AerSale Corporation

Greetings. Welcome to the Aercel Corporation fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Jackie Carlin. You may begin.

Good afternoon. I'd like to welcome everyone to AirSail's fourth quarter and full year 2022 earnings call. Conducting the call today are Nick Finazzo, Chief Executive Officer, and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business, and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2022. filed with the Securities and Exchange Commission on March 7, 2023, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP 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 Finazzo.

Thank you, Jackie. Good afternoon, and thank you for joining our call today. I'll begin with a brief overview of the quarter and year and provide operational updates before turning the call over to Martin to review the numbers in greater detail. By nearly every measure, 2022 was an excellent year for air sale. We reported record company revenue and made significant progress in the FAA certification of our enhanced flight vision system, AirAware, and its subsequent commercialization. Strong operating results were driven by broad market success and strategic execution on our 757 passenger to freighter, which you'll hear me refer to as P2F conversion program, which was well-timed with elevated demand for freighter aircraft. Our solid financial performance was only achievable due to our unique end-to-end solution, which enabled us to secure the necessary aircraft and perform the conversions in a timely manner to have these aircraft customer ready. The year was also supported by a strengthening commercial recovery, which kept our on-airport MRO facilities at capacity all year and drove demand for our used serviceable material, which you'll hear me refer to as USM, parts sales business. Taken together, these factors led to a year-over-year increase in full-year revenue of 20% to $408.5 million. Gap earnings per diluted share was $0.83 with adjusted EBITDA of $87.4 million compared to the prior year gap earnings per diluted share of $0.76 with adjusted EBITDA of $89.3 million. Higher margins in the prior year were almost entirely attributable to CARES Act proceeds of $14.8 million which were not excluded from our adjusted EBITDA numbers. As such, our underlying business performed at a similar margin level relative to revenue when considering CARES Act funding. As we do every quarter, we believe it's important to remind investors that our financial results are typically uneven quarter to quarter, and we advise investors to analyze our performance over a full year based on the patterns of expected feedstock availability and whole asset sales. The pacing of our revenue in 2022 is no exception to this, as the timing of flight equipment sales created a record first half, followed by a lower third quarter. In the fourth quarter, our results included significant flight equipment sales, but to a lesser degree than the prior year period. As a result, our fourth quarter revenue in 2022 was 95.1 million, including 51.4 million of whole asset sales, compared to 116.8 million in the prior year period, which included 73.1 million of whole asset sales. Fourth quarter earnings per diluted share was 17 cents, with adjusted EBITDA of 17.7 million, compared to the prior year period earnings per diluted share of 21 cents, with adjusted EBITDA of $28.6 million. Turning to segment performance and beginning with our asset management segment, in the fourth quarter, sales were $67.9 million compared to $93.6 million in the same period in the prior year as a result of lower whole asset sales during the period. A reduction in aircraft and engine leasing in the quarter also contributed to the decline, partially offset by higher sales of USM material during the period. In the fourth quarter of 2022, we sold six engines and three aircraft, which included one 757 P2F converted aircraft. This compares to the prior year period in which we sold three aircraft and four engines, which included two 757 P2F converted aircraft. The decrease in revenues is due to the decrease in 757 P2F aircraft sales, which command a higher sales price. Looking to the year ahead, we expect another busy year for our 757 P2F conversion program. As Martin will detail in our guidance, we have subcontracted for an additional 12 conversions from multiple providers, of which nine are expected to be completed in 2023 and three in 2024. Due to contractual delays by one of our conversion providers, the delivery of these aircraft will be more heavily skewed toward the second half of the year. In our USM parts business, airframe and engine parts sales were both up compared to the prior year period, mostly as a result of an improving commercial backdrop. As we look out beyond the next couple of quarters, we expect to continue on this growth trajectory as feedstock availability improves. Overall in our leasing portfolio, revenue was down compared to the prior year period, mostly as a result of fewer aircraft on lease during the period. Lower aircraft leases were from aircraft that came off lease during the year that we were able to either resell or part out at more attractive economics, which again speaks to our ability to maximize asset return on investment regardless of the discrete sales channel conditions. These moves focused our leasing activity to short-term engine leasing, where we're able to continue to achieve more attractive high margins. In our tech ops segment, sales increased by 20.8%, driven by greater on-airport MRO availability, as we were able to free up capacity by subcontracting 757 P2F conversions to third-party providers. This allowed us to benefit from increased demand for on-airport MRO services. In addition, our landing gear and component MROs improved, as a result of increased demand from passenger airlines. Turning to an update on air aware, I'm pleased to report that we began FAA certification flight testing in February, and so far have successfully completed two of five stages of flight testing. The third and fourth set of flight tests are scheduled in March, with a final set scheduled in April, subject to FAA staffing and weather. That notwithstanding, We're now in the red zone with the FAA on achieving our supplemental type certificate, which you'll hear me refer to as STC, which will allow us to begin commercialization of this STC product. Next, I'd like to touch on capital allocation and our plans in 2023 and beyond. We ended the year in an excellent financial position with more than $147 million in cash on our balance sheet and an undrawn $150 million revolving credit facility. We intend to deploy this capital to the highest risk-adjusted returns available to our shareholders, which in our case generally falls within two categories, aircraft feedstock acquisitions and capability enhancements. 2022 was a challenging year regarding the availability of properly priced aircraft feedstock. This was not a result of an absence of deals, as we bid on over $1 billion of flight equipment during the year. We won over $50 million of properly priced flight equipment in 2022, despite our disciplined approach to asset acquisition requiring a strong risk-adjusted ROI. However, when we announced our initial 2022 guidance, we had expected to win over $200 million in properly priced deals, which would have made a positive contribution to our second half of 2022 financial results and would have carried into 2023. That notwithstanding, I am pleased to report a substantial improvement at the start of 2023 and through February. We have already been awarded $107 million, more than double the feedstock deals we were able to close during all of 2022. This success has been across all the narrow and wide-body aircraft and engines we typically invest in. The improving backdrop of properly priced asset availability sets us up well into the second half of 23 and into 2024 and could represent a significant upside to our current financial outlook if we're able to maintain this level of buying throughout the balance of the year. As I noted earlier, our facilities are busy and near capacity across the air cell system. We have an opportunity to expand our total capacity, footprints, and capabilities through MRO facility expansion to drive further growth. This effort is already underway, and while it is too early to detail all the specifics, I can share that we have added a third on-airport MRO facility in Millington, Tennessee to increase capacity on narrow-body aircraft, which is expected to come fully online by the first quarter of 2024. This 100,000 square foot hangar in Millington is just 20 miles from our expanded USM distribution hub in Memphis. We're also adding pneumatic capabilities at our Miami-based Accessories MRO, which we expect to be online in the second half of 2023. We look forward to sharing the outcome of these additional efforts as well as new opportunities in the coming quarters. In summary, I'm extremely pleased with our financial performance in 2022, despite the challenging market for feedstock acquisition. We delivered multiple company records throughout the year, executed strategically well on our 757 P2F conversion program, and crossed meaningful milestones in obtaining our STC for airware. We hit the upper range of our adjusted EBITDA guidance, despite diminished feedstock acquisitions and no airware sales. As we look to the year ahead, and as Martin will detail in our guidance, we expect 2023 to demonstrate another year of growth for air sales, driven by continued progress on our 757 P2F conversion program and a supportive commercial aerospace recovery. In the second half and into 2024, we're positioned to benefit from increased feedstock availability, the commercialization of airwear, and facility expansion opportunities. I would like to thank all of our employees for their dedication to air sale and for their commitment to our stakeholders. We look forward to providing incremental updates throughout the year. With that, I'll turn the call over to Martin for a closer look at the numbers. Martin?

Thanks, Nick. I will start with an overview of our fourth quarter financial performance and end with our guidance for 2023. Our fourth quarter revenue was $95.1 million, which included $51.4 million of flight equipment sales. Revenue in the fourth quarter of 2021 was $116.8 million and included $73.1 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $43.7 million in the fourth quarter of 2022 and 2021. In addition, as we mentioned on our last earnings call, The delivery of one 757 P2F converted aircraft, which was initially anticipated to close during the third quarter of 2022, was delivered at the beginning of the fourth quarter. As we have noted on multiple earnings calls and press releases, our business may and often does fluctuate from quarter to quarter based on the timing of flight equipment sales. We believe that investors and analysts should monitor our progress based on asset purchases and sales over the long term. Fourth quarter asset management revenue decreased 27.4% to $67.9 million, largely due to lower flight equipment sales. Leasing revenue for the fourth quarter declined as a result of the planned reduction in the number of aircraft in our leasing portfolio as we determined market conditions would not support our historical return on investment for these assets. Fourth quarter USM parts sales were similar to levels seen in the fourth quarter of 2021. Technical operations, or tech ops, revenue was $27.2 million in the fourth quarter, which was an improvement of 17.2% compared to the fourth quarter of 2021. Tech ops benefited from better performance from landing gear activities and Goodyear on-airport MRO services. Revenue growth from our Goodyear facility within tech ops was offset by lower revenue at our Roswell facility due to fewer customer aircraft in storage as compared to prior periods. Fourth quarter of 2022 gross margin was 36% compared to 37.8% in the fourth quarter of 2021, mainly on account of the sales mix. Flight equipment sales, which generally have higher margins, were lower in the fourth quarter of 2022. Fourth quarter selling, general, and administrative expenses were $25.1 million, with higher payroll expenses, including $4.5 million of non-cash equity-based compensation. Selling general and administrative expenses were $24.4 million in the fourth quarter of 2021, of which $3.8 million were non-cash equity-based compensation expenses. Income from operations was $9.1 million in the fourth quarter compared to $19.8 million in the fourth quarter of 2021. Income tax expense was $4.1 million in the fourth quarter versus $2.9 million in the fourth quarter of 2021. Fourth quarter net income was $9.2 million compared to $11.2 million in the fourth quarter of 2021. Adjusted for non-cash equity-based compensation, inventory write-down, mark-to-market adjustment to the private warrant liability, gain on an aircraft insurance claim, and secondary offering and facility relocation costs, fourth quarter adjusted net income was $12.3 million versus $22.3 million in the fourth quarter of 2021. Fourth quarter diluted earnings per share was 17 cents and 21 cents in the fourth quarter of 2021. Adjusted for non-cash equity-based compensation, inventory write-downs, mark-to-market adjustment to the private warrant liability, gain on an aircraft insurance claim, and secondary offering and facility relocation costs, fourth quarter adjusted diluted earnings per share was 23 cents versus 41 cents for the fourth quarter of 2021. Fourth quarter adjusted EBITDA was $17.7 million and $28.6 million in the fourth quarter of 2021. Adjusted EBITDA and related margins were adversely impacted by lower flight equipment sales, which generally have higher margins. AERCIL did not receive any payroll support program proceeds during the fourth quarter of 2021 or 2022. Cash used in operating activities was $0.1 million primarily due to the application of $18 million in customer deposits associated with the sale of a 747 freighter aircraft that closed during the year, for which the sale proceeds are reflected under investment activities. In addition, we continue to invest in advance vendor payments of $13.3 million primarily associated with the 757 P2F conversion program. We also invested an additional $37.6 million to increase inventory available for sale. AERCIL ended the year with $147.2 million of cash as well as an undrawn $150 million credit facility. Finally, moving to our guidance for 2023 and summary. We expect to generate revenue of $460 to $490 million and adjusted EBITDA of $70 to $80 million in 2023. Revenue growth for the year is driven by improvements in USM, engineered solutions, and component MRO as the company benefits from an increasing demand for passenger air travel. Margin levels are expected to see some pressure in 2023, primarily as a result of 757 deliveries generating lower margins. Combined with higher SG&A costs related to an increase in payroll, which includes higher executive compensation amounts as a result of the CARES Act limitations expiring on April 1, 2023. In addition, the company is investing $2 million in research and development costs in order to continue to create innovative products that will impact future years. This guidance reflects Airsoil's expected whole-acid sales during the year and anticipated volume in our ongoing operations. As noted earlier, due to delays in the 757 P2F conversion program and lower feedstock acquisitions in 2022, we expect revenue and adjusted EBITDA to be weaker in the first half of the year and increasing during the second half as the company benefits from increased feedstock and 757 P2F deliveries. Our guidance for 2023 does not include any potential sales of errorware as the product is in its final stages of FAA approval. we will provide an update once the SDC is issued and we have initial orders. Further, we have not assumed the rate of feedstock acquisitions will continue as we have seen during the first two months of 2023. And if it does, it could represent upside to our 2023 guidance. In summary, aside from the variability in the timing of flight equipment sales, our business has continued to gain strong traction and the underlying momentum remains on a robust growth trajectory. With a strong balance sheet and liquidity, we are well positioned to capitalize on increasing feedstock availability, as well as other internal and external opportunities in order to continue generating high returns for our stakeholders going forward. With that, operator, we are ready to take questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Bert Subin with Stifel. Please proceed with your question.

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

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

Yeah, I'm a little confused when you say we had projected for the quarter to have another $30 million in sales. What specifically are you referring to?

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

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

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

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

Well, I think it's possible, but it's really impossible to predict. It's possible because we have kits in stock, but it's impossible to predict when we would get our first. Until we get this STC approved and we have a first order, we're not going to speculate on when we might have sales. We did not put any sales in our guidance. Not that we don't think that that's possible. We think that that is possible, but we think it's maybe a little irresponsible to be projecting sales of airware before we even had the STC or an initial order.

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

Well, I don't think. there's ever enough good USM to supply the market with the USM requirements. Now, that was certainly an exception during the peak of COVID because you had so many airplanes parked and not flying and there was almost no demand for USM. Now, as the narrow body market has substantially recovered and we're well underway for same recovery on the wide body side, the demand for USM is picking up. And again, what we're starting to see is There's just not enough good USM to service the requirements because aircraft are flying, consuming USM. Engines that have been, you know, airlines have cannibalized engines that are on parked aircraft to keep the airplanes flying. Those engines now have been depleted, or quite a few engines have been depleted of their useful life, well, of their overhaul time. They need to be repaired. Puts those engines in the shop. The shops are backed up. And there's just not enough good engine USM to supply their requirements for the amount of engine shop visits that are going in. And that doesn't seem to matter whether it's narrow body or wide body. Wide body hasn't suffered as much due to the substantially wide body market is the freighter side. And we didn't see much decline in the demand for wide-body engines or wide-body engine parts. So we see the requirement for USM continuing to stay extremely strong. And what's affecting USM, it's just two sides to that story. With the delay in delivery of new aircraft, which we're definitely experiencing, both with Boeing's issues with the FAA and with Airbus has narrow body issues with the multiple amount of engine problems they've had with the A320neo, that those aircraft are not displacing the older flight equipment that is staying out there. The result is it's a diminished amount of used aircraft that are coming into our market, which would bolster our availability of USM material. That's the negative side. The positive side is because those aircraft keep flying, there's more demand for USM material. And that's the basis that I make the statement that there's never, well, certainly at this point in the market, there's not enough good used service material to feed the narrowbody engine market for both the A320 and the 737. So we are, we had a, the first two months of this year, we had a very, very high level of USM acquisition, of all feedstock acquisition across everything we typically deal in, double what we did in all of last year in the first two months of this year. And we're trying to figure out, well, what is causing that? And one could be cost of funds have gone up for investors that invest in this space. And for those that can't find ways to extract substantial value out of all feedstock at all levels, that the cost of funds is impinging on their margin and maybe sending some of those people away. Plus, there's a number of investors that have been overpaying since 2018 that probably have lost their funding sources and no longer have the ability to buy assets in the market. So those are two reasons why we can think of that we've had such success in the first first two months of the year, coupled with a substantial improvement in, again on the demand side, a substantial improvement in demand, but it's the availability that was surprising. We were very surprised to see that level of feedstock acquisition in the first two months of the year. So we're very optimistic about the balance of the year. If things continue at this rate, We continue to buy at the rate that we've been buying. It is probable we'll increase guidance for the balance of the year. So, you know, all in all, I'd say if you can get the right feedstock at the right price, then you can extract the greatest value out of it, and I think the air sale machine does that. I think the opportunity for substantial feedstock growth here this year and in the coming years is significant, and we look forward to it.

Really good color. Thanks so much, Nick. You're welcome. Our next question comes from the line of Ken Herbert with RBC.

Hi, Nick. Hi, Martin. Good afternoon.

Hi, Ken.

Hey, Nick. Maybe just to start off, could you update us on the 12-757s? It sounds like there's been some delay with the PDOF process. Does the guidance... Does the guidance assume nine of the 12 are moved, sold, or put into your lease pool this year? And how should we think about the completes on some of these conversions and where you stand in the process?

I think we have three or four aircraft in conversion now. One of them started, I believe, in December. The first one started in December. It was supposed to start in October. And that was, you know, those were, you know, we relied on one of our STC provider to have contracted for those slots, and that got delayed. They ended up not being able to contract with one of their providers. Initially, we thought we would have three, and now we have two. So between us and the STC provider for the 757, We've now got all 12 slots booked. Some of those actually we took as cargo kits, and then we contracted with a provider to do the installations. AirSail itself will not be doing any of these conversions. But that pushed back the second and third aircraft that were supposed to go in in October and December into, you know, pushed it back several months. I don't know the exact dates off the top of my head. They're supposed to be delivered in those periods. Well, the October one would be delivered in the first quarter. So deliveries that we expected to happen in the first quarter, I don't even know if we may get one in the first quarter. As you previously asked and we mentioned, when we thought we would get all 12 in the year, we thought those would be fairly evenly spaced throughout the year. Now, with the exception of maybe one in the first quarter, I don't even know if it's possible to get maybe two, the balance will come in the rest of the year. And we've got a pretty full line at this point on a go-forward basis. But that whole thing shifts back a couple of months. So aircraft that we expected to have delivered in the last quarter, three of those will push into the early first quarter and will be available in the first quarter of 24. Okay.

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

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

Where we are seeing increases in the 757 conversion program is on the overall cost of engines in that we had the advantage or the benefit in the first two years of a pretty robust spare engine inventory balance. Now the engines that we have require more engine work. So that's increasing the cost. And even for a few of those assets, we might have to go into the market to secure those overall assets. So we reflected that in our guidance, which is why we're projecting a lower margin profile for this year compared to the last.

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

They've gone great. I think that when the FAA got on board and started flying the airplane, they were, and this is not a new comment because I've made this comment before. These are different FAA people than had previously been on the airplane. They're impressed. They like it. They see how the system works. So I would say overall, we did as well as we could expect. There were no negatives that came out. The only negative part of this whole thing is I think we've probably only flown in the first two phases of flight tests less than 10 hours. And again, the disappointing part for us, and I'm sure for anybody that's invested in the company, is that the flight testing is spread out over a longer period of time, even though in the last couple of months, all through February, we only flew seven hours. So that's the disappointing part, that it's just that the elapsed time between flight sets are relatively long. But understanding the FAA, there's multiple parties from the FAA involved. It's multiple areas. And in our fifth set of flights, there will be a lot of pilots on the airplane, both commercial pilots that will get on the airplane and fly it, and we'll be demonstrating to the FAA how a brand new pilot gets trained on the system. And multiple FAA pilots and human factors individuals from the FAA will be assessing how those pilots perform who have never flown the airplane with that system on it. So it's all good. Again, it's frustrating that it's so long. I mean, we're getting a level of scrutiny from the FAA that we've never experienced, that all the people we're dealing with have never seen this before when we're really we're not making modifications to the flight characteristics or physical part of the aircraft. We're just giving it enhanced vision. And so maybe that's a result of the increased scrutiny that they got over the MAX. And the good part about that is when we're done with this system, it will have gotten all the scrutiny of the FAA. They're fully behind it. They're very supportive, very cooperative. I have nothing but really positive things to say about it. The FAA's attitude on getting this certified, I think they see what we have, which is advanced technology, something that doesn't exist today. And I think that they're going to do their job. They're going to be thorough. But at the end of the day, we're going to have a rock-solid, safe system that has the full support of the FAA, and we'll get an STC.

If I could add, this is the first primary flight control system that's being certified by the FAA after the 737 MAXs. Primary flight display. Primary flight display. Again, we're kind of in new territory. This is novel technology, so the FAA is providing more screening, which is rightfully so.

Great. Thanks, Martin. Thanks, Nick. Okay. You're welcome.

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

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

So I won't tell you exactly how many kits we have, but I will tell you that I have mandated our people to build a minimum of 100 kits by the end of the year, and we're well underway of doing that. I think we'll exceed that. And with regard to – what was the other question? Regarding launch customer again, it's premature to talk about who the launch customer will be, but I will tell you this. The potential customer that has flown with us on multiple occasions all throughout the past 200-some hours we've flown our airplane, they have a fleet of over 500 737 NGs and MAXs. So that would be a big one. How long would it take to get up to 500 sets of flight equipment? Just figure if we did 100 this year, I've set a target of minimum 250 for next year and another 250 a year after that, and then adding 25, 250 A320 kits. It would take several years to build up to a 500 airplane fleet for one customer, one airplane type.

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

Again, you know, we don't know what, what, however, What we have been told is that the airline won't start using the system until they get at least 50% of their fleet installed. So I would expect that they would want them installed as fast as they could get them because they couldn't, you know, if it takes a year or more to get to 250 kits, they're not going to be able to use the system for that period of time. So they would want it as fast as we could deliver it. And that's why we've been working on production of kits in advance of their requirements. because it's just going to take time for us to build the kits, put the kits in, and it's going to take time for Elbit Universal to manufacture the kits and gear up their manufacturing capacity for this level of requirement.

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

You know, it would be too speculative at this point for me to answer that question.

Okay. Okay. No, that's fair. What about last one on kind of the feedstock? I mean, are you guys see kind of hinted at it? You know, do you know how many, you know, kind of entities you're competing against for purchases? Are you seeing less competition out there? And then I guess with sort of all the airlines running all of their assets, burning all of the green time, do you think that's potentially driving, you know, the need for more USM?

Oh, of course. Of course, the increasing utilization of the flight equipment is driving the need for more USM, but once the market started to recover as far as utilization, our issue with USM is getting the USM out of the shop. We were force-feeding USM into the shop even when there wasn't the demand, and I'm glad we did that because now we're seeing... very strong demand. That's why we feel optimistic about increasing our USM sales, continuing to increase because now we have more product. As long as we get the stuff out of the shop, it doesn't seem like we're having any trouble selling it to somebody who needs it. So having a lot of material that we put into work is helping our availability of ready USM to sell. Demand continues to rise. So I don't see that changing. Again, it's the availability of feedstock that is the issue. Now, with regard to competitors that we bid against, look, we bid on over a billion four in deals last year. I could have won hundreds of millions of dollars if we chose to push our numbers up and really push our margins down. And we're just not going to do that. We've never done that, certainly not intentionally. We're disciplined. I'd rather pass on hundreds of millions of dollars worth of crappy deals than to win $50 million worth of terrible deals, because $50 million worth of terrible deals can wipe out hundreds of millions of dollars worth of good deals. So we remain very disciplined. When I say we won $50 million of deals last year, we won them. Those were properly priced deals. The rest? There are deals we could have won if we chose to raise our bid price, and we didn't. Now, the people who bought those assets, I can assure you, they cannot extract more value out of them than we can. So why they bought those assets at the pricing that they did, there is a growing list of companies that have competed against us in our space that were financed by companies that don't understand the market, by people who have no personal investment in those acquisitions, who are starting to litter the roads with carcasses of companies and people that have overspent and died with product. We've been doing this a long time. We don't overspend. We'll pass on those poor deals. So I'm not... going to be apologetic that we didn't win more than $50 million worth of deals last year because there were $50 million a deal that were properly priced. And in our opinion, the rest wasn't. And whoever bought those either has no cost of funds, no cost of fund requirement, no threshold. They'll take a super low margin, which on a risk-adjusted basis, I don't know how they can justify making acquisitions. I mean, when we get outbid, by more than we think we can collect in total from an asset, I just think that, and we've seen it, that somebody way overpaid. So competition has been diminished. I think that we're at about 50% of the amount of competitors that used to bid are now bidding, and our success rate is going up because those companies that have been bidding that have been somewhat successful now are tempering their bids based on their experience, the ones who survive. The other ones have gone away. So if we had two dozen bidders that we would bid against previously, maybe we're down to a dozen. And it doesn't mean those dozens don't have money. They still have plenty of money. And it doesn't mean those dozens won't take a much lower margin than we would. But on a risk-adjusted basis, whether that's a good investment, time will tell.

Got it. Those single-dimensional players have an uphill battle with those lower margins.

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

Okay. Welcome. Good talking to you.

Our next question comes from the line of Gautam Khanna with Cowan. Q4C, what's your question?

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

Okay. Hi, Jack. Regarding – you've got too many questions.

Let's go back to the first question. I'm sorry. Beyond our launch customer. Okay. Yeah, okay. Other customers beyond our launch customer. So we are talking to a number of airlines that are very interested in the system. And their fleet sizes would range from, let's say, 20. Oh, we have some that could be even smaller, a couple, to 20, to hundreds. Not necessarily 500, but hundreds. And as far as our ability to deliver kits to all of those companies at the same time, if we're fortunate enough to get an offer, that would be challenging. Our ability to increase our production of kits, I think, is not problematic for us. We are sapping up our own production of kits, but our kits consist of a number of subcomponents, modifying the radome, manufacturing an installation bracket for the camera, an eight, I think it's an eight-segment wire harness that has eight separate packages. we can subcontract out to other companies to remanufacture the radomes to accommodate the camera, to make the brackets, to pick any piece of that eight-piece wire harness and have other people do a piece of the eight pieces or all of the eight pieces at third parties or use multiple third parties to increase our manufacturing capability, not necessarily internally but externally. Getting up to speed to be able to do a minimum of 100, what it's teaching us is the most expeditious and cost-effective way to build these kits so that if we get the demand and we need to go to 500 kits a year, well, let's say 500 kits a year. We either build up the internal capacity to more space to do more ourselves, or once we understand the most efficient way to do it, We then contract that out to several vendors that make the kits, and then we review on a quality basis the kits that third parties have made. Matter of fact, the first 10 kits that we did were manufactured by another party, and we had to do a lot of rework on those ourselves because they didn't really understand how to build the kits, the wiring harness kits. So we've learned a lot along the way, and we're in good stead to... to do the 100 minimum kits this year. And again, if we get an order for something significantly more than that, we'll subcontract that out if we can't build a capacity fast enough ourselves to do it. Now, the flip side of that is that's the installation kits. Manufacturing the LBIT hardware, it's a little different story. I don't know that their supply chain can spool up as quickly to manufacture hundreds of kits you know, within a short period of time. I think that that typically takes longer. And so airlines ultimately, for the large order, are going to have to wait until Elbit can produce their side of the kits.

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

Thanks. So now that engines are going into the shop and being repaired and demanding material, is not able, again, USM on the engine side is never able to, now good USM, now if you part out an engine and you have, you know, 500 parts from an engine, you're not going to consume 500 parts because a lot of those parts when an engine goes in the shop can be reworked. The good USM on the engine side that I refer to are the material that either is left limited parts or hot section parts. These are parts that wear out due to heat and fatigue and you end up, you end up throwing them away once they get to a certain point. You can never get enough of the hot section parts or the life-limited parts on an engine that's in service and consuming and having a lot of shop visits. So when I refer to good USM, that's what I'm referring to on the engine side. There's never enough of that. So as the shops are picking up, there's not enough USM to supply all that. Customers are forced to buy PMA parts or they're forced to buy brand-new parts from the OEMs. So, okay, I guess that's part of your question. What was the other part?

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

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

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

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

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

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