AerSale Corporation

Good day and welcome to ESL Inc's fourth quarter and full year 2023 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press start and then zero on your telephone keypad. Please note that this conference is being recorded. It is now a pleasure to hand the conference over to Kristen Gallagher. You may begin.

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

Thank you, Kristen. Good afternoon, and thank you for joining our call today. I'll begin today with a recap of the year and our strategic objectives before turning the call over to Martin to review the numbers in greater detail. The final months of the year deviated meaningfully from our expectations headed into year end, which entirely stemmed from lower than anticipated flight equipment sales in the fourth quarter. If you recall, in the prior quarter we noted a significant number of flight equipment sales that were slated for delivery in December, which would account for the bulk of our EBITDA for the year. As noted at the time, the schedule of these deliveries is subject to change due to customer acceptance and delivery requirements, which were expected to occur in the fourth quarter. In total, we had 28.8 million of flight equipment sales that did not close in 2023, that have thus far closed in the first quarter. We expect the remaining sales that did not materialize in 2023 to close in the first half of 2024 or be returned to available inventory for subsequent sale or lease. Importantly, this is common in our business, and as a public company, we have had quarters that have demonstrated a significant deviation from our original expectations, both on the upside and the downside. As we have discussed, we operate a purpose-built, end-to-end solution, which is unique in the industry and gives us a competitive advantage to extract value from assets that our peer group is unable to achieve. This ecosystem allows us to direct assets to the most attractive ROI for our equipment, and we're agnostic to the end use, whether it be through part sales, aircraft and engine leasing, or flight equipment sales. With this complex ecosystem comes a significant fixed cost hurdle that we must clear annually, at which point we begin generating significant EBITDA on each incremental dollar of sales. In the short term, flight equipment sales generate significant revenue and therefore EBITDA drop through as we have already reached our fixed cost hurdles. In the longer term, to the extent we deploy more assets to USM, it will have a similar effect on our financials, but over an extended period of time. Following the lessons learned in 2023, we recognized the need to provide investors accurate and insightful inputs to our go-forward performance. Therefore, we're discontinuing our practice of numerical full-year guidance, but will continue to provide as much qualitative detail as possible about opportunities and outcomes expected over future periods. Our change in guidance policy should not be interpreted as a change in our bullish view about 2024 and future year's performance, which we are confident we can derive from the diversified air sale platform. Turning to a summary of full year results, our sales declined 18.1% to $334.5 million. Lower full-year sales were attributable to lower feedstock acquired in 2022, combined with significantly lower flight equipment sales throughout the year, particularly in the first half of 2023. Excluding flight equipment sales and the sale of a 737 aircraft in tech ops in 2022, which is not expected to recur, full-year revenue increased 5.6%, reflective of the strong commercial demand environment we're operating in. Turning to our profitability for the full year, we reported adjusted EBITDA of $12.3 million compared to $87.4 million in the prior year. The decline in EBITDA year over year stemmed from reduced volume in the first half of 2023 due to lower feedstock availability, substantially fewer flight equipment sales during the year, and the absence of stronger margins generated in the prior year related to our 757 P2F conversion program. At the segment level and beginning with asset management, our full-year sales came in at 215.2 million compared to 277.6 million in the prior year. Lower full-year sales almost entirely stemmed from a reduction in total flight equipment sales and fewer aircraft and engines on lease. Our full-year USM sales partially offset these factors, with a 26.1% growth year-over-year as we benefited from strong demand and improved fee stock in the second half of 2023. For the full year, we sold 17 engines and 4 aircraft, compared with 15 engines and 12 aircraft in the prior year. Turning to our end markets, commercial demand remains robust as a result of strong airline traffic and capacity, which has now exceeded pre-pandemic levels. This is a formidable tailwind to our business and provides significant demand for our equipment. Importantly, this is a compelling indicator as we've ramped up our asset purchase program in 2023. After a weaker purchasing environment in 2022, that unfavorably impacted our first half of the year. Simply put, with sufficient demand and favorable pricing, our current ability to drive revenue and EBITDA stems from our ability to acquire, service, and deploy equipment back into the market. In the cargo market, conditions remain challenging, as we've reported throughout the year. We have seven remaining 757s that are being converted and continue to actively market these aircraft to potential customers. In our USM parts business, airframe and engine parts sales both grew substantially year over year, driven by the success of our feedstock program. For the full year of 2023, we acquired $132 million of feedstock and had an additional $72 million under contract at year end. The availability of feedstock continues to be negatively impacted by the delay in new OEM production that has forced operators to retain older equipment for longer than is typical. Despite this environment, we've been successful in continuing to acquire feedstock as our purpose-built model was made to extract a maximum value of aircraft in any condition, allowing us to execute on purchases of unserviceable equipment that requires investment and expertise to monetize. In addition, the condition of records for these assets have been challenging as they have not met the robust requirements of the industry for full back-to-birth trace. This is again where our industry know-how and experienced team can add value where others cannot, but has also delayed the timing of closing on some of these feedstock acquisitions. Finally, in our leasing portfolio, Full year sales declined by approximately 50% as we had fewer assets under lease during the year. We had no aircraft in the lease portfolio in 2023 compared to three aircraft in the prior year that were sold at very favorable prices. In 2024, the company plans to increase of engines available for sale and lease based on engines that we purchased in 2023, as well as from engines that are returning to service after maintenance or repair activities that have been completed. Turning to our Tech Ops segment, we reported full year sales of $119.3 million compared to $130.9 million in the prior year, which included the sale of our 737 AeroWare demonstrator aircraft to a government entity for $23.7 million. Excluding this asset sale, Segment sales were up roughly 10% year-over-year as a result of strong demand for our MRO services, particularly at our Goodyear facility. Turning to engineered solutions and airware, I'm very pleased to report that on December 6th, we received our STC from the FAA for airware, which marks the conclusion of a multi-year development and flight testing process. With the approval, the FAA also determined that AirAware provided a 50% visual advantage over the naked eye, which will be instrumental in helping our customers assess and model the financial returns for the product. Importantly, AirAware is now the only enhanced flight vision system that the FAA has approved for this degree of visual advantage. The addressable market for airware is substantial, with more than 6,737 NG aircraft actively flying that would benefit from this product and qualify under the F-8 certification. This market includes very large passenger carriers that represent hundreds of units, Boeing business jet operators, as well as cargo and government operators. As we concluded the certification process, We also ramped up our go-to-market activities in an effort to secure a launch order and build an order backlog. We're in active discussions across these categories, and as we've detailed in the past, many of the largest players are already familiar with the product through demonstrations and flight testing. Further, I'm pleased to announce that as of today's call, we have written proposals out to five potential launch customers. which span from small to large passenger and cargo carriers. While we expect formal orders to take some time as customers fully assess the benefits and return profile of airwear, the proposition is clear and compelling that the installation of airwear will both substantially enhance aircraft safety in suboptimal weather conditions while providing a compelling ROI to customers through reduced delays, diversions, and fuel consumption. In closing, while 2023 was a challenging year that fell short of our expectations, we remain confident in the long-term prospects for our business. Our unique end-to-end solution provides a durable competitive advantage. The recent FAA certification of Airware was a major milestone that unlocks a large and exciting growth opportunity, and we have a robust pipeline of potential launch customers actively evaluating the system. By continuing to execute on our strategic priorities, acquiring attractively priced feedstock, maximizing returns across our asset management channels, and driving adoption of airware, we are positioned to generate significant long-term value for our shareholders. I want to thank our dedicated employees for their hard work and our investors for their continued support. We look forward to updating you on our progress in the future. Now, I'll turn the call over to Martin for a closer look at the numbers.

Martin? Thanks, Nick. I will start with an overview of our fourth quarter financial performance, followed by our expectations for the business in 2024. Our fourth quarter revenue was $94.4 million, which included $47.4 million of flight equipment sales. Revenue in the fourth quarter of 2022 was $95.1 million, which included $51.4 million of flight equipment sales. If we exclude flight equipment sales, revenue would have been $47 million and $43.7 million in the fourth quarter of 2023 and 2022, respectively, an increase of 7%. As we have discussed in multiple earnings calls and press releases, our business may and often does fluctuate from quarter to quarter based on the timing of flight equipment sales. We believe that investors and analysts should monitor our progress based on asset purchases and sales over the long term. Fourth quarter asset management revenue decreased 4.9% to $64.6 million, largely due to lower flight equipment sales. Leasing revenue for the fourth quarter declined as a result of the planned reduction in the number of aircraft in our leasing portfolio. Fourth quarter USM parts sales improved from the year-ago period by 27% because of higher demand and availability of feedstock. If we exclude flight equipment sales, asset management revenue would have been $17.2 million in the fourth quarter compared to $16.5 million in the prior year period, an increase of 3.6%. Technical operations, or tech ops, revenue was $29.8 million in the fourth quarter, which was an improvement of 9.7% compared to the fourth quarter of 2022. TechOps benefited from better performance from landing gear activities and Roswell on airport MRO activities. Revenue growth from our Roswell facility within TechOps was offset by lower revenue at our Goodyear facility due to a greater percentage of intercompany work being performed during the quarter. In the fourth quarter of 2023, gross margin was 25.9% compared to 36% in the fourth quarter of 2022. due to a decline in flight equipment sales, which generally have higher margins and were a lower part of the mix in the fourth quarter of 23. Fourth quarter selling general and administrative expenses were $25.5 million, of which $3.1 million were from non-cash equity-based compensation expenses, compared to $25.1 million in the fourth quarter of 2022, of which $4.5 million were non-cash equity-based compensation expenses. Losses from operation was $1.1 million in the fourth quarter compared to operating income of $9.1 million in the fourth quarter of 2022. Income tax expense was $2.1 million in the fourth quarter of 2023 compared to $4.1 million in the prior year. Fourth quarter net loss was $2.7 million compared to net income of $9.2 million in the same year period. adjusted for non-cash equity-based compensation, inventory write-downs, mark-to-market adjustment to the private warrant liability, gain on legal settlement, secondary offering, and facility relocation costs. Fourth quarter adjusted net loss was $0.1 million versus adjusted net income of $12.3 million in the fourth quarter of 2022. Fourth quarter diluted loss per share was $0.08, compared to diluted earnings per share of 17 cents in the prior year period. Adjusted for stock-based compensation, inventory write-downs, mark-to-market adjustments to the private warrant liability, gain on legal settlement, secondary offering, and facility relocation costs, fourth quarter adjusted diluted loss per share was 2 cents versus adjusted diluted earnings per share of 23 cents for the fourth quarter of 2022. Fourth quarter adjusted EBITDA was $6 million compared to $17.7 million in the fourth quarter of 2022. Adjusted EBITDA and related margins were adversely impacted by lower flight equipment sales, which generally have higher margins. Cash used in operating activities was $174.2 million, primarily due to inventory investments of $168.6 million. AERISO continued its investment in feedstock opportunities which consumed most of the available cash as of December 31, 2023. AERSOL ended the year with $136.9 million of liquidity, consisting of $5.9 million of cash and available capacity of $131 million on our $180 million revolving credit facility, which can be expanded up to $200 million. As Nick noted earlier, due to the inherent variability in our asset management segment, specifically as it relates to the timing of flight equipment sales, we have decided to discontinue our practice of providing numerical full-year guidance. We remain confident that the first half of 2023 was a low point and that 2024 will show improved recovery. This confidence is driven by a strong balance sheet that has over $320 million in inventory that will be deployed in support of leasing, USM, and flight equipment sales in a favorable aftermarket that has benefited from robust passenger demand and delays in production of new aircraft. In our tech ops segment, we have been awarded several service agreements with airlines and OEMs at our component MROs that will help increase the volume at these shops and will also help us improve operational efficiencies and begin to monetize on the capacity expansion investments we have made. Our on-airport MROs continue to remain strong, fueled by demand for maintenance work, supporting the robust passenger demand. Lastly, with the SEC in hand, we have entered the commercialization phase of airware, and we are working on securing orders that will provide revenue predictability over many years. In conclusion, excluding flight equipment sales, our business volume increased in 2023 as commercial markets continued their recovery and demand remained robust. We were successful in closing on $131.9 million of feedstock in 2023 and have agreements to acquire an additional $83 million to date, which marks a sharp recovery from the low volume of acquisitions completed in 2022 that partially contributed to softer 2023 revenues. While we were disappointed more of the flight equipment sales did not close at the end of 2023, it is important to note that all of these assets are still available for sale or leased. with 28 million of sales that have already closed in 2024, and the rest expected to generate revenue later in the year. Our balance sheet remains healthy, with more than $136.9 million of liquidity available to fund our business, and we will continue to direct capital to the highest risk-adjusted returns for our shareholders. With that, operator, we are ready to take questions.

Thank you. Ladies and gentlemen, please note that if you like to ask a question, please press star and then 1 on your telephone keypad. A confirmation turn will indicate that a line is in the question queue. You may press star 2 to leave the question queue. For participants making use of speaking equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question comes from Bert Subin of Stifle. Please go ahead.

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

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

Yeah, I mean, I guess you've seen some consistent shifts, so I'm just curious that and why you've seen delays and maybe what happens from here.

It's not one thing. It's a whole number of factors. Some of the things that we've seen that have extended the purchasing and sale time of these assets are the condition of the records that we're getting from various operators. As we've seen from... some recent events where there has been fraudulent paperwork produced on records, the scrutiny that goes into these aircraft records is just increasing. It's not necessarily, you know, comes from regulatory requirements today, but it comes from, you know, just a much higher level of scrutiny in back-to-birth trades. And what's good for an airline to operate an airplane and maintain records that's suitable to the FAA or to their local CAA, Local regulatory agency may not be suitable if we acquire the aircraft and then we're trying to sell it to somebody else or going to another airline. So the condition of records has been a mess. Airlines are selling equipment. Even leasing companies are selling equipment to us. The records are a mess. It's taking a lot of time to clean it up. And candidly, nobody has enough resources to clean it up. It's just very, very, very time consuming. And it's just gotten worse. So that's one reason. The other, with respect to deliveries as we approach year end, it's always tough when you come up on holidays to get everybody focused on what it takes to get a closing. Now, we had our entire team focused on it and made sure that nobody went home for the holidays if there was any possibility that we could get any one of these assets delivered as we had scheduled to be delivered in the last quarter of the year. Unfortunately, we don't always get that same level of cooperation when somebody's buying something. I mean, when they're selling it, everybody focuses on it, but when you're buying something, you don't necessarily have the same focus. So I think that a number of the deals that we didn't close in the last quarter could have closed if we would have had better attention from our buyers. I'm not going to necessarily blame them, but it's important for both parties to execute a transaction You expect to get cooperation from both parties. That particularly becomes problematic at the end of the year because despite what everybody says they'll do, when it comes to Christmas time and New Year's, nobody wants to work. Everybody has things to do. And again, that's not on our sales side. Everybody here did what we needed to do to get things delivered. Other issues such as bore scope reports. We do a bore scope. Multiple other people do bore scope of engines prior to delivery. engine's fine, next guy looks at it, sticks the borescope in an area of an engine that is not designed to be looked at, finds something that's an anomaly, goes back to the OEM, the OEM says, why did you look there? We have no parameters for that, so if you've got a problem, then you're going to have to fix it. And so take an engine that was serviceable to everybody, and you look in an area of the engine that there's no manual that tells you what the serviceability limit is, and all of a sudden you've got an engine that's rejected and requires it to go into a shop. That doesn't always kill a deal for us. We have replacement engines, so we can offer a replacement engine, but that also requires cooperation from the lessee or the buyer to look at the records on a timely basis and to be in a position to accept an alternate asset. That's not all of them. I mean, but that's just kind of a little bit of a few examples of the kind of things that caused us to lose some closings at the end of the year that just got pushed out. And it's just exacerbated at the end of the year. It's just because you just have no recovery time.

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

Yeah. You know, I understand. And as you see, the amount of revenue we need to generate to cover kind of our fixed overhead, once we hit that, that's where it becomes, you know, everything falls to the bottom line, and we just don't know that at the beginning of the year. We can estimate it based on our prior experience. And we look back five years and we said, well, geez, how did we perform previously where we didn't know exactly what we were going to buy? We had assumptions. We didn't know exactly what we were going to sell. And that's not new to us. I mean, we've been in that situation every year since we've had this company. As we look back five years, we actually did pretty well on our estimates of where we would end up at the end of each year based on a lot of information that we didn't have at the beginning of the year. This year was worse. This year was worse as far as our ability to predict where we would end up for a number of the factors I just mentioned on why some of these delays occurred in closing, but there are other factors that exist in the industry today. This is a Very different. We haven't experienced an industry with this level of problems in I don't know when. I don't recall it. I mean, when you look at all the issues Boeing is going through with the certification, recertification of the MAX, other issues that have come up recently regarding the 7379 issue or the MAX 9 issue, Airbus with the problems it's having on its geared turbofan, and that just seems to be prolonging. When you have an expectation, there'll be over 600 A320s grounded. So what that's done is that it's made predicting the availability of feedstock to be very difficult because these are circumstances that we haven't experienced before. And these situations change during the year. So as we're The beginning of the year, we're trying to make a determination of how much feedstock can we buy. These events that are unusual and we haven't seen them before make it really difficult to predict how much we're going to buy. Couple that with when we buy something, we generally look at it as we're going to purchase at the price at which we can make sense parting it out. And we always believe parting it out is the lowest value we can get out of the flight equipment that we buy. As we acquire this flight equipment, we may have thought, oh, it's going into our part-out machine, and that would be easier to predict because we can calculate how long it will roughly take us to get it through the repair cycle, although that's even been problematic lately because of an extended repair cycle time. Putting all that aside, if you can predict when it gets through the repair cycle, then you can predict with some specificity as when you'll generate revenue on a go-forward basis from USM. That's not what typically happens. What typically happens is we look at it. We said, well, we're going to sell this as USM. No, I'm going to keep these parts, and I'm going to rebuild an engine. Then I'm going to take that engine, and I'm going to put that engine out on a lease. Or if the market opportunity is better to sell it, I'm going to sell it. And being able to predict which of those avenues we're going to pursue to monetize that investment is fluid. It changes as we acquire the material. It changes based on market demand during the year, and it changes based on the condition of the assets when we actually get it in our hands because a lot of this you don't really know until you physically get the assets and you have an opportunity to start looking at it and see where the true value is in the metal that you've bought. So it's all those factors that just make it really, really difficult to forecast on a go-forward basis, and it's why... is why we really feel that it's not in the investor's interest for us to give very specific guidance. However, directionally, how should our investors feel about what the prospects of the company are on a go-forward basis? Clearly, you have to point to available inventory and fixed assets. What do we have to sell or lease at any different level? You have to look at The investments we've made on the MRO side in expanding on our accessory side for pneumatics capability, which we have yet to complete and get a benefit from, tripling the size of our structural component shop, which we are almost there, but we have yet to receive a dime's worth of incremental revenue from tripling the size of our building because we're not quite finished with it yet. Our Millington facility, which is about to come online, and we made an investment in that, but we have yet to see any return on that because that facility will be up and running here in the next quarter, but it's not yet up and running and contributing. The development of all the capability we've got on the landing gear side. We, for the first time in the history of that landing gear business, have been receiving contracts from airlines and OEMs to overhaul their landing gear which is producing a significant amount of recurring revenue that we can point to and say and now we can forecast that out more accurately because it's not you know go fight for every landing gear you could get it's you know we have recurring contracts and by the way that is that is not just on the landing gear side but we're seeing that on the on the accessory side as well on the on airport MRO side Our issue there is, besides Millington, which has yet to come online, is just building up the labor force to accommodate the demand. We're in good shape on that. We still have lots of room to grow, but we've got to get more mechanics to be able to do that.

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

I don't even – I'm not going to answer that.

I don't know. Martin, do you have an answer?

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

Got it. Just my last question on the Airwire side, Nick, you said there was five proposals out there. Can you just tell us what that means? And Is your expectation that revenues may be more a 25-plus setup?

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

Got it. Thank you. You're welcome.

The next question comes from Horton Kenner of TD Cohen. Please go ahead.

Hey, guys. How you doing?

Good afternoon. How are you?

So I was curious if you could talk about the Arrowware customer traction. At one point, I know it was a while ago, we were talking about maybe a 250-unit order from one of the customers that was deeply involved in your development of the product. I was just curious, is that within your five proposals that you have out there, are there any big elephant orders that are part of that five? Maybe what is kind of the status of that one potential launch customer we thought we had? What's the holdup at all?

Okay, this is Gotham, right?

Correct, yeah.

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

And does that same, I mean, I imagine that same process applies to even some of the smaller potential customers, right? I mean, they're going to have to figure out how to get the simulators and all that. So is it a similar lead time, do you think, in terms of closing on some of these orders, whether it's a larger airline or a smaller one, or is it just a lot simpler with the smaller airlines?

You know, it probably will be slower with a large airline because more pilots would have to be trained. With a smaller airline, they actually could do flight training in the airplane. It's expensive. But for a small airline, it may not make sense for them to pay to have a simulator modified with our system. So we don't know the answer to that yet. That's going to depend on how many airplanes does the airline have and can they justify the cost of modifying a simulator and whether a simulator operator would be willing to modify their simulator. So if you're going to do, and if you recall, when we did flight training for the FAA during our flight testing, we took five pilots who had never received training on our enhanced flight vision system. We put them through a ground school, and we actually, took them in the airplane and did flight testing in the airplane and trained them in the airplane. Now, that's expensive, but we were able to do that successfully with those five pilots. Gotcha.

Okay. And just to follow up on some of your earlier comments on, you know, the increased documentation standards of maintenance history and the like, have there been any – is it obtainable? I mean, I just wonder, like, is there – is it one of those things where it's just a matter of time to dot the I's and cross the T's, or is it... I'm just curious, like, is something different where it's just much harder to even obtain the information and that might extend when these assets are actually available for sale, if you will?

The information is generally available if you can get somebody to... go through their records archives and pull the data. And what's really frustrating is when we go to buy an airplane or an engine, and it's been in the hands of multiple airlines, and the airline still exists, and it has records, or we have the records, and there are some gaps in the paperwork, whether it be a non-incident statement or a back-to-birth traceability, on an LOP, life-limited part, and we go back to the airline and say, hey, would you guys, this is what we need you to sign, and they just say no. They say, well, guys, we're busy doing other things, and we sold this airplane a long time ago, and no, we're not going to fix it. Now you've got a gap in the records that for most customers, they won't buy it. Some will because it wasn't a Some of these are not even regulatory requirements. They're just requirements that the industry has imposed to make the records impeccable, perfect, no gaps, no questions. But it's also very frustrating. So I believe that all the records can be fixed if you get cooperation from the various parties who operate the flight equipment. And we've been successful for the most part. I mean, rarely do we have something that we say we give up. And by the way, and when we're doing our pricing, if we see an engine that has or whatever, aircraft landing gear, that doesn't meet the standards and we look at it and we say there's no way we can fix that, then we adjust the price. We say, okay, look, these parts aren't going to trace. They're not sellable. So I'm not going to – you want those parts back? I'll give you those parts back when we take the engine apart, but I'm not paying for them. And we've done that where we've not paid for parts that don't have life-limited trace. traceability. I don't know what they do with them because if you don't have the paperwork that goes with them, the parts are just scrap metal.

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

I wish I could report that we were in great shape on the 757s as far as customer demand. Right now, the cargo market continues to be very soft. There seems to be more available aircraft than the cargo operators need at this point, and that applies to the 757. We do have seven airplanes that are uncommitted at this point. We are talking to airlines for both the lease and potential sale, including customers that we've already sold aircraft to, but we have no contracts at this point on those airplanes. And that's another very difficult thing to project for the balance of this year because I don't have any real strong understanding of where the freight market will be as the balance of this year unfolds. So at this point, seven airplanes, either been converted or finishing conversion. We're looking for homes for them in a tough market. The market will recover, and those airplanes will be viable again for leasing and sale, and we're going to have to wait it out.

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

Hey, good afternoon, Nick and Martin. Hey, I just maybe wanted to start. Martin, to your point, you've got almost $330 million in inventory or assets you can monetize on the balance sheet. It sounds like you've got agreements for an incremental $83 million to purchase, and you've already sold maybe $30 million or so this quarter in the first quarter to date, if I got that right. I know it's hard to predict, and there's obviously a lot of customer issues, but really two questions. One, can you give any more granularity, aside from maybe the 5.7s, on what sort of broad buckets of what type of assets you hold? Because, you know, are these maybe engines where there just isn't much near-term demand or airframe? And how much could that 330, you know, 24 if everything goes according to plan, considering you're obviously still committing capital to feedstock?

So the majority of the inventory that we have on hand is engine-related, and we have engines that are in demand. We have CFM56, CF680s, RB211. So I think that's really going to put us in a position to not only support USM sales, but opportunities in the leasing market to do the customized type of leases that we do, short-term in nature, getting a much higher return than the typical sub-1% monthly lease rate factors that a pure play leasing company would be able to obtain. A smaller portion of that inventory is airframe material, again, supporting the 737 and 757 overall platforms. And again, that material is in high demand to continue to service those overall fleets. So we feel good about those opportunities. Ken, as I mentioned earlier, the real challenges here is what avenue do we take to monetize these? We're seeing a pretty good leasing market, and when we look at that from a long-term perspective, those returns are attractive. Obviously, with the availability or with limited kind of assets being available for sale, these assets are also demanding a premium from a trade perspective. So, again, we're always looking at what is the best long-term kind of view and objective, and that's really what's driving us kind of pulling that overall guidance because we want to be opportunistic. We want to be able to maximize that and not be kind of triggered to meeting a specific quarterly or year-to-date number.

Okay. Thanks, Martin. I mean, I can appreciate the desire to sort of maximize the return, but just considering sort of the EBITDA in 23 and a question we get a lot, I mean, maybe at what point would you maybe have just a, maybe a bit of greater sense of urgency around some of this monetization of these assets to just, you know, make room for more inventory and maybe just accelerate the, you know, accelerate the push off the balance sheet a bit?

Let me answer that.

So the, we sell what we have more or less 757 as a sign. We sell, we sell, what we have available when it's ready for sale. So the demand is there, very strong demand in the marketplace for USM, for engines. The issue is getting it through the system and getting it available for sale and dealing with all of the dynamics in the market today about long lead times for any type of work, whether it be repairing an engine, repairing a piece of part, overhauling an aircraft. So there is a sense of urgency, I can assure you, Ken, on getting whatever we have made ready for sale. And the issue isn't that we're not prioritizing the make-ready nature of whatever it takes to get these assets available for sale. We are prioritizing it. Some of the decisions we make, however, could be longer, such as taking engine parts that we pulled out of an engine or aircraft that we bought and deciding that, yeah, we could turn this, and by the way, this is a struggle that we have every day, and we could sell it as USM to somebody else that's overhauling an engine and would love to get their hands on the coveted life-limited parts that we have that we were able to pull from an engine we bought for part-out and some of the other parts out there to get a low-cost engine that they would then build and supply their customer. So we'll pull those and now we lose a short-term sale and that goes into work and it goes into an engine and then we run that through the whole process of getting the engine overhauled and instead of having an immediate sale from a part that we had ready, now it's in the repair process of getting an engine done And then we're done with that, then we're fighting with, well, do we sell it because the market's really red hot on this engine type today and we can get a premium over what we think we could get in the short run, or do we go the long route, which is to put the engine on lease? So it's not that there's not a sense of urgency. It's that the quickest return is not always the best return. And we have a long-term view of... of building up this company's profitability and not doing things in the short term that will impact the business over the long run. Now, I know that that's not what investors want to hear because everybody wants to see short-term returns, as do we, but we consistently look to do what's best for the business, and we don't focus on just the short term.

Yeah, no, Nick, I appreciate that. And I guess as a public company, you're obviously having to walk a very fine line between sort of managing near, mid, and long-term expectations. So definitely appreciate that. I guess as I think about, again, the carrying value or the inventory on the balance sheet, as this becomes available and as you look to monetize it, back to one of the earlier questions, is there any reason to think that this value wouldn't support, you know, the kind of gross margins we saw in 21 and 22?

Well, some of the margins we saw in 21 and 22 related to our 757 program, which had a pretty exceptional margin. So I wouldn't expect you're going to see the same 40-plus percent margins that we were seeing on some of them. Martin, correct me if I'm wrong as to what the margins were. You're correct. They average around 40. Yeah, a pretty exceptional margin on our 757 transactions. We were able to take advantage of a very unique time in the market, and we had the assets available. So I don't think at that level, but consistently margins that we have seen over the history of the company, and we target a 25% margin, also coincidentally targets 25 IRR. Those continue to be our minimum target thresholds, and we've been successful over time in reaching those.

Perfect. We have no reason. We can't continue that. Okay. Perfect. Thanks, guys. I'll pass it back there. Okay. You're welcome.

Thank you. Our final question comes from Sam Stuseka of Trist Securities. Please go ahead.

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

Martin, you know, you have the numbers on what's available? Yeah, overall. What's ready available today?

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

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

That is part of the – that's part of, again, the challenge of kind of doing the overall forecasting, these whole asset opportunities. And Nick gave a perfect example. We can get an engine that we can sell some of these fast-moving parts, and the market would love and take them out of our hands extremely quickly. But the right decision there is to really get the engine and rebuild it. But, again, as we've noted kind of earlier, we're truly agnostic on how we monetize that overall asset. It's just looking for the highest return.

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

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

That's very helpful. Thank you, guys.

You're welcome.

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

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

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