maybe slightly down from that. And you're already selling some of your whole assets and have a lot for sale. Is there any sort of parameters that you're not giving guidance but is there any way to think about EBITDA? I mean, you did over $87 million last year and around $12 million in '23. So it's a big jump in terms of trying to hammer out expectations.

I understand. The amount of revenue we need to generate to cover our fixed overhead is critical. Once we reach that point, everything contributes to our bottom line. However, we can only estimate this at the start of the year based on our past experiences. Looking back at the last five years, we've generally done well with our estimates, even though we didn't have all the information at the beginning of each year. This year has been more challenging in terms of predicting our outcome due to various factors causing delays. The industry is facing unique challenges that we haven't encountered before, such as Boeing's certification issues with the MAX and problems with the Airbus 737-9. We're expecting over 600 A320s to be grounded, which complicates our ability to predict feedstock availability. At the start of the year, we try to determine how much feedstock we can acquire, but these unfamiliar events make accurate predictions difficult. When we decide to purchase equipment, we generally plan to part it out for revenue. This approach usually allows us to estimate how long it will take to get through the repair cycle, but even that has been problematic lately. Typically, we anticipate certain outcomes, like selling parts or rebuilding engines, but these plans can change based on market conditions and the state of the assets we acquire. Much of the actual value only becomes clear once we physically inspect the assets. This complexity makes it hard to provide reliable forecasts, which is why we prefer not to offer very specific guidance to investors. For guidance on the company’s prospects, we should consider available inventory and fixed assets for sale or lease. We also need to look at our investments in expanding MRO capabilities, like the structural component shop, which is nearing completion but hasn't yet generated revenue. Our Millington facility will soon be operational, but we haven't seen returns from that investment yet. Additionally, we're witnessing growth in our landing gear business with contracts from airlines and OEMs for overhauls, producing reliable recurring revenue. This trend is also seen in our accessory division. On the airport MRO front, building our workforce to meet demand is essential. We're in a good position to grow, but we need to hire more mechanics to accommodate that growth.

So maybe just to clarify there, and one last question. In terms of the clarification, I know there is a lot of uncertainty, but if I just look at the assets you have for sale and the things that are happening in the MRO and USM side of things, is there a plausible outcome where your EBITDA could look like '22 in '24?

I’m not going to answer that. Martin, do you have an answer?

Yeah. I mean, I think, Bert, I think the best place to note, and we've noted this in all the calls, is to look at that inventory balance, it's $329 million, that's almost twice what we had at the beginning of last year overall. That's going to give us opportunities to do several things. Not only can we support the USM side, of which demand is robust, but we can also look in putting assets back on the leasing pool, specifically on the engine leasing side of which, with the issues on the geared turbofan, there's very high demand overall. So we're going to have an opportunity to deploy capital and start making revenue in that side. And as always, we'll continue to see opportunities to do whole asset trading as it's opportunistic and as that becomes the highest use of the overall asset. The real challenge that we have from forecasting is we have all of these great avenues to monetize these assets. And sometimes we need to make a determination on, hey, based on the current factors, this is really the best approach from a long-term return aspect. That's what really gives us difficulty in trying to forecast specific overall numbers to give you the analysts and the investors. But pointing at that amount of capital deployment in a market where this material is in high demand, I think gives us some pretty good confidence and belief that we'll be able to improve our performance in 2024.

Got it. Just my last question on the AerAware side. Nick, you said there was five proposals out there. Can you just tell us what that means? And is your expectation that revenues may be more a $25 million plus set up?

Okay. So we have demonstrated our system, whether it be through live flights or through looking at our video or in-person meetings and giving them a good explanation to five different airlines. And all five of those have made a written proposal as to how we would go about, here is the pricing, and here's what we could do for delivery. And we're negotiating with those. And one continues to be the big boy airline that we've been talking to from the very beginning.

Thank you. The next question comes from Gautam Khanna of TD Cowen. Please go ahead.

Hey, guys, how are you doing?

Good afternoon.

Good.

Could you provide an update on the customer interest for AerAware? Some time ago, there was mention of a potential 250-unit order from a customer heavily involved in the product's development. Are there any significant orders within the five proposals currently out there? Additionally, what is the current status of the potential launch customer we anticipated? What seems to be causing the delay?

Okay. This is Gautam, right?

Correct. Yeah.

Okay, good. I had thought so. Okay. So, yes, the customer that I referred to as our big boy that has a lot of 737NGs, we are still talking to, and we're working with them. We've given them more than one proposal. We're getting feedback from them on what they need. We're trying to get to a point at which we can figure out how they can integrate this into their system, the fastest and most economical way. We're not there yet, but that's what it takes. When you get to a point where customers indicated that they want the system, it's one thing to say you want it, but it's another thing to actually place an order. So we've heard that they want it. All five of these, by the way, have indicated they want this system. And one's the big boy, one is another relatively large international airline, and then there are some smaller ones. So we're still working with them. We're still trying to help them figure out how they're going to get their simulators modified. We know how to do that now, get our flight training manual in their hands, so that they can do their own flight training program, which will come from, basically flow from our flight training program. And then the delivery schedule is going to meet and how are they going to put them in the airplanes? Is it going to be while the airplanes are in a maintenance check? Are they going to bring them to our facilities? Are we going to go to their facilities? So all of these are details that have to be worked out as we get to the point before we get a firm order.

Interesting.

We're working on all of those.

I imagine that the same process applies to some of the smaller potential customers. They will need to determine how to acquire the simulators. Do you think there is a similar lead time for closing these orders, whether they're with a larger airline or a smaller one, or is it easier with the smaller airline?

It will likely take longer with a large airline because they have more pilots to train. Smaller airlines may conduct flight training in the airplane itself, which is costly. It might not be feasible for a small airline to invest in modifying a simulator with our system. The timeline will depend on how many airplanes the airline has and whether they can justify the modification costs. Additionally, it will depend on the willingness of a simulator operator to make those modifications. When we conducted flight training for the FAA, we trained five pilots who hadn't previously used our Enhanced Flight Vision system. We provided ground school training and conducted flight testing with them in the airplane. Although it was an expensive process, we successfully trained those five pilots.

Got it. Okay. To follow up on your earlier comments regarding the increased documentation standards for maintenance history, I’m wondering if this information is accessible. Is it just a matter of time to finalize things, or is it more complicated to obtain this information? I’m curious if this might delay the availability of these assets for sale.

The information is generally accessible. If you can have someone review their archives and pull the data, that would help. It's quite frustrating when we attempt to purchase an airplane or engine that has been owned by various airlines, and even though the airline still operates and has records, we encounter gaps in the documentation, like missing non-incident statements or back-to-birth traceability on certain life-limited parts. When we approach the airline to request what we need them to sign, they often respond that they are too busy with other matters and are unwilling to assist, even though the airplane was sold long ago. This results in gaps in the records that deter most customers from buying. Some may proceed despite this, as these gaps aren't always regulatory issues but rather industry standards that require complete and flawless records. This situation is frustrating, but I believe that all records can be resolved with the cooperation of the various parties involved with the flight equipment. We typically find success, and it's rare that we abandon the effort. Additionally, when we're pricing, if we identify parts, like an engine or an aircraft landing gear, that don't meet standards, we assess the situation. If we determine that those parts cannot be fixable, we adjust the price accordingly. We indicate that those parts lack traceability and are not sellable, and if requested, we can return them when we disassemble the engine, but we won't pay for them. We have done this in cases where parts lack life-limited traceability, and without the necessary paperwork to accompany them, those parts essentially become scrap metal.

That's a helpful answer. I appreciate it. And I may have missed this if you did address it, but can you remind us how many 757 aircraft you still have kind of in the hopper to potentially monetize? And where we are in some of those? Which negotiations are closer at hand and which are a little further out?

Yeah. I wish I could report that we were in great shape on the 757, as far as customer demand. Right now, the cargo market continues to be very soft. There seem to be more available aircraft than the cargo operators need at this point, and that applies to the 757. We do have seven airplanes that are uncommitted at this point. We are talking to airlines for both lease and potential sale, including customers that we've already sold aircraft to. But nothing is, we have no contracts at this point on those airplanes. And that's another very difficult thing to project for the balance of this year because I don't have any real strong understanding of where the freight market will be, as the balance of this year unfolds. So at this point, seven airplanes either have been converted or finishing conversion. We're looking for homes for them in a tough market. The market will recover and those airplanes will be viable again for leasing and sale. And we're going to have to wait it out.

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

Hey, good afternoon, Nick and Martin.

Good afternoon, Ken.

Hi, Ken.

Hey, I wanted to start by mentioning that you have nearly $330 million in inventory or assets on the balance sheet that can be monetized. It seems you have agreements for an additional $83 million in purchases, and you've already sold about $30 million this quarter, if I remember correctly. I understand it's difficult to predict, especially with various customer issues. I have two questions. First, could you provide more details, besides the 757s, on the types of assets you hold? Are these primarily engines with low near-term demand or airframes? Also, how much could the inventory balance decrease by the end of 2024 if everything goes as planned, especially since you're still investing capital in feedstock?

The majority of our inventory consists of engine-related parts, including CFM56, CF6-80s, and RB211 engines, which are currently in demand. This positions us well to support used serviceable material sales and create opportunities in the leasing market for our customized short-term leases, offering significantly higher returns compared to the typical sub-1% monthly lease rates of pure-play leasing companies. A smaller segment of our inventory is made up of airframe materials, which support the 737 and 757 platforms, and this material is also in high demand for servicing those fleets. We're optimistic about these opportunities. However, as I mentioned earlier, our primary challenge is determining the best strategy to monetize these assets. The leasing market appears promising, and from a long-term perspective, the returns are appealing, especially given the limited availability of assets for sale, which are also commanding a premium in trades. We are continuously evaluating the most effective long-term approach because we aim to be opportunistic and maximize our potential, rather than simply focusing on hitting specific quarterly or year-to-date targets.

Thanks, Martin. I understand the desire to maximize returns, but considering the EBITDA in 2023 and a recurring question, at what point might you feel a greater sense of urgency to monetize these assets? This could create more inventory and potentially speed up the process of moving things off the balance sheet.

Yeah. I would say.

Let me address that. We sell what we have available, particularly the 757s, when they are ready for sale. The demand in the marketplace for USM and engines is very strong. The challenge lies in processing these assets through the system, making them available for sale, and navigating the current market dynamics, such as long lead times for repairs and overhauls. I assure you there is a sense of urgency in getting whatever is ready for sale. We are prioritizing this process, but certain decisions might take longer. For instance, we sometimes choose to take parts from engines or aircraft we've acquired to sell as USM to others who are overhauling engines, as they would benefit from the life-limited parts we've extracted. This can delay short-term sales as we focus on getting an engine repaired rather than securing immediate revenue from available parts. We then consider whether to sell it in a hot market for a premium or lease the engine for a longer-term return. It's important to understand that urgency does not equate to the best financial outcome, and we maintain a long-term perspective on building the company's profitability rather than focusing solely on short-term gains. I realize this may not align with what investors typically expect, as everyone desires quick returns, but our priority is to do what benefits the business sustainably.

I appreciate that, Nick. As a public company, you're clearly navigating a delicate balance between managing short-term, mid-term, and long-term expectations, which I value. Regarding the carrying value of the inventory on the balance sheet as it becomes available and as you aim to monetize it, is there any reason to believe that this value wouldn't support the gross margins we experienced in 2021 and 2022?

Some of the margins we experienced in 2021 and 2022 were due to our 757 program, which had notably high margins. Therefore, I don’t anticipate we will see the same margins exceeding 40% that we observed during that time.

That's right. They average around 40%.

We achieved an exceptional margin on our 757 transactions by taking advantage of a unique market opportunity and having the right assets available. I don't anticipate maintaining that level in the future. However, historically, we aim for a consistent margin of 25%, which aligns with a 25% IRR. These are our minimum target thresholds, and we have successfully met them over time.

Perfect. Thanks.

We can't continue that.

Okay, perfect. Thanks, guys. I'll pass it back there.

Okay. You're welcome.

Thank you. Our final question comes from Sam Struhsaker of Truist Securities. Please go ahead.

Hey, good evening, guys. On for Mike Ciarmoli, this evening. Thanks for taking the question. I guess thinking about all of the inventory that you guys have on hand. I'm just kind of curious, I guess, first of all, how much of that you mentioned, a lot of the issues that you guys have been facing in terms of getting those things fully through and sold to customers. So I guess, first of all, how much of that inventory would you say is just ready to go right now versus might still have some things you need to overcome? And then in addition to that, are the kind of issues you guys have discussed so far really the only thing, or is there anything else going on that might kind of lead to delays in getting it out the door?

Martin, do you have the numbers on what's available?

Yeah. Overall.

What's already available today?

Yeah. Overall available that we have that potentially will go into leasing, USM or whole assets would be about almost about over $200 million of that overall inventory. Again, the notion will be whether it goes into the leasing portfolio, or it goes into trading or ultimately it goes into the USM bucket overall. But that's what's already available, the rest of the material is obviously in inventory being processed. And as Ken noted earlier, we have an additional $80 million of inventory that's been awarded that is going to close in the first half of the year.

Okay, that's very helpful. And then on the engine inventory, do you guys have any metrics on, I guess, how much of that is parts versus full engines?

That's part of the challenge in overall forecasting these old asset opportunities. Nick provided a great example. We can sell some of these fast-moving parts, and the market would eagerly take them off our hands. However, the best decision is to actually obtain the engine and rebuild it. As we've mentioned before, we're completely agnostic about how we monetize that asset; our focus is simply on achieving the highest return.

Understood. Yeah, that's helpful. And then one more would be, I think you guys mentioned, you were seeing some potentially longer-term contracts, more stability. Was that really just the landing gear and the accessory contracts that you guys alluded to, or is there some more there that you guys are looking at?

Yeah, that comment was specifically related to our component MROs. We've had some pretty significant wins in '23, both with airlines and one particular OEM, on giving us pretty much a line of sight on specific overall business. So that is going to improve our volume that we're running through those units. It's also going to allow us to use the greater capacity that we have available in those units. And we've noted earlier, we've actually been making investments to increase capacity at a lot of our businesses. So all of those investments are starting to bear fruit. These contracts are going to start using that capacity and that capability. That's also going to improve efficiencies in operating those units. So we're going to have a good strong start in 2024. As these contracts start maturing, that'll also give us greater visibility into kind of recurring revenue patterns. But as we did note, those were wins in 2023, so we'll start seeing exactly how those contracts perform in '24.

Great. That's very helpful. Thank you, guys.

You're welcome.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over to Nick Finazzo for closing remarks.

Okay. Well, thank you again for listening to our call today and for your interest in AerSale. We look forward to updating you again next quarter. Good evening.

Thank you. Ladies and gentlemen, that concludes today's event. Thanks for attending and you may now disconnect your lines.