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

Good afternoon. I'd like to welcome everyone to AerSale's Third Quarter 2024 Earnings Call. Conducting the call today are Nick Finazzo, Chief Executive Officer; and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results. Important factors that could cause our actual results to differ materially from forward-looking statements are discussed in the Risk Factors section on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 8, 2024, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important to assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investors section of the AerSale website at ir.aersale.com. With that, I'll turn the call over to Nick Finazzo.

Thank you, Christine. Good afternoon, and thank you for joining our call. I'd like to begin today with a summary of the quarter and a review of our strategic objectives before turning the call over to Martin for a closer look at the numbers. Underlying business trends continue to improve in our core business, and we remain focused on the factors we can control. This included the following drivers and key takeaways from the quarter: We expanded our lease pool, which drove a meaningful uptick in our leasing revenue, which will recur through the balance of the lease terms. This is consistent with the strategic priorities we discussed last quarter. Second, as a result of increased feedstock availability, our USM business performed well, and we have sufficient stock remaining throughout the next 12 months as we navigate a challenging used aircraft backdrop. Third, our MRO business continued to improve in the quarter and was the primary driver of an 18% growth year-over-year in the segment. Lastly, we remain on track with our MRO expansion projects, which will drive increased revenue incrementally each quarter in 2025 and improve margins as the investment period concludes. Turning to our consolidated results, third quarter revenue of $82.7 million trailed the prior year of $92.5 million as a result of lower flight equipment sales in the quarter, primarily related to the sale of a 757 freighter that occurred in 2023. Excluding flight equipment sales that tend to be volatile, the underlying trends were positive year-over-year across our business and revenue increased 26%. Improved underlying performance resulted from stronger USM sales as volume from feedstock acquisitions worked its way through the system, additional assets in our lease pool compared to the prior year, and continued strength in demand for MRO services. Flight equipment sales in the third quarter of 2024 were $22.6 million compared to $44.8 million in the prior year. As we remind investors every quarter, due to the nature of our business and the impact of flight equipment sales, our top line revenue levels can vary significantly quarter-to-quarter, and we believe our business is best assessed based on aggregate performance over a longer period of time with a focus on feedstock levels and the value our team is able to extract from those investments. Third quarter adjusted EBITDA improved to $8.2 million compared with $1.9 million in 2023. Higher EBITDA in the period resulted from stronger gross margin and lower operating expense. Next, I'd like to provide an update on the strategic priorities that we laid out last quarter, beginning with our MRO facility expansion projects. In our Miami component facility, which will add pneumatic capabilities to our MRO footprint and expand our addressable market, we remain on track to complete this project at the end of the year. We expect it to be operational in the first quarter of 2025, at which point we will begin to generate revenue. Second, at our expansion project for the Miami Aerostructures facility, where we are tripling our total capacity, we also remain on track to complete this investment by the end of the fourth quarter and be operational by the end of the first quarter of 2025. Finally, at our Millington on-airport MRO facility, we are operational and have begun to generate revenue during the quarter. As we fill capacity, we expect this facility to contribute to our overall EBITDA, but initial volume during the ramp-up phase created a $0.9 million drag on EBITDA in the period. With all of these facilities, we expect a sequential step-up from initial volumes in 2025 and into 2026, with an ultimate run rate of at least $50 million annually. Further, as we complete these projects, the associated CapEx and excess operating costs will abate, benefiting the operating run rate in our TechOps segment. In total, we have been incurring approximately $1 million in annualized costs for incremental rent as we work to expand these facilities. These amounts are in addition to the $0.9 million EBITDA loss in Millington, which is now operational and will have a more positive impact on our operating results. As I noted last quarter, we're utilizing a portion of our feedstock to expand our specialty lease pool, which is more in line with our pre-pandemic operating structure. To that end, we added four engines during the period. This led to a year-over-year improvement in our leasing revenue and, as we continue to add engines, will help smooth our quarterly performance in subsequent quarters through the duration of these leases. Regarding our 757 P2F conversion program, the end market showed additional signs of loosening with enhanced customer interest and bidding activity. These opportunities range from sales to leases. While we're still in discussions with multiple customers and the outcome is uncertain, we're encouraged by the enhanced level of activity occurring. Turning to our segments and beginning with Asset Management, third quarter sales were $50.4 million compared to $65.1 million in the prior year. Similar to our consolidated results, lower revenue was entirely attributable to flight equipment sales during the period, particularly from the sale of a 757 freighter in the third quarter of '23. Excluding flight equipment sales, segment sales were up 36.9% year-over-year, driven by better feedstock availability from the $139.9 million acquired in 2023 and the addition of four engines to our lease pool. In the quarter, we sold five engines compared to seven engines and a 757 freighter in '23. The backdrop for acquiring feedstock remains challenged, primarily as a result of OEM production delays that have led airlines to continue operating midlife aircraft. Fewer aircraft available and more competition for these aircraft has led to higher asset pricing which has also decreased our overall acquisition rate. We've continued to bid on select available assets following our disciplined guidelines, with more than $253 million in bids submitted in the third quarter, of which over $117 million were awarded, with AerSale winning $3.6 million, however, a success rate of just 3.1% of awarded deals. To put it in perspective, this compares to our historical win rate of approximately 10%. Year-to-date, we've acquired $42 million in total feedstock, which is at a level below our annual target of $150 million, but we still retain sufficient inventory levels to support our business for at least the next 12 months as we envision market conditions will begin to normalize. Turning to our TechOps segment, second quarter sales continued to grow amid strong commercial demand. Segment revenue increased 17.6% to $32.3 million compared to the year ago period. Growth was widespread across most of our facilities, including modest initial sales volume from our new Millington on-airport MRO. We expect growth at Millington to continue as we expand our customer base and also from the additional capacity and new capabilities being added to our component and accessory shops coming online by the end of 2024. Turning to Engineered Solutions, we had an active quarter of dialogue with multiple prospective customers regarding AerAware, our revolutionary enhanced flight vision system, incorporating a dual head wearable display applicable to the 737 for which we hold the only supplemental type certificate for its type issued by the FAA, which we received last December. This AerAware sales activity included demonstration flights for three different operators. Despite the long commercialization phase for this advanced system, we remain optimistic about the prospects for AerAware as we work to win a launch customer, and we'll continue to update investors on incremental developments. We also continue to pursue sales opportunities for AerSafe, our proprietary STC developed to provide fuel tank flammability protection, applicable to a number of popular narrow and wide-body commercial aircraft, including the 727, 737, 767, 777, and the A320 family of aircraft. As we approach a 2026 regulatory compliance deadline requiring aircraft not equipped with AerSafe or another approved system to have fuel tank flammability protection, we anticipate our current order backlog of approximately $11 million to accelerate and double over this time frame. As commented during previous earnings calls, our Engineered Solutions products have generated sales margins in excess of 50%, which we expect will be consistent for future sales. In the third quarter, we sold two AerSafe systems. In closing, our core business demonstrated strong underlying growth driven by better feedstock and a robust commercial aerospace backdrop. We are working hard to stabilize our base revenue and have added additional lease equipment, which will provide recurring quarterly revenue. Longer term, we're excited to bring the capacity expansion projects online in our TechOps segment and look forward to pursuing the monetization of the 727 P2F conversions that will help drive meaningful cash flow. Finally, we remain confident that our revolutionary enhanced flight vision system, AerAware, will gain market acceptance and become a significant contributor to our long-term financial performance and ultimate company valuation. 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. Now I'll turn the call over to Martin for a closer look at the numbers.

Thanks, Nick. Our third quarter revenue was $82.7 million, which included $22.6 million in flight equipment sales, consisting of five engines and no aircraft. Revenue in the third quarter of 2023 was $92.5 million and included $44.8 million of flight equipment sales, consisting of seven engines and a P2F converted Boeing 757 aircraft. As we have pointed out during all of our earnings calls, flight equipment sales may significantly vary from quarter-to-quarter, and we believe monitoring our progress based on asset purchases and sales over the long term is a more appropriate measure of our progress. Third quarter gross margin was 28.6% compared to 25.4% in the third quarter of 2023, primarily driven by sales mix that included higher-margin engine leasing and flight equipment sales. Selling, general and administrative expenses were $21.7 million in the third quarter of 2024, which included $1.2 million of noncash equity-based compensation expenses. Selling, general and administrative expenses were $25.4 million in the third quarter of 2023 and included $3.2 million of noncash equity-based compensation expenses. The decrease in selling, general and administrative expenses was primarily driven by lower payroll, research and development costs, and repair and maintenance expenses during the quarter. Third quarter income from operations was $2 million compared to a loss from operations of $1.9 million in the third quarter of 2023. Net income was $0.5 million in the third quarter compared to a net loss of $0.1 million in the third quarter of 2023. Adjusted for noncash equity-based compensation, mark-to-market adjustment to the private warrant liability, facility relocation costs, inventory reserves, and secondary issuance costs, adjusted net income was $1.8 million in the third quarter of 2024. Adjusted for the same items, the third quarter of 2023 had an adjusted net income of $0.9 million. Third quarter diluted earnings per share was $0.01 compared to diluted earnings per share of zero in the third quarter of 2023. Excluding the adjustments mentioned above, third quarter adjusted diluted earnings per share was $0.04 compared to adjusted diluted earnings per share of $0.03 for the third quarter of 2023. Adjusted EBITDA was $8.2 million in the third quarter of 2024 compared to $1.9 million in the prior year period. The growth in adjusted EBITDA was a result of increased leasing revenue and higher margins on flight equipment sales. Next, in terms of our cash flow metrics, year-to-date cash used in operating activities was $26.4 million, resulting from a gross investment of over $62.6 million in newly acquired feedstock and make-ready costs to prepare inventory for sale, which should drive our revenue and earnings going forward. This is an improvement for the quarter of $10.4 million in cash generated from operations as we begin to monetize previously purchased feedstock. We ended the quarter with a substantial balance sheet with $103.5 million of liquidity, consisting of $9.8 million in cash and available capacity of $93.7 million on our $180 million revolving credit facility, which can be expanded to $200 million. As an update to pending insurance claims, as we mentioned during the second quarter earnings call, we suffered a loss due to a fire at one of our leased auxiliary USM inventory facilities located in Roswell, New Mexico. In that facility, we had approximately $67.6 million of inventory valued at market prices, which is fully covered by insurance and for which we have made a $67.6 million claim subject to a $10,000 deductible. In addition, we also have an outstanding claim of $5.5 million against our war risk insurers for a General Electric CF-680C2 engine that has been detained in Russia since the start of the war with Ukraine. Although the exact amount that will be paid to us for these claims totaling over $70 million has yet to be finalized, in both cases, our insurers have indicated they anticipate making payment before year-end. Looking forward, we have an opportunity to drive significant near-term cash flow through the monetization of our 757 P2F aircraft, existing feedstock inventory, and increased contributions from our MROs as we take advantage of available capacity and new capabilities. With that, operator, we are ready to take questions.

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

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

Okay. So Gautam, I've been asked that question multiple times in given my opinion of when I thought things would happen. Based on prior experience, I think it's not prudent to give another opinion on when this will happen. I can tell you this much. We have been diligently working with multiple customers to help them figure out what it will take to get this system over the line for them. It's not simple. It'd be simpler for a small carrier, but for larger carriers, it's much more complex and requires much more planning. There hasn't been pushback yet other than the complexity of dealing with, in the case of a large carrier of what it takes to get the system implemented. And just to give you a little heads-up on what those complexities are, it involves pilot training, simulators, updating training manuals, the logistics of when you can get aircraft to be available to have the system installed in it, future planning, needing to be included in the budgetary process, in addition to the economic analysis that comes with looking at it from the perspective of whether it saves flights in inclement weather, and what's the economic benefit of that. The safety benefit is also a consideration. So, all of those things contribute to an airline's decision on whether to take this. Across the board, that has taken time. One of the things that I think I didn't fully understand was the long commercialization phase of this. Since we've gotten this product certified and we've talked to several airlines, the only pushback has been that this doesn't happen overnight and it's going to take time to figure out how to implement this system. We're working through that. I think in the prior earnings call, I mentioned that we expect the commercialization phase from start to finish with the carrier would be 18 months. We've actually been talking to the airline that we started with for more than 18 months by now. I believe we are in an advanced phase with them and they have indicated their commitment and interest in taking it. So, we're working there. The only pushback we've received is related to funding. They simply don't have the money for it. It doesn't matter whether they could use the system or not or they operate in an area where they don't have a need for it. They don't appreciate the safety aspect, and they don't fly into areas prone to inclement weather.

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

Yes. It's a good question because I ask it every day: how are we losing these deals and to whom. So, it's a combination of various players. Typically, we would acquire flight equipment from airlines that are retiring flight equipment and from leasing companies that have taken back flight equipment off lease, and they don't have a home for these assets. In today's environment, with the A320 engine problems and the 737 MAX delivery issues, airlines are holding on to midlife flight equipment, which is our core focus. Airlines that would otherwise turn an airplane back to the lessor are now purchasing the aircraft directly from the lessor, preventing us from accessing them. Lessors have become smart and realized that the best way to sell an airplane is with a couple of years of lease revenue attached to it. We've been unsuccessful in winning deals where we are just buying aircraft without leases because the residual values that others can put on an asset, assuming two to three years of lease revenue, could be dramatically different than our projections. We have to maintain discipline because we know what the equipment is going to be worth. We are competing against companies that may not have our insight or are more aggressive than we are, and we need to remain disciplined. Additionally, we have other leasing companies buying equipment when it comes off lease, which is very rare, and we face competition from new money entering the space, including private equity, hedge funds, or family offices that see an opportunity to invest in this sector and buy used equipment. If it's equipment being leased, those companies might find success, but they may struggle with off-lease equipment that requires significant work, which we are equipped to handle. What I have tried to explain to our investors from the beginning is that we possess a fully integrated, multidimensional value extraction business. This capability allows us to look at an asset and determine the best way to monetize it, providing good insight into future value and the maximum amount we can pay for it. When we lose bids, it is often by a wider margin than we expect based on projected margins. This is why we are committed to maintaining discipline, and I do not know how those winning bids will profit from it.

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

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

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

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

Yes. I mean, Ken, as a reminder, the fourth quarter of last year had the sale of two 757 P2F aircraft accounted for in that overall quarter. So, when you've seen increases in the fourth quarter, it's been related to the timing of flight equipment sales. Having said that, we do have good line of sight on some engine whole asset sales that will occur in the fourth quarter. However, that seasonality has really been just the timing of that equipment.

Okay, thanks, Martin, that's helpful. I want to add that while we do anticipate improvement in the fourth quarter, we want to emphasize that there's no guaranteed seasonality to that.

Got it. That's helpful. And Nick, you mentioned with the MRO investments you're making, you expect to achieve an incremental $50 million run rate throughout the few programs you've identified: two in Miami and the Millington facility. Perhaps you could specify where the MRO business stands today concerning the revenue run rate? What would be a good normalized EBITDA margin or number on that base business as we start to layer in the additional revenue opportunity from these programs?

Yes. So right now, Ken, we anticipate an increase of about $50 million in run rate for when the three expansion projects come online. Millington went online during the actual end of the second quarter, and it's starting to gain momentum. Unfortunately, initial volume hasn't been enough to cover overall costs; it was a negative contributor for the quarter, but we expect it to return to profitability as we expand our customer base. The two other projects will come online by the end of the year, generating revenue profiles in the first quarter of the following year. That $50 million will be incremental through 2025 and into 2026. We believe that in terms of margin profile for those units, we foresee contribution margins of about 20% to 30%, depending on the type of work we will be conducting at those facilities.

Okay. Very helpful. Can you provide any commentary on the run rate today of the base MRO business and the growth you've seen in that sector throughout this year?

I think right now, we're probably running around an $8 million to $10 million EBITDA contribution in those overall units. We expect that not only to improve because of the new additions, but we also have additional capacity, both in our on-airport MROs and component and accessory shops. As we continue to fill those units, we will benefit from the new contracts we've won in both our accessories and landing gear shops, allowing additional volume to flow through. This will enhance our margin profile due to better absorption of fixed costs and labor utilization. Thus, we expect that number to increase significantly through 2025.

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

Good evening, guys. Thanks for taking the questions. I am on for Michael Ciarmoli. Building on the MRO line of questioning and the new build-outs, you mentioned that Millington was a bit low on volume to start. How are you thinking about the incremental projects? Do you have contracted business expected once the other projects are operational, or how do you envision the timeline for new work at those facilities once they come online?

Millington is operational. We are actively seeking customers for their on-airport MRO work and expect to start filling that facility, but we only need to reach two bases for it to be effective. It's a new location, but we already have an existing customer there. We had a large airline with 737s that we conducted landing gear work for. This customer base is familiarizing itself with our site, which is located mid-country, in contrast to our west facilities like Goodyear or Roswell. We are working to introduce new customers to that facility as we've dedicated significant resources to it. The location itself is impressive, and we expect to ramp up over time, similar to our other facilities. However, we incurred ramp-up expenses because we need to train mechanics and establish proper tooling before revenue can be realized. The reason for the upfront ramp-up loss is tied to these factors. Regarding our component MROs, we have more business than we can handle in our existing aero-structures shop, compounded by space limitations. Our existing facility has about 30,000 square feet, while the new one we have been paying for over a year boasts roughly 90,000 square feet, equipped with the latest technology. We've already shown our new facility to large commercial operators, and they have indicated that they will provide work once we can accommodate it. Since we are limited in capacity at our current site, we are eager to ramp up quickly in our new facility.

Got it. Understood. That's very helpful color. Thank you, and it makes good sense in terms of the demand trends there. If I could just sneak in one other query. You mentioned that the USM feedstock availability and supply appear to be improving a bit. Could you clarify what you are observing regarding the specific supply of USM?

I'm not sure you stated that correctly or understood it entirely. USM availability as of today, owing to the win rate of our bids, is not as abundant as it was at this same time last year. That doesn’t imply we won’t end the year positively; there are just fewer than two months left. Achieving our $150 million feedstock purchase target by year-end appears unlikely. Last year, we exceeded $130 million in acquisitions, and we are currently at about $40 million. So, we have less feedstock available compared to last year. While we could end the year on a positive note, we are likely to have a reduced amount of closed feedstock compared to the previous year. With the limited feedstock, we obviously face a timeline for it to index into our inventory and sold off over the next year. We must maintain discipline; if we overpay, we may not profit from selling it and could incur write-offs. It’s a balancing act regarding how aggressive we will be with our feedstock purchases. The answer to that is no; we will not chase the market. Our historical approach has remained unchanged. Through years of experience, we’ve learned that becoming overly aggressive in bids can be detrimental, resulting in losses that can jeopardize the company's future.

Additionally, as Nick mentioned, waiting for the market to recover, we are positioned well with our existing inventory. Our efforts to deploy over $130 million last year into serviceable material will require further investment before the inventory can be marketed effectively. However, we are starting to see positive impacts from those deployments within our financial statements. We have a solid line of sight for at least the next 12 months to support our USM business.

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

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