AerSale Corporation

Good day and welcome to the ARCEL, Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star then one. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jackie Carlin, Vice President of Marketing and Communications. Please go ahead.

Good afternoon. I'd like to welcome everyone to AirSales' third quarter 2023 earnings call. Conducting the call today are Nick Finazzo, Chief Executive Officer, and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission, 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 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 AirSail website at ir.airsail.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 provide operational updates before turning the call over to Martin to review the numbers in greater detail. Our consolidated third quarter results improved notably over the second quarter and the prior year. In total, we reported sales of 92.5 million, an increase of 81% against third quarter 2022 sales of 51 million. This increase was largely the result of flight equipment sales in the period, which included 38.9 million of engine sales. 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, third quarter results trailed our internal forecast expectations as several additional flight equipment sales slated for the third quarter are now expected to close in the fourth quarter. 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 than year-over-year or sequential revenue patterns. Turning to profitability, adjusted EBITDA in the third quarter was $1.9 million, compared to a loss of $0.5 million in the year-ago period. 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, third quarter sales were $65.1 million compared to just $20.6 million 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 sales, partially offset by lower revenues from our leasing portfolio. In the current year, we sold seven engines and one P2F-converted 757 aircraft during the period, compared with two engines and no aircraft in a prior year. In addition to the flight equipment sales delivered in the third quarter, there are two aircraft, a highly modified 737-800 and a P2F converted 757 aircraft, we expected to deliver in the third quarter that are now expected to be delivered in the fourth quarter. Looking forward, with the aircraft and engines planned for delivery in the fourth quarter, 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 than what we experienced during and immediately following the pandemic when consumer demand for physical goods peaked. To date, we've sold eight 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. 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 million of feedstock, with a total of 200 million acquired or under contract. This compares to the first nine months of 2022, which included just 34 million of feedstock. Elevated feedstock levels drove higher sales in the third quarter. which is expected to continue in the fourth quarter and into 2024. Finally, in our leasing portfolio, we had no aircraft and seven engines on lease during the period, compared to one aircraft and 17 engines in the year-ago period. 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 tech ops segment, we reported sales of 27.4 million compared to 30.4 million in the third quarter of 2022. 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. airline that began in the fourth quarter. At our aerostructure shop, we're onboarding new customers to fill the additional capacity made available after moving into our new building, which is almost triple the size of our current facility. 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 AeroWare the first and only product available with this level of visual advantage. We're proud of this award as it validates the primary benefit of AeroWare, offering a compelling value proposition to our customers as the system enhances safety, lowers operating costs by minimizing weather-related delays in 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 million of feedstock and ended the quarter with approximately 175 million 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. In conclusion, our third 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 fourth quarter 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 airsail and their efforts in delivering on our commitments to all stakeholders. Now, 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 third quarter financial performance and end with our updated guidance for 2023. Our third quarter revenue was $92.5 million, which included $44.8 million in flight equipment sales, consisting of seven engines and a P-2F converted Boeing 757 aircraft. Revenue in the third quarter of 2022 was $51 million and included $2.7 million of flight equipment sales, consisting of only two 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. Third quarter asset management revenue rose to $65.1 million 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% to $27.4 million in the third quarter from $30.4 million in the third quarter of 2022. Our TechOps business was adversely impacted by fewer customer aircraft and storage as compared to prior periods and weaker contributions from our aero structures 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 P2S conversions of our 757 aircraft. Third quarter gross margin was 25.4% compared to 30.4% in the third quarter of 2022, primarily driven by the mix of flight equipment sales. Selling general administrative expenses were $25.4 million in the third quarter of 2023, which included $3.2 million of non-cash equity-based compensation expenses. Selling general administrative expenses were $24 million in the third quarter of 2022 and included $4.4 million of non-cash equity-based compensation expenses. The increase in selling general administrative expenses were primarily driven by higher costs related to airware development and facility expansion. Third quarter loss from operations was $1.9 million and $8.5 million in the third quarter of 2022. Net loss was $0.1 million in the third quarter compared to $9 million in the third quarter of 2022. 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 $0.9 million in the third quarter of 2023. Adjusted for these same items, the third quarter of 2022 had an adjusted net loss of $1.9 million. Third quarter diluted earnings per share was zero compared to diluted loss per share of 17 cents in the third quarter of 2022. Excluding the adjustments mentioned above, third quarter adjusted diluted earnings per share was two cents compared to adjusted diluted loss per share of three cents for the third quarter of 2022. Adjusted EBITDA was 1.9 million in the third quarter of 2023, compared to a loss of half a million in the prior year period. The growth in adjusted EBITDA was a result of higher USM sales and a greater number of flight equipment sales. Next, in terms of our cash flow metrics, cash used in operating activities was $168.1 million, resulting from a growth investment of over $200 million 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 174.6 million of liquidity consisting of 3.2 million in cash and available capacity of 171.4 million on our $180 million revolving credit facility, which can be expanded to 200 million. Finally, moving to our updated guidance for 2023. We now expect to generate revenue of 400 to 420 million and adjusted EBITDA of 40 to 45 million 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 these flight equipment sales can vary by days or weeks based on a variety of factors. 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 first quarter of 2024. We are pleased with the recovery in our sales in the third quarter, which 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.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. The first question comes from Bert Subin from Stiefel. Please go ahead.

Hey, good afternoon, and thank you for the question. Good afternoon, Martin. Hey, Nick. Martin, you just said you could see some rollover into the first quarter. I know visibility has been sort of challenging this year, and that's led to some timing delays. Can you just give us, I guess, some commentary on what your visibility is in the fourth quarter? Have you sold any of those, I guess, through today in the quarter? And as we think about 2024 – You've had about $65 million of sales slippage just based on your guidance update, which seems to be mostly on the whole asset side. Can you give us any way to think about how that gets, or at least how you're thinking about that showing up in 24?

Yeah, so as far as overall guidance, at this point, we actually have anticipated a 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 fourth quarter. 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. On a positive note, these contracts, these assets are under overall agreement, so if we are not able to close those in the current year, we had to expect those to close in the first quarter of 2024.

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 24, you know, just where things stand, just because there's been so much movement in the timing of asset sales.

Yeah, as of right now, we have one 757 that's 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.

Okay. And then just as a follow-up, it seemed like positive commentary on the airware front. I know people seem like they're probably biting their nails trying to 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 six or so weeks? And I guess what your best visibility is into what happens between now and hopefully an STC being granted.

So what typically happens is as you're going through the whole process of, uh, Obtaining an STC and anticipation of doing flight testing you submit reports to the FA all the testing that you've done how you how the flight testing is going to come is going to demonstrate that that the Product that you're trying to 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 FA 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. It took the FAA, because of the complexity of this certification, it took the FAA many, many days to return documents to us, in some cases as much as six months to get documents back to us, because there wasn't certainty as to what type of test we would do. that would satisfy the FAA. 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, you know, within, surely within several weeks after completion of flight testing, the balance of testing that we had to do was completed satisfactorily, and now we're just in the documentation phase. Now, in the documentation phase, every document is reviewed, every word is looked at, If the FAA doesn't like the way you describe something in a sentence, that I should review it, we'll go back, we'll fix it, send it back to them, they have to review it again. 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 five, six 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. 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 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. The very last thing we do is the summary report. And we're not there yet. And we're not there yet because we don't have all the comments back from the FA on all the documents we've submitted. But we're substantially there. There are very few documents compared to the overall amount of documents that are outstanding. And I see every day, including today, I see more and more reports are coming back as signed off.

Thanks, Nick. And thanks, Martin. Appreciate the time. You're welcome.

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

Yeah. Hi. Good afternoon, Nick and Martin.

Hey, Ken. Hey, Nick. Maybe just wanted to follow up on the On the asset sales, if I understood correctly, you've committed to $200 million. I think you've done 130 of that year to date in terms of deploying capital. Do you expect much upside to that $200 million as 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's the pricing environment out there for the feedstock?

So we do anticipate... to grow that $200 million 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 flight 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, et cetera, they don't have the capability to do that. They have to farm it out. Their costs are higher. 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 gear 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 technology flight equipment that we expected to see by now, 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. I don't see any change in that. As we're thinking about, we just finished a board meeting, as we're thinking about our acquisitions into 24, 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.

Yeah, I wanted to follow up on the gear turbofan issue because it sounds like on the one hand that would restrict, you know, availability of feedstock to your comments there. But on the other hand, it's probably really strengthening demand for material to support, you know, legacy engines, the CFM56 and the V25 in particular. How does the net factor of the gear turbofan issues affect you and are there, you know, opportunities that arise from that that you could maybe call out?

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 were going to end up as parts turned out to be engines that have good service life left. 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 at the piece part 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 the 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. The question is, can you get engines today? Where are they going to come from? And as I said, Finding good serviceable engines today, 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, you know, they don't want to spend money on putting engines through the shop, you know, 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. So yes, there is an upside for the supply of USM parts, for the supply of 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 that. 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.

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 fourth quarter, is virtually much of the sort of sequential increase expected to come from whole asset sales? Or are you expecting maybe more contribution in the fourth quarter from tech ops, from USM and other parts of the business?

Yeah, I think it's twofold. We definitely expect to see a continuation of improvement in the USM side of the overall business, but definitely through the visibility that we have from flight equipment sales, that'll be the bulk of the overall increase that we have factored in into the guidance number overall.

Yeah, and I want to add to that because I think it's an important thing to note. When we're buying engines at Pardot values, 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 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. 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 flight equipment sales rather than USM sales.

Got it. Thanks, Nick. Thanks, Martin. I'll pass it back. Okay. You're welcome.

The next question comes from Michael Charmouli from Truist. Please go ahead.

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? 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 a simple question, what's more valuable for you? What generates better returns?

Well, we don't necessarily look at IRR because a short-term sale of an engine versus a longer-term sale part-out process may produce a greater IRR, but the quantum of the net revenue would be much smaller. So we have to weigh, you know, 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, well, 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 you know, net of no additional time or acquisition cost, what dollar value or dollar volume can we get today? We then may factor in a small interest carrying factor in that, 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 the longer route and selling it as parts, we will almost always choose to sell the asset today and then be struggling with you guys as to the amount of whole asset sales we have because I think that just 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, but 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. Okay.

Got it. That's helpful. And then just looking at, you know, the feedstock purchases, looking at the inventory of kind of aircraft frames, parts, you know, you're up to, I think, $326 million on the balance sheet. How should we think about that? I mean, it sounds like, you know, that could grow potentially into the fourth quarter and then Just trying 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?

Yeah, I would say from the USN side, we're already starting to see a pickup in overall sales volume. We're probably kind of approaching closer to about $8 million in overall monthly sales, so a run rate of about $100 million. 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 to $140 million of annual sales on the USM 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. 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 24 and beyond.

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

Yeah, I think overall for the quarter for USM sales, we were running around, let me see, give you that, probably around $20 million overall. Okay.

Okay. Got it. Last question, Nick, just as it relates to AeroWare. You know, 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 reservist call-ups and, you know, just maybe frame sort of what the – any kind of supply chain choke points or getting product.

You know, 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 – 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 product sitting on the shelf for us, and we want it. So they're continuing to manufacture and deliver. Now, there's no way for me to be able to guess what's going to happen in all the eventualities And I don't think it's even appropriate for me to comment on that. But, you know, at this point, you know, we're not seeing any effect on our ability to get product. But, you know, who knows? Who knows depends on what happens in Israel.

Yeah, no, of course. Got it. All right, good stuff, guys. I'll turn back to you. Okay.

The next question comes from Jack Ayers from CD8. T.D. Cowen, please go ahead.

Hey, guys, this is Jack on for Gotham. Thanks for the question here. Hey, yeah, just just kind of honing in here on the Q4 guides. And I know you mentioned you're kind of just baking in that 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 discussion. So, you know, maybe it's like at first glance, it seems like there's more downside or sort of more risk to a push out. But could there be, you know, incremental upside if, you know, demand sort of strengthens here? Like, do you have the ability to, you know, basically monetize those projects? those tenant inventory you've got, or the magnitude you could do in Q4.

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 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 will fall out of this year and they'll They won't close this year for who knows what reason. 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. And we ended up closing the first business day of the next quarter. So we don't anticipate anything like that this quarter. And when I identified 18, that doesn't take into account additional assets that keep popping up as opportunities to sell in the near term. I mean, even before. end of the year so you know it we may end up closing on 18 we may end up closing on more than 18 we may end up closing on less than 18. what we're telling you is that we've got 18 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 will we replace that with others the probability is yes how many i can't tell okay yeah i i was kind of asking just specifically the 757 Oh, I'm sorry. The 757 has been under contract. We had a delivery issue with one 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.

Okay, got it. So, is that incremental to the one you've already got under contract? I guess, like... No, that is the one.

Yeah, guidance only has one 757 P2F sale.

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, you know, those discussions are progressing well or... Just any color there would be helpful.

So we've got, we are negotiating with one to two aircraft today. One is available, the 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 gonna talk about that until they get their first 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 seven of the aircraft uncommitted. But at this point, I'd tell you that it's eight aircraft uncommitted and – well, no, it's 10 aircraft uncommitted with discussions on two more, leaving eight aircraft that we have yet to find homes for. And we're working on it, but we don't have customers identified for those yet.

Yeah, just to give you a little color, the fourth quarter, there will be four deliveries of the 757s. So those aren't available right now. They're being delivered in this board. Four deliveries from cargo conversion. Yes, that will become available, yeah.

Okay, got it. Yeah, from your third-party supplier. Okay, that makes sense. And then just one last one on airware 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. Any color would be helpful. Thanks.

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 nine days, if that happens on the 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 You know, then we get into the unfortunate part, which is once you get into December, you've got FAA guys taking vacation. You've got two holidays between then, certainly Christmas and New Year's. And, yeah, I mean, I'm just hoping we're not caught up in that as we're just so close at this point.

Understood.

But with our luck, who knows?

Yeah, no, I hear you. Okay. No, that's it for me. Thanks, guys. All right. You're welcome.

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

Hey, thanks for the follow-up. Just on the airware 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 future customers? Have those kicked off, or are you waiting for STC?

Okay. Let's see. First question. Possibility of STC 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 send back to them. You know, 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. In some cases, they have. In some cases, the guy's on vacation, the guy's sick, he's not in, he's too busy. You know, we're dealing with that, and I'm not complaining about the FAA because they've been, really, they have been great to work with in this complex program. So I can't tell you that I have any reason to believe that we will get this certified in 23, neither do I have any reason to believe that I won't get it certified in 23. It's just out of our control. We've done everything the DAPA has asked us to do and continues to ask us to do, but it's in their hands as to the pace and then, you know, add potential government shutdown and then the end of the year holidays to it, it is a possibility that we will not get it certified in 23.

I can't make that definitive because it could.

Second part was customer outreach. Oh, customer outreach. We have been continuing to fly with a number of customers, both customers that have expressed an interest and have been flying with us all along and some new customers that are interested. We continue to get very positive feedback. All of the customers, we press them and push and And some get fed 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. You know, it's like, okay, you'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. 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 STC is approved before airlines are going to start taking it. They're going to have to 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 that's what we've heard from a number of customers that now's the time to, you know, start working on it, and they are. I mean, we're getting a much higher level of activity from our customers. And ever since we finished the flight testing, then we've had, you know, 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, you know, call them our big boy customer because it's a big airline.

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

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

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 third quarter, we're beginning to see positive results from the 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 fourth quarter and into the future. 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&A opportunities to cost-effectively expand customers' capacity and capability. Certification of airware 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 AirSail. We look forward to keeping you updated on our progress. So everyone, have a good evening.

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