AerSale Corporation

Please stand by, your program is about to begin. If you should need audio assistance during today's program, please press star zero. Good day, everyone, and welcome to today's AirSail Incorporated Third Quarter 2024 Earnings Conference. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Today's call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Ms. Christine Patron, Vice President of Compliance. Please go ahead.

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

Thank you, Christine. Good afternoon and thank you for joining our call. I'd like to begin today with a summary of the quarter and a review of our strategic objectives before turning the call over to Martin for a closer look at the numbers. Underlying business trends continue to improve in our core business and we remain focused on the factors we can control. This included the following drivers and key takeaways from the quarter. We expanded our lease pool, which drove a meaningful uptick in our leasing revenue, which will recur through the balance of the lease terms. This is consistent with the strategic priorities we discussed last quarter. Second, as a result of increased feedstock availability, our USM business performed well, and we have sufficient stock remaining throughout the next 12 months as we navigate a challenging used aircraft backdrop. Third, our MRO business continued to improve in the quarter and was the primary driver of an 18% growth year-over-year in this segment. And lastly, we remain on track with our MRO expansion projects, which will drive increased revenue incrementally each quarter in 2025 and improve margins as the investment period concludes. Turning to our consolidated results, Third quarter revenue of $82.7 million trailed the prior year of $92.5 million. As a result of lower flight equipment sales in the quarter, primarily related to the sale of a 757 freighter that occurred in 2023. Excluding flight equipment sales that tend to be volatile, the underlying trends were positive year over year across our business and revenue increased 26%. Improved underlying performance resulted from stronger USM sales as volume from feedstock acquisitions worked its way through the system. Additional assets in our lease pool compared to the prior year and continued strength in demand for MRO services. Light equipment sales in the third quarter of 2024 were $22.6 million compared to $44.8 million in the prior year. As we remind investors every quarter, Due to the nature of our business and the impact of flight equipment sales, our top-line revenue levels can vary significantly quarter to quarter, and we believe our business is best assessed based on aggregate performance over a longer period of time with a focus on feedstock levels and the value our team is able to extract from those investments. Third quarter adjusted EBITDA improved to $8.2 million, compared with $1.9 million in 2023. Higher EBITDA in the period resulted from stronger gross margin and lower operating expense. Next, I'd like to provide an update on the strategic priorities that we laid out last quarter, beginning with our MRO facility expansion projects. In our Miami component facility, which will add pneumatic capabilities to our MRO footprint and expand our addressable market, We remain on track to complete this project at the end of the year. We expect it to be operational in the first quarter of 2025, at which point we will begin to generate revenue. Second, at our expansion project for the Miami Aerostructures Facility, where we are tripling our total capacity, we also remain on track to complete this investment by the end of the fourth quarter and be operational by the end of the first quarter of 2025. And finally, at our Millington-on-Airport MRO facility, we are operational and have begun to generate revenue during the quarter. As we fill capacity, we expect this facility to contribute to our overall EBITDA, but initial volume during the ramp-up phase created a $.9 million drag on EBITDA in the period. With all of these facilities, we expect a sequential step-up from initial volumes in 2025 and into 2026, with an ultimate run rate of at least $50 million annually. Further, as we complete these projects, the associated CapEx and excess operating costs will abate, benefiting the operating run rate in our TechOps segment. In total, we have been incurring approximately $1 million in annualized costs for incremental rent as we work to expand these facilities. These amounts are in addition to the $0.9 million EBITDA loss in Millington, which is now operational and will have a more positive impact on our operating results. As I noted last quarter, we're utilizing a portion of our feedstock to expand our specialty lease pool, which is more in line with our pre-pandemic operating structure. To that end, we added four engines during the period. This led to a year over year improvement in our leasing revenue, And as we continue to add engines, we'll help smooth our quarterly performance in subsequent quarters through the duration of these leases. Regarding our 757 P2F conversion program, the end market showed additional signs of loosening with enhanced customer interest and bidding activity. These opportunities range from sales to leases. And while we're still in discussions with multiple customers and the outcome is uncertain, were encouraged by the enhanced level of activity occurring. Turning to our segments and beginning with asset management, third quarter sales were $50.4 million compared to $65.1 million in the prior year. Similar to our consolidated results, lower revenue was entirely attributable to flight equipment sales during the period, particularly from the sale of a 757 freighter in the third quarter of 23. Excluding flight equipment sales, segment sales were up 36.9% year-over-year, driven by better feedstock availability from the $139.9 million acquired in 2023 and the addition of four engines to our lease pool. In the quarter, we sold five engines, compared to seven engines and a 757 freighter in 2023. The backdrop for acquiring feedstock remains challenged, primarily as a result of OEM production delays that have led airlines to continue operating midlife aircraft. Fewer aircraft available and more competition for these aircraft has led to higher asset pricing, which has also decreased our overall acquisition rate. We've continued to bid on select available assets following our discipline guidelines, with more than $253 million in bids submitted in the third quarter, of which over $117 million were awarded to somebody with Aercel winning 3.6 million, however, a success rate of just 3.1% of awarded deals. Put in perspective, this compares to our historical win rate of approximately 10%. Year-to-date, we've acquired 42 million in total feedstock, which is at a level below our annual target of 150 million, but we still retain sufficient inventory levels to support our business for at least the next 12 months, as we envision market conditions will begin to normalize. Turning to our tech ops segment, second quarter sales continued to grow amid strong commercial demand. Segment revenue increased 17.6% to $32.3 million compared to the year-ago period. Growth was widespread across most of our facilities, including modest initial sales volume from our new Millington on-airport MRO. We expect growth at Millington to continue as we expand our customer base and also from the additional capacity and new capabilities being added to our component and accessory shops coming online by the end of 2024. Turning to engineered solutions, we had an active quarter of dialogue with multiple prospective customers regarding AeroWare, our revolutionary enhanced flight vision system incorporating a dual head wearable display applicable to the 737, for which we hold the only supplemental type certificate for its type issued by the FAA, which we received last December. This airware sales activity included demonstration flights for three different operators. Despite the long commercialization phase for this advanced system, we remain optimistic about the prospects for airware as we work to win a launch customer and will continue to update investors on incremental developments. We also continue to pursue sales opportunities for AirSafe, our proprietary STC developed to provide fuel tank flammability protection, applicable to a number of popular narrow and wide-body commercial aircraft, including the 727, 737, 767, 777, and the A320 family of aircraft. As we approach a 2026 regulatory compliance deadline, requiring aircraft not equipped with air safe or another approved system to have fuel tank flammability protection, we anticipate our current order backlog of approximately 11 million to accelerate and double over this timeframe. As commented during previous earnings calls, our engineered solutions products have generated sales margins in excess of 50%, which we expect will be consistent for future sales. In the third quarter, we sold two air-safe systems. In closing, our core business demonstrated strong underlying growth driven by better feedstock and a robust commercial aerospace backdrop. We are working hard to stabilize our base revenue and have added additional lease equipment, which will provide recurring quarterly revenue. Longer term, we're excited to bring the capacity expansion projects online in our tech ops segment and look forward to pursuing the monetization of the 727 P2F conversions that will help drive meaningful cash flow. Finally, we remain confident that our revolutionary enhanced flight vision system, Airware, will gain market acceptance and become a significant contributor to our long-term financial performance and ultimate company valuation. I want to thank our dedicated employees for their hard work and our investors for their continued support. We look forward to updating you on our progress. Now, I'll turn the call over to Martin for a closer look at the numbers. Martin?