AerSale Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Aerosil Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Jackie Carlin, Vice President of Marketing and Communications. Please go ahead.

Speaker 1

Good afternoon. I'd like to welcome everyone to AerSale's Q3 2023 earnings call. Conducting the call today are Nick Sannazzo, 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.

Speaker 1

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 ks for the year ended December 31, 2022, filed with the Securities and Exchange Commission, SEC, on March 7, 2023, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ only 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 during the Q1 of 2019. 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 AirSale website at ir.airsale.com. With that, I'll turn the call over to Nick Fonazo.

Speaker 2

Thank you, Jackie. 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 3rd quarter results improved notably over the Q2 and the prior year. In total, we reported Sales of $92,500,000 an increase of 81% against Q3 2022 sales of $51,000,000 This increase was largely the result of flight equipment sales in the period, which included $38,900,000 of engine sales.

Speaker 2

Sequentially, sales increased as we were able to monetize the strong levels of feedstock acquired over the past 12 months, which included both engine and aircraft flight equipment sales during the period. While we're pleased to see the increased volume, 3rd quarter results As we do each quarter, I would like to remind investors that our quarterly results tend to be lumpy because of the timing of flight equipment sales. Therefore, assessing full year Time periods and feedstock acquisition rates are both better analytical tools to our performance and year over year or sequential revenue patterns. Turning to profitability. Adjusted EBITDA in the 3rd quarter was $1,900,000 compared to a loss of $500,000 in the year ago period.

Speaker 2

The improvement in EBITDA performance was the result of higher flight equipment sales during the period and better USM volume. At the segment level and beginning with Asset Management, 3rd quarter sales were $65,100,000 compared to just $20,600,000 in the prior quarter in the prior year's quarter. Higher sales compared to 2022 reflected the monetization of feedstock acquisitions with the growth stemming from increased flight equipment and USM parts partially offset by lower revenues from our leasing portfolio. In the current year, we sold 7 engines and 1 P2F converted 757 aircraft during the period compared with 2 engines and no aircraft in the prior year. In addition to the flight equipment sales delivered in the 3rd quarter, there are 2 aircraft, a highly modified 730seven-eight 100 and a P2F converted 757 aircraft we expected to deliver in the 3rd quarter that are now expected to be delivered in the 4th quarter.

Speaker 2

Looking forward, with the aircraft and engines planned for delivery in the Q4, we anticipate a solid finish to the year for flight equipment sales with an additional 18 in the pipeline expected to close before year end. Turning to an update on the cargo market. Conditions continue to be unfavorable as higher interest rates and lower air cargo demand create a dramatically different backdrop And what we experienced during and immediately following the pandemic when consumer demand for physical goods peaked. To date, we've sold 8 aircraft under our 757 P2F conversion program and currently have an additional 10 aircraft in inventory waiting for delivery or conversion. Consistent with our communication last quarter, given the current end market conditions, We anticipate these will take longer to place than originally forecasted at the start of the year and expect a higher mix of aircraft will be leased instead of sold.

Speaker 2

In our USM Parts business, airframe and engine parts sales nearly doubled compared to the prior year, which is the direct result of the success of our feedstock acquisition program converting to sales. Year to date, We've closed on approximately $130,000,000 of feedstock with a total of $200,000,000 acquired or under contract. This compares to the 1st 9 months of 2022, which included just $34,000,000 of feedstock. Elevated feedstock levels drove higher sales in the 3rd quarter, which is expected to continue in the Q4 and into 2024. Finally, in our leasing portfolio, we had no aircraft and 7 engines on lease during the period, compared to 1 aircraft and 17 engines in the year ago period.

Speaker 2

Because we're continuously monitoring the best and highest use of our flight equipment, We opportunistically sold some of these assets, which provided a higher return profile than continuing to lease. In our TechOps segment, we reported sales of $27,400,000 compared to $30,400,000 in the Q3 of 22. Lower sales resulted from fewer aircraft in storage and the completion of several large customer programs at our aerostructures and landing gear facilities. This work at our landing gear shop has since been replaced by a larger long term program with a major U. S.

Speaker 2

Airline that began in the Q4. At our Aerostructure shop, we're on boarding new customers to fill the additional Turning to Engineered Solutions. We are near the conclusion of the FAA approval process of our enhanced flight vision system, AeroWare. At this time, all tests have been completed and we're working through documentation review and completion of final checklist items in anticipation of issuance of the STC by the FAA. In addition, in late October, we announced that we received FAA approval for a 50% visual advantage over the naked eye, which will make Eiroware the 1st and only product available with this level of visual advantage.

Speaker 2

We are proud of this award as it validates the primary benefit of EraWear, offering a compelling value proposition to our customers as the The system enhances safety, lowers operating costs by minimizing weather related delays and fuel consumption and provides associated environmental benefits by lowering carbon emissions. Turning to capital allocation. We have a healthy almost unlevered balance sheet enabling continued funding of our acquisition programs to sustain business growth. To date, we've acquired roughly $130,000,000 of feedstock and ended the quarter with approximately $175,000,000 of liquidity, consisting of cash on our balance sheet and remaining revolver capacity. Further, as we continue to monetize the feedstock already acquired, we anticipate an increase in free cash flow generation, net of any additional feedstock purchases.

Speaker 2

In conclusion, our 3rd quarter results Have shown significant improvement over the previous quarter and the same period last year. Our growing feedstock availability is driving Better quarterly performance and flight equipment sales. Given the success of our feedstock acquisition program in 2023, Resulting in the significant volume of inventory we currently have available to convert to sales, we anticipate this trend to continue into the foreseeable future. We anticipate a strong Q4 as we finish the year with flight equipment sales expected to continue their positive momentum. I would like to thank our employees for their dedication to AerSale and their efforts in delivering on our commitments to all stakeholders.

Speaker 2

Now, I'll turn the call over to Martin for a closer look at the numbers. Martin?

Speaker 3

Thanks, Nick. I will start with an overview of our Q3 financial performance and with our updated guidance for 2023. Our 3rd quarter revenue was $92,500,000 which included $44,800,000 in flight equipment sales consisting of 7 engines and a P2F converted Boeing 757 aircraft. Revenue in the Q3 of 2022 was 51,000,000 and included $2,700,000 of flight equipment sales consisting of only 2 engines and no aircraft. 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.

Speaker 3

3rd quarter asset management revenue rose to $65,100,000 because of the increase in flight equipment sales I just mentioned. USM Parts sales were up from the year ago quarter because of higher demand and availability of feedstock, which was partially offset by lower revenue from leasing. TechOps revenue was down 9.8 percent to $27,400,000 in the 3rd quarter from $30,400,000 in the Q3 of Our TechCos business was adversely impacted by fewer customer aircraft in storage as compared to prior periods and weaker contributions from our aerostructures and landing gear facilities. This was partially offset by greater revenue associated with increased on Airport MRO capacity dedicated to customer aircraft, which was enabled by outsourcing the P2F conversions of our 7/57 aircraft. 3rd quarter gross margin was 25.4 percent compared to 30.4% in the Q3 of 2022, primarily driven by the mix of flight equipment sales.

Speaker 3

Selling, general and administrative expenses were $25,400,000 in the Q3 of 20 23, which included $3,200,000 of non cash equity based compensation expenses. Selling, general and administrative expenses were $24,000,000 in the Q3 of 2022 and included $4,400,000 of non cash equity based compensation expenses. The increase in selling, general and administrative expenses were primarily driven by higher costs related to Airwear development and facility expansions. 3rd quarter loss from operations was $1,900,000 $8,500,000 in the Q3 of 2022. Net loss was $100,000 in the 3rd quarter compared to $9,000,000 in the Q3 of 2022.

Speaker 3

Adjusted for non cash 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 $900,000 in the Q3 of 2023. Adjusted for these same items, the Q3 of 'twenty two had an adjusted net loss of 1,900,000 3rd quarter diluted earnings per share was 0 compared to diluted loss per share of $0.17 in the Q3 of 2022. Excluding the adjustments mentioned above, 3rd quarter adjusted diluted earnings per share was $0.02 compared to adjusted diluted loss per share of $0.03 for the Q3 of 2022. Adjusted EBITDA was $1,900,000 in the Q3 of 2023 compared to a loss of $500,000 in the prior year period. The growth in adjusted EBITDA was a result of higher UFM sales and a greater number of flight equipment sales.

Speaker 3

Next, in terms of our cash flow metrics, cash used in operating activities was $168,100,000 resulting from a gross investment of over $200,000,000 in newly acquired feedstock and make ready costs to prepare inventory for sale, which should drive our revenue and earnings going forward. We ended the quarter with a substantial balance sheet with 174 point $6,000,000 of liquidity, consisting of $3,200,000 in cash and available capacity of $171,400,000 on our $180,000,000 revolving credit facility, which can be expanded to 200,000,000 Finally, moving to our updated guidance for 2023. We now expect to generate revenue $400,000,000 to $420,000,000 and adjusted EBITDA of $40,000,000 to $45,000,000 in 2023. Our revenue and adjusted EBITDA guidance reflects current expectations for our core business and flight equipment sales slated for delivery before year end. The exact timing of the flight equipment sales can vary by days or weeks based on a variety of factors.

Speaker 3

Therefore, because of the amount of asset sales that are planned to close by the end of the year, but with limited time remaining to do so, Some of those could roll into the Q1 of 2024. We are pleased with the recovery in our sales in the 3rd quarter, was driven by the broad success of our feedstock acquisition program, and we remain confident that our purpose built model and excellent execution capabilities will enable us to drive and generate long term value for all of our stakeholders. With that operator, we are ready to take questions.

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. The first question comes from Bert Soudin from Stifel. Please go ahead.

Speaker 4

Hey, good afternoon and taking the question. Good afternoon, Mark. Hey, Nick. Martin, you just said You could see some rollover into the Q1. I know visibility has been sort of challenging this year and that's led to some timing delays.

Speaker 4

Can you just give us, I guess, some commentary on what your visibility is in the Q4? Have you sold any of those, I guess, Through today in the quarter. And as we think about 2024, you've had about $65,000,000 of sales slip Just based on your guidance update, which seems to be mostly on the whole asset side,

Speaker 5

can you give us

Speaker 4

any way to think about how that gets At least how you're thinking about that showing up in 2024?

Speaker 3

Yes. So as far as overall guidance, at this point, we actually have anticipated delivery schedule. So That gives us better visibility into the potential flight equipment sales that we have scheduled for the remainder of the year. As we did note, there's a lot of different factors including The customer and their ability to deliver or to take possession of those assets, which is why we make the comment that potentially some of those assets Could move into the Q4. However, right now they all have contractual agreements to end and to close this year and we're moving forward to get those closed Kind of overall.

Speaker 3

On a positive note, these contracts these assets are under overall agreements. So if we are not able to close those the current year, we had to expect those to close in the Q1 of 2024.

Speaker 4

Okay. And then just on the I guess on the 24 side of that or I guess just to clarify, can you say, I guess, How many of the 757s you have under contract? And then in terms of sort of the teeing up expectations for 2024, Just where things stand, just because there's been so much movement in the timing of asset sales?

Speaker 3

Yes. As of right now, we have 757 is under contract to be sold in the current year. And then we have the remaining 757s that Are still being marketed for potential lease or sale.

Speaker 4

Okay. And then just as a follow-up, It seems like positive commentary on the Airwear front. I know people seem like they're probably biting their nails trying figure out when that's going to happen, it seems like when you got through the final test end of August, it was going to be expected to be a pretty quick process. Can you just walk us through what's happened over the last 6 or so weeks? And I guess what your best visibility is into what happens between now and

Speaker 2

So what typically happens is as you're going through the whole process of Obtaining an STC in anticipation of doing flight testing, you submit reports to the FAA. All the testing that you've done, How the flight testing is going to demonstrate that the product that you're trying certify complies with whatever the rules are. So you've got a number of reports. And if I recall, I think we submitted over 50 reports to the FAA for Their review and ultimate approval. Typically, that is all finished by the time you start your flight testing, but that did not occur in our case.

Speaker 2

It took the FA because of the complexity of this certification. It took the FA many, many days To return documents to us, in some cases, as much as 6 months to get documents back to us, because There was a there wasn't certainty as to what type of test we would do that would be that would satisfy the So a lot of back and forth with the FAA on the type of testing that dragged on slightly past completion of flight testing, But not much because by within shortly, within several weeks after completion of flight testing, the balance of testing that we had to do was And now we're just in the documentation phase. Now in the documentation phase, it's every document is reviewed, every word is looked at. If the FDA doesn't like us the way you describe something in a sentence, that they should review it, we'll go back, we'll fix it, Send it back to them. They have to review it again.

Speaker 2

And it's just taken incredibly long. There's a lot of people involved at the FAA a lot. And again, because of the complexity of this, at the stage that we're at now and what we've been working at Since, I don't know, the last 5, 6 weeks or more, is just the documentation completion And editing that the FAA gives us and says, look, we need you to fix this. And it's minor stuff, but it's just time consuming. And there's really very little for us to do now except finish up the few documents that they've asked us to revise or waiting on their comments on our revisions.

Speaker 2

And then it's a summary. You give them a summary and say, look, here's everything you asked us to do. Here's everything we did. Here's all the reports that you guys have that we've submitted to you that you've now approved and That's it. There's nothing left at that point for us to do.

Speaker 2

The last very last thing we do is the summary report. And we're not there yet, But we're and we're not there yet because we don't have all the comments back from the FAA on all the documents we've submitted, but we're substantially there. There are very few documents The overall amount of documents that are outstanding. And that's and I see every day including today, I see more and more reports are coming back

Speaker 4

Thanks, Mick, and thanks, Martin. Appreciate the time. You're welcome.

Operator

And the next question comes from Ken Herbert from RBC Capital Markets. Please go ahead.

Speaker 6

Hi, good afternoon, Nick and Martin.

Speaker 2

Hi, Ken.

Speaker 6

Hey, Nick. Maybe just wanted to follow-up On the asset sales, if I understood correctly, you've committed to $200,000,000 I think you've done 130 of that year to date in terms of deploying capital. Do you expect much upside to that 200,000,000 we get into the end of the year and maybe if you could just comment on sort of where you're seeing the opportunities and how is the pricing environment out there for the feedstock?

Speaker 2

So we do anticipate to grow that $200,000,000 in the balance of the year. It hasn't really changed much. The type of feedstock that we're acquiring requires a lot of work. It continues to be I think it favors us because we have the capability to extract value out of light equipment that needs a lot of work Versus others that are more financial buyers that they don't have that capacity. They could buy an aircraft on lease, but buying an aircraft off lease with Two engines that need to be repaired, heavy checks, etcetera, that they don't have the capability to do that.

Speaker 2

They have to farm it out. Their costs are higher. So that so the opportunity to continue buying feedstock of the type we've seen all year remains. And even though, this is a little bit counter to this, but even though the OEMs with the Dear turbofan problem and even still how long it's taking to get all these MAXs delivered, even though that is keeping the older flight equipment In service and depriving us of a big bow wave of flight equipment, technology flight equipment that we It will come and it will come when the OEMs catch up. But in the interim, we're still getting the kind of stuff that fits Our business model that we can extract value out of.

Speaker 2

So I don't see any change in that. We as we are thinking about we just finished the Board meeting as we're thinking about Our acquisitions into 2024, at this point, I don't see any change over what we've seen thus far in 2023. I see that continuing and accelerating as the OEMs resolve their problems and start delivering more new aircraft that have reliable engines.

Speaker 6

Yes. I wanted to follow-up on the Gertruba fan issue because it sounds like on the one hand that would restrict availability of feed Talk to your comments there, but on the other hand, it's probably really strengthening demand for material to support legacy engines, the CFM56 and the V25 in particular, how does the net factor of the geared turbofan issues affect you? And are there Opportunities that arise from that, that you can maybe call out?

Speaker 2

We purchased Quite a few CFM56-5Bs that power the A320 CEO. And we bought most of those at parts value thinking that eventually that The amount of engines that went into the shop would increase and the demand for USM parts for the engines specifically on the older technology A320 would come back very strong. And that's a fact. We're seeing that. The issue we're having is a lot of the engines that we thought We're going to end up as parts turned out to be engines that have good service life left.

Speaker 2

And we have Customers that are interested in taking those engines, whether it be for purchase or for lease, that are going to deprive us From having the USM to sell the Peace Park level. And we don't care. I mean, as long as the net value we receive out of that is The same or greater than we would get going long haul for part out. We will sell or lease an engine that we bought at part out value. But I do see that, that market is continuing to be strong.

Speaker 2

The question is, can you get engines today? Where they're going to come from? And as I said, finding good serviceable engines Day, very difficult to do. I mean, when you're taking low time remaining parts engines and you're selling them as whole engines or leasing them as whole engines to people because they can't They don't want to spend money on putting engines through the shop. That's telling you that there's going to be less USM available to support all the engine shop visits That are coming, or that are already here as a result of these older technology aircraft staying in service.

Speaker 2

So yes, there is an upside for the supply of USM parts, for the supply of whole engine, the whole engine trading and leasing, But there's a limited demand of that equipment. And so I don't know that we've quantified the offset to What's better for us to have more USM available for sale or more whole assets to lease or sell? And I know that doesn't necessarily answer your question, but

Speaker 6

No, no, that's helpful. I appreciate that. There's a lot of moving pieces there. And if I could just one final question and maybe for Martin. As we think about sort of the implied adjusted EBITDA in the 4th quarter, Is virtually much of the sort of sequential increase expected to come from whole asset sales?

Speaker 6

Or are you expecting maybe more contribution in the Q4 From TechOps, from USM and other parts of the business?

Speaker 3

Yes, I think it's twofold. We definitely expect to see a continuation of Improvement in the U. S. M side of the overall business, but definitely for the visibility that we have from flight equipment sales, that will be the bulk of the overall increase We have factored it into the guidance number overall.

Speaker 2

Yes. And I want to add to that because I think it's an important Important thing to note, when we're buying engines at Pardot value And we then turn around and lease or sell them as a whole asset. It really does skew your perception of what our USM business is doing. If we could, we would just be reporting whole asset sales of parts that we of engines we bought for USM as Part of our USM line, but the reality is it's not USM, it's still a whole engine. But don't be confused By the amount of whole asset sales, when we're telling you that most of these assets were bought for parts.

Speaker 2

And just because we're selling them as whole assets or whole flight equipment doesn't mean that we don't have the opportunity to grow the USM business. It's just It's popping up in a different segment. It's popping up as light equipment sales rather than USM sales.

Speaker 6

Got it. Thanks Nick. Thanks Martin. I'll pass it back.

Speaker 5

Okay. You're welcome.

Operator

The next Question comes from Michael Ciarmoli from Churys. Please go ahead.

Speaker 7

Hey, good evening, guys. Thanks for Taking the questions. Just to stick with that final how are you guys? Just to stick with that final thought, Nick, what's Better for you, a whole asset sale or individual piece part sales? I mean, where do you think you can get better returns?

Speaker 7

I mean, obviously, you can move inventory faster with a whole asset sale. But given this kind of tight market, do you look at that equation Of individual parts and pricing on parts, I mean, I guess, simple question, what's more valuable for you? What generates better returns?

Speaker 2

Well, we don't necessarily look at IRR because a short term sale of an engine versus a longer term Part out process may produce a greater IRR, but the quantum of the net revenue would be much smaller. So We have to weigh, forget put IRR aside for the moment. So forget the IRR because we make a much, much higher IRR if we quickly flip an engine. What we look at is what's the dollar value of what we would get if we went long and we parted out the engine And then we had sales of USM versus what can we get today net of no additional time or acquisition costs, What dollar value or dollar volume can we get today? We then may factor in a small interest carrying factor in that.

Speaker 2

And if the net result of that is that We feel that with or without interest, because I don't think that makes a big enough difference. But even with interest, if we feel That we can get the same or more money today selling it as a whole asset versus going in the longer route and selling it as parts, we will almost always choose to sell the asset today and then be having and then be struggling with you guys as to the amount of whole asset sales we have because I think that This skews everybody's view of the business when you see a lot of whole asset sales, which produces a lot of volatility. And I could straighten that out if I went the longer route. I don't think that's the right answer. I think the right answer is we get the same or better money on a short term basis, that's where we go with the asset.

Speaker 2

Okay.

Speaker 7

Got it. That's helpful. And then just looking at the feedstock purchases, looking at the inventory of kind of aircraft Frames, parts, you're up to, I think, dollars 326,000,000 on the balance sheet. How should we think about that? I mean, it sounds like That could grow potentially into the Q4 and

Speaker 6

then just trying

Speaker 7

to get a sense of How that inventory winds down and maybe drives cash flow next year and also helps the top line. Can you give us any color there?

Speaker 3

Yes, I would say from the USN side, we're already starting to see a pickup in overall sales volume. Probably kind of approaching closer to about $8,000,000 in overall monthly sales or run rate of about $100,000,000 Based on the volume that we have, again, if we keep the assets that we have identified as piece parts, that we could increase that overall volume to $120,000,000 to $140,000,000 of annual sales on the U. S. Sm side based on the level of inventory and historic Kind of disposition rates, kind of overall. We're also seeing opportunities to increase our leasing portfolio, Again, taking demand on strength in certain platforms such as the CFM56.

Speaker 3

And again, we have those assets. A lot of them are being repaired and being ready to be put on lease. So with that feedstock, you're going to see increases in USM, you're going to see increases in the leasing portfolio. And again, there will always be opportunities to do whole asset sales as well and you'll start seeing those benefits flowing through 2024 and beyond.

Speaker 7

Okay, got it. And then Martin, you kind of hit on it. I You said the $100,000,000 run rate for USM. What was the actual USM dollar amount in Quarter or even if you can give us kind of the year over year, I think you did close to $20,000,000 in USM last quarter?

Speaker 3

Yes. I think overall for the quarter for USM sales, we were running around let me see, give you that, By around $20,000,000 overall.

Speaker 7

Okay. Got it. Last question, Nick, just as it relates to Eroware, I know you had pre built some inventory, but how are you thinking about your kind of hardware supplier Elbit? What's going on over there? Obviously, they're having a lot of reservice call ups and just maybe frame Sort of what the any kind of supply chain choke points or getting product?

Speaker 2

Elbit we've been in contact with Elbit. They've got their own Contingency plans in place for events like this. It's not I guess the tragic part of this is they've never experienced this In recent times, but they've got their contingency plans in place. They are currently manufacturing product for us. We expect to get product delivered here Imminently, they've got products sitting on the shelf for us, and we want it.

Speaker 2

So they're continuing to manufacture and deliver. Now, there's no way for me to be able to guess what's happened in all the eventualities and I don't think it's even appropriate for me to comment on that. But At this point, we're not seeing any effect on our ability to get product, but Who knows? Okay. Who knows depends on what happens in Israel.

Speaker 7

Yes. No, of course. Got it. All right. Good stuff, guys.

Speaker 7

I'll jump back in the queue.

Speaker 2

Okay.

Operator

The next question comes from Jack Ayers from TD Cowen. Please go ahead.

Speaker 5

Hey, guys. This is Jack on for Gautam. Thanks for the question here. Hey. Yes, just kind of honing in here on the Q4 guides.

Speaker 5

And I know you mentioned you're kind of just Baking in that one sort of asset sale in Q4, I just wanted to see kind of how Customer sort of campaigns are going. I know you've talked in the past that you are having active discussions. So maybe Like at first glance, it seems like there's more downside or sort of more risk to a push out, but could there be incremental upside if Demand sort of strengthens here. Like do you have the ability to basically monetize Those tenant inventory you've got or the magnitude you could do in Q4?

Speaker 2

So we identified there are 18 individual pieces of flight equipment that we intend. So I think I'm answering your question that we have Scheduled actually planned and scheduled to close between now and the end of the year. So all of those have dates associated with them, have delivery conditions And we're working towards putting those putting that equipment in the hands of our buyers who have to go through their own due diligence process and inspection. We have taken into account the time that we have remaining and Are confident that if everybody does what they're supposed to do, we'll get those assets delivered this year. Some of them invariably We'll fall out of this year and they won't close this year for who knows what reason.

Speaker 2

We had a closing in one of the quarters where the customer that was going to send us the money's bank closed on the last day of the quarter when we were going to close. We ended up closing the 1st business day of the second of the next quarter. So we don't anticipate anything like that this quarter. And when I identified 2018, that doesn't take into account additional assets that keep popping up as opportunities to sell in the near term, I mean, even before The end of the year. So, we may end up closing on 2018, we may end up closing on more than 2018, we may end up closing on less than 2018.

Speaker 2

What we're telling you is that we've got 2018 scheduled to close this year. What's the probability of some of those will move out? I think that the probability is some of those will move out. How many? I can't tell.

Speaker 2

Will we replace that with others? The probability is yes. How many? I can't tell.

Speaker 5

Okay. Yes. I was kind of asking just Specifically the 757 passenger operator.

Speaker 2

I'm sorry. The 757 is under has been under contract. We had a delivery issue with 1 of the engines. We thought it would be delivered already. We've rectified the delivery issue on the engine, given them a substitute engine And they're in the final phase of the acceptance of the aircraft.

Speaker 5

Okay, got it. So is that Incremental to the one you've already got under contract,

Speaker 2

I guess like No, that is the one.

Speaker 3

Yes, Gynans only has 1757 P2F sale.

Speaker 5

Okay. So okay. No, that's helpful. And are there any other campaigns? Because I think you've got those, I guess, now 10 remaining 757s, like is there any chance those discussions are progressing well or just any color there would be helpful?

Speaker 2

So we've got we are negotiating with 1 to 2 aircraft today. 1 is available and next one is not, but it's Close to delivery to be leased. And then we have the prospect with the customer that's taking the aircraft this quarter That they want a second aircraft, but they're not going to talk about that until they get their 1st aircraft in operation. Beyond that, we don't have anything that's pending. We have discussions with multiple customers, but we have nothing pending where I can point to and say, okay, we've got that accounts for potentially Leaving 7 of the aircraft uncommitted.

Speaker 2

But at this point, I'd tell you that it's 8 aircraft uncommitted And well, no, it's 10 aircraft uncommitted with discussions on 2 more, leaving 8 aircraft that we have yet to find homes And we're working on it, but we don't have customers identified for those yet.

Speaker 3

Yes. Just to give you a little color, the 4th quarter there will be 4 deliveries of the 757. So those aren't available right now. They're being delivered in this In these deliveries From cargo conversion. Yes, a bit that will become available.

Speaker 3

Yes.

Speaker 5

Okay. Got it. Yes, from your 3rd party supplier. Okay. And then just one last one on Erewear and just conviction there with the FAA and whether A government shutdown in any case here in the next couple of weeks could have any impact on potential timing there?

Speaker 5

Any color would be helpful. Thanks.

Speaker 2

We've already been told by the certification branch that they will be shut down if the government shuts down. So I can only speculate that based on the last time there was a government shutdown, government can only hold out a couple of weeks. So if that happens and that's in another 9 days, if that happens on 17th and that lasts all the way through the end Of November, it still leaves December for them to finish up the paperwork and issue the STC, But that would clearly delay it until December and potentially longer if Well, and I can't imagine the government will stay shut down longer than that. But then we get into the unfortunate part, which is once you get into December, you've got FA guys taking vacation. You got 2 holidays between then, certainly Christmas And New Year's.

Speaker 7

And yes, I mean,

Speaker 2

I'm just hoping we're not caught up in that as we're just so close at this point.

Speaker 5

Understood.

Speaker 2

With hard luck, who knows?

Speaker 5

Yes. No, I hear you. Okay. No, that's it for me. Thanks guys.

Speaker 2

All right. You're welcome. Thanks, Joe.

Operator

And we have a follow-up question from Bert Soudin from Stifel.

Speaker 4

Hey, thanks for the follow-up. Just on the Airwear front, I guess just two real quick questions. Nick, is there any Sort of possibility in your mind right now the way things stand that you think there's an STC approval or granting in 2023? And then aside from the STC question, can you give any color about how conversations are going with the future customers? Have those kicked off?

Speaker 4

Or are you waiting for

Speaker 2

Okay. Let's see. First question, possibility of SDC approval in 23, possible. I've identified what we're going through at this point. It's out of our control how long the FAA takes To respond to the revisions that we sent back to them, you'd think that they could When they're asking us to make a minor change, they could look at it in a couple of days and get back to us.

Speaker 2

In some cases, they have. In some cases, The guy is on vacation, the guy is sick, he is not in, he is too busy. We are dealing with that and I am not complaining about the FA because they have been really they have been They have been great to work within this complex program. So I can't tell you that I have Any reason to believe that we will get this certified in 2023? Neither do I have any reason to believe that I won't get it certified in 2023.

Speaker 2

It's just out of our control. We've done everything that DAP A has asked us to do and continues to ask us to do, but it's in their hands as to And then add potential government shutdown and then the end of the year holidays to it. It is a possibility we will not get it certified in 2023. Okay. And then just

Speaker 6

one second.

Speaker 5

I can't

Speaker 2

make that definitive because it could.

Speaker 3

2nd part was customer outreach.

Speaker 2

Customer, Ari. So we have been continuing to fly with a number of customers, both customers that have And some new customers that are interested. We continue to get very positive feedback. All of the customers, we press them and push and some get set up a little bit and say, guys, Come back to us when you have your STC. So we are getting a little bit of that pushback.

Speaker 2

It's like, okay, we've been talking about this for a long time as we've been telling you guys for a long time. And customers want to see it. It's okay. Got approval, great. Now it definitely changed the attitude of the people we've been dealing with When we finished our flight testing, because that let everybody realize that, okay, maybe we don't have the STC yet, but we better start Figuring it out because a lot of work has to be done once the SDC is approved before airlines are going to start taking it.

Speaker 2

They're going to have to do Revise their flight training manuals, potentially changing their simulators. They're going to have to be discussing with their FAA, The implementation of this new technology, so they know that they're interested and they want it and We've heard from a number of customers that now is the time to start working on it and they are. We're getting a much higher level of activity from our customers. And ever since we finished the flight testing And we've had in the entire time we've gone through the certification process. With the exception of one customer that's been with us from the very beginning, And that's the one that we think is, call them our big boy customer because it's a big airline.

Speaker 7

Very helpful. Thank you, Nick. You're welcome.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Nick Fanazzo, Chief Executive Officer for closing remarks.

Speaker 2

Okay, guys and everyone listening, thanks for all the good questions. Look, thank you for everyone on the line for joining our call today and for your interest in Aerosil. With the Q3, we're beginning to see positive results from Investments we've made in feedstock over the past year. We've judiciously used our balance sheet to overcome supply chain delays and organically build out our infrastructure of people and facilities. These investments have positioned us well to accelerate growth in this Q4 and into the future.

Speaker 2

We have confidence in our purpose built, multidimensional and fully integrated business model, And we're not discouraged by short term earnings volatility. We're leaning into our future and are perfectly situated to thrive in a growing aftermarket. We are continuing to look at M and A opportunities to cost effectively expand customers, capacity and capability. Certification of Airwear will come and we expect its commercialization will drive a steady base of recurring revenue well into the future. We're excited about all the opportunities ahead of us and we're convinced the future is bright for AerSale.

Speaker 2

We look forward to keeping you updated on our progress. So everyone have a good evening.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
AerSale Q3 2023
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