AerSale Corporation

Good afternoon and welcome to the Airsail Corp third quarter 2025 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference operator by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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 Christine Padron, Vice President of the Compliance. Please go ahead.

Good afternoon. I'd like to welcome everyone to Aerosil's third quarter 2025 earnings call. Conducting the call today are Nick Bonazzo, Chief Executive Officer, and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you all, The 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, 2024, filed with the Securities and Exchange Commission, SEC, on March 11, 2025, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investors section of the AirSale website at ir.airsale.com. With that, I'll turn the call over to Nick DeNovo.

Thank you, Christine. Good afternoon, and thank you for joining our call today. I'll begin with a brief overview of the quarter, then provide operational updates before turning the call over to Martin to review the numbers in greater detail. We reported revenue of $71.2 million for the third quarter, compared to $82.7 million in the prior year period. The year-over-year decline was entirely driven by the absence of engine or aircraft sales in the quarter compared to five-engine sales in the prior year period. Excluding whole asset sales, which tend to be lumpy quarter to quarter, the balance of our business grew 18.5% to $71.2 million, driven by a strong inventory position supporting our USM business and higher leasing revenue. In tech ops, sales were down modestly versus last year as strength in component sales and higher airsafe volume partially offset lower services revenue, particularly at our Roswell facility as we've repurposed that site for teardown and decommissioning work that yields higher margins. As we note every quarter, due to the nature of our business and the impact of whole asset sales, our revenue levels tend to be volatile quarter to quarter, and we believe our business should be evaluated based on aggregate performance over a longer period of time with a focus on feedstock acquisitions and the value our team is able to extract from those investments. Turning to profitability, we delivered solid margin performance despite the absence of whole asset sales in the quarter. Adjusted EBITDA was $9.5 million, or 13.3% of sales, compared to 8.2 million, or 10.0% of sales, in the prior year period. This improvement reflects stronger leasing contributions, higher USM activity, and the ongoing benefits from our cost reduction efforts over the past year that have trimmed SG&A expenses and increased MRO profit margins. By segment, and starting with asset management, Revenue was $39.2 million in the third quarter, compared to $50.4 million in the prior year period. This year-over-year decline reflects the absence of engine or aircraft sales this quarter versus five engine sales in the same period last year. Excluding whole asset transactions, segment revenue increased nearly 40.9% year-over-year to $39.2 million, driven by strong USM volume and higher leasing activity. As we've discussed in past calls, we've made a strategic decision to balance whole asset transactions with assets deployed on lease, which is more in line with our historical operating model. Consequently, we expect more stability in quarterly operating results, which was evident in the quarter. We've continued this effort throughout the year, and as of quarter end, we had 15 engines and one 757 freighter aircraft on lease, with a second 757 lease executed at the end of the quarter. During the quarter, we remained active on feedstock acquisitions to drive our future growth. We acquired a total of 13.7 million in the quarter, which brings the year-to-date total to 84.2 million. As we've reported for the past few quarters, we're continuing to see opportunities in the market, but overall supply of attractively priced feedstock has been limited as new OEM production has yet to catch up with demand. We remain extremely disciplined not to overpay for feedstock in this highly competitive market, which has been driving up pricing. For the balance of the year, we're in a strong inventory position with more than $371.1 million of feedstock inventory, which includes nine engines that are available for sale or lease and another 10 engines currently undergoing repairs. Turning to our 757 passenger to freighter conversion program, we continued to make steady progress. As I noted, we had one aircraft on lease during the quarter and we placed an additional 757 freighter on lease that will begin generating revenue in the fourth quarter. Customer interest is high. and we're in active discussions to place the remaining five 757s we converted across multiple potential customers. While the timing of these transactions is still uncertain and will likely take some time, we're encouraged by the clear improvement in market interest since a low point in 2023. Turning to tech ops, revenue was $32.0 million, down modestly from $32.3 million in the prior year period. During the period, we reported stronger sales of component parts and engineered solutions, which mostly offset a modest aggregate decline in MRO services revenue. At Goodyear, sales have stabilized following the conclusion of a contract encompassing multiple aircraft heavy checks that started to wind down in the second quarter of last year. Supported by a strong pipeline of recommissioning work, that is expected to keep the facility operating at or near full capacity through 2026. We're also in discussions to secure long-term contracts that would provide greater volume visibility going forward. At our Roswell facility, results were lower, but in line with our expectations, as we continue transitioning the facility to focus exclusively on teardown and decommissioning activity, which is yielding higher margins. Looking forward, construction of our expansion projects at both our aerostructures and pneumatics facilities are now complete, and we're in the process of transitioning to production in both facilities. We expect this to be a significant driver of revenue growth in 2026 and beyond. In engineered solutions, we saw a strong increase in air safe deliveries year over year, and we anticipate volume will remain at elevated levels for the balance of the year and through 2026 as we get closer to the deadline for compliance with an FAA Airworthiness Directive, which is satisfied by installation of AirSafe. At quarter end, our 2025 deliveries of AirSafe plus current backlog totaled more than 22 million, and we have sufficient orders secured to achieve our 2025 financial plan. Turning to AeroAire, We continue to enhance the functionality of the system and engage with potential customers as we work toward a launch order. We believe the ongoing enhancements to the product, combined with the increased focus by both operators and the FAA on situational awareness, will drive long-term adoption of this advanced technology across the industry. As we've seen throughout the year with several safety incidents, we're now seeing system-wide air traffic control delays as a result of the government shutdown. In each of these scenarios, AirAware could serve to help alleviate air traffic congestion and enhance safety, particularly as we gain ADS-B in functionality to the system. To that end, we're expanding our outreach and education efforts with government authorities, including the FAA and congressional leaders. This will raise awareness of how technologies like AeroWare can contribute to addressing industry-wide challenges such as airport congestion, air traffic control staffing shortages, and overall flight safety enhancement. Looking to the balance of the year and into 2026, we're positioned for continued progress. We have ample feedstock availability to support growth across our USM, leasing, and asset trading activities, providing a solid foundation for our core operations. Our lease pool continues to expand, creating a more predictable and recurring revenue stream, which will strengthen further as additional 757s are placed. This has been a strategic priority for us in 2025 and demonstrated its effectiveness in the third quarter through EBITDA margin improvement, even without the sale of an aircraft or engine. In tech ops, Construction is now complete on our new MRO facilities, and we're in the process of transitioning into operations. These additions will be an important growth driver in 2026, enhancing both capacity and capability. Finally, AirSafe remains a steady contributor, and we expect it to continue supporting results through the regulatory compliance deadline in the fourth quarter of 2026. Taken together, These initiatives position AirSale for a stronger, more stable, and more diversified earnings profile as we move into 2026. In closing, I want to thank our dedicated team for their continued focus and execution. We're invigorated by the underlying performance of our business, and despite the absence of whole asset sales this quarter, we delivered solid margins and made meaningful progress across key initiatives. We're entering the fourth quarter with strong momentum, a growing base of recurring revenue, and a platform that is more diversified and resilient. Now, over to Martin.

Thanks, Nick. Our third quarter revenue was $71.2 million compared to $82.7 million in the third quarter of 2024. As Nick mentioned, the prior year included $22.6 million of flight equipment sales consisting of five engines, while this quarter did not include any whole asset sales. As we've noted in past calls, flight equipment sales can vary significantly from quarter to quarter, and we believe our progress based on asset purchases and sales over the long term is a more appropriate measure of our progress. Third quarter gross margin was 30.2% compared to 28.6% in the third quarter of 2024. This year-over-year improvement reflects stronger execution across the business, including higher lease revenue, sales mix, and cost control measures that we've implemented over the past year that have allowed us to improve MRO margins. Selling general and administrative expenses totaled $18.6 million, compared to $21.7 million in the third quarter of 2024. SG&A included approximately $1.3 million of non-cash, stock-based compensation, which is in line with recent quarters. The reduction in total SG&A stems from lower fixed and variable payroll-related expenses which benefited from the cost reduction efforts taken over the last 12 months. Operating income for the quarter was $2.9 million compared to $2 million in the same period last year. Net loss for the quarter was $0.1 million compared to net income of $0.5 million for the prior year period. Adjusting for stock-based compensation, facility relocation costs, restructuring charges, and other non-recurring items, adjusted net income was $1.5 million compared to an adjusted net income of $1.8 million in the third quarter of 2024. Adjusted EBITDA was $9.5 million in the third quarter, up from $8.2 million in the prior year period. This improvement reflects higher leasing revenue, lower operating expenses across the business, and increased monetization of our feedstock inventory, partially offset by the absence of whole asset transactions compared to the prior year. Adjusted diluted earnings per share was $0.04 which was flat compared to the third quarter of 2024. We ended the quarter with $58.9 million of liquidity, consisting of $5.3 million of cash and available capacity of $53.6 million on our $180 million revolving credit facility, expandable to $200 million, subject to conditions and the availability of lender commitments and borrowing-based liabilities. Cash used by operating activities year-to-date was $34.3 million, primarily due to continued investments in seed stock acquisitions as we continue to grow USM and leasing. Looking to the fourth quarter and full-year performance, excluding flight equipment sales, we continue to expect full-year revenue in excess of 2024 levels, with a greater increase in EBITDA year-over-year as a result of more robust lease pool, continued monetization of our USM inventories, and the cost reduction initiatives we've taken over the past 12 months that have improved MRO margins and reduced SG&A expenses. We remain focused on executing with financial discipline and in training a strong balance sheet to support our growth initiatives. This progress we've made in leveraging our strong inventory position, improving operating efficiency, and optimizing working capital is translating into a more resilient business model with greater earning stability. With ample liquidity, a growing base of recurring revenue, and solid demand trends across our end markets, we believe Airstill is well positioned to deliver continued improvement in profitability and shareholder value as we move into 2026. With that, operator, we're ready to take questions.

Thank you. We will now begin the question and answer session. Just so you're aware, To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Stephen Strackhouse of RBC Capital. Please go ahead.

Hey, Nicky and Martin. Thanks for taking the question. First question is that you guys have had some nice capacity expansion in your MRO business. And I can appreciate that you don't want to necessarily give a formal guide, but how should we be thinking about a baseline EBITDA for your MRO business into 26? Is there maybe a revenue or margin range that we can kind of get a target from on the nice recurring piece of the business?

Yeah, as we noted from the three expansion projects that we have, we give a full year projection of $50 million at full overall capacity. Looking at 2026, we think those numbers will be approximately $25 million of revenue and generating pretty strong margins of $4 to $5 million. So we're excited that those facilities will be coming online. We're already seeing progress on our Millington facility, and the two remaining facilities will start generating towards the end of this quarter.

So the $50 million in 2025, is that an incremental $25 million in 2026?

The $50 million was total capacity, the $50 million, sorry. The $25 would be our expectations for 2026.

Got it. Okay, and then are you maybe able to just speak on your passenger-to-freighter conversions? It sounds like you guys got another aircraft on lease in the quarter. Has the market at all changed there, or has the demand kind of shifted at all, kind of in your favor?

We think that due to the lack of availability of a of an aircraft really that provides the same operating performance as a 757, that the operating community has paid attention that there really is not a replacement aircraft for the 757. And 767s, which even though they have greater capacity, could fly routes that a 757 would fly because it's a longer range aircraft. They're not available. A330s are really yet to be converted to freighters en masse and so really and the A321 is not a true competitor to the 757 and neither is the 737-800 converted freighter. Those aircraft are much smaller with smaller range and smaller capacity. So there isn't a competitive product really say in existence for the 757 and we only have a few left and Although we didn't state it in this announcement, we do have another two under LOI at this point, which we expect to deliver this quarter and the next quarter, which will put us at four aircraft for the year, or at least four aircraft under contract for the year, leaving only three left to place. And we're talking to enough operators to take those three and some others. So we feel that things have definitely changed from a low point in 2023 where we saw little demand And just due to a variety of factors and really the quality of the aircraft, you know, we're very optimistic about our ability to place the balance of these aircraft in the relatively near term.

That sounds great. And then maybe just the last one from me. I was hoping you might be able to give us a quick update on your USM strategy. Are there any changes about how you're thinking of it kind of into 26? Are you seeing any better demand signals or maybe any relaxation of the supply at all?

Yeah. So I'm not sure which followed that question. Could you – I apologize. Could you state that again? Because I didn't really follow it. Neither Mark nor I really followed your question.

Sorry, but just trying to understand your availability of USM, how you anticipate USM to maybe kind of grow as we kind of get into 2026.

Okay, good. I understood that. Availability of USM. As we mentioned, we've got a substantial amount of USM. that we've had in work and is becoming available for sale, and we're selling it. Even though the market is very tight for USM, we still buy USM. We're disciplined. We could buy a lot more if we weren't as disciplined, but we're not gonna do that. So we remain disciplined in making sure we hit our target margin in IRR profiles when we acquire inventory. We're still acquiring it. We've got ample inventory to carry us, I think, all the way through 26 without buying much more, but we expect to continue to buy more. So, you know, we think that it's because of the way we can extract value out of feedstock that allows us to win deals. And so that even though it's tough to buy things in an overheated market where pricing has gone up, if you can extract greater value out of it than somebody else because you can do more than just sell parts, you can sell parts, you can sell engines, you could lease engines. You could put a whole airplane together. You can use pieces to put other airplanes together that you have. It's really the multidimensional integrated business model we have that I think is allowing us to win deals. So we're optimistic that even in a really tough buying market, that we'll be able to continue to acquire feedstock to grow the business in the future.

I appreciate the details to all my questions. I'll be back in a few.

Our next question comes from Sam Strashaker. of Trace Securities. Please go ahead.

Hey, guys. Appreciate you taking the questions. Just trying to, I guess, clarify for my sake as much as anything, on the Roswell and Goodyear facilities, do you have any, I guess, line of sight to when those facilities would kind of be fully transitioned to the new scope of work and operating at the level that you guys would ideally like, either in timeline or just any thoughts there in terms of visibility?

In our Roswell facility, we have substantially transitioned that away from heavy maintenance work and to be more focused on storage and tear down of aircraft. So we're substantially there. Now, there's still opportunity for significant growth even doing that work. And there are other opportunities that if we fill up at Goodyear and Millington that, you know, we may have no choice but to put some heavy maintenance work back into Roswell. And there are some programs that are under consideration right now where we may do that. But at this time, we don't want to develop any additional overhead necessary to support heavy maintenance in Roswell until we fill up completely our Goodyear and Millington facilities. Now, progress on those is outstanding. In Goodyear, although we've yet to conclude a substantial number of long-term contracts, we're almost full. I think we have seven out of our eight bays operating right now with transition work from the 70 or so A320 NEOs and CEOs that have been parked there that are transitioning to new less source. Those airplanes are requiring seat checks and paint jobs and other transitioning work, engine work, because the A320 NEO, half the airplanes out there, I take it back, most of the airplanes that are parked there don't have engines. So we have lots of activity going on surrounding the the engine problem on the A320neo. The problem is being resolved and those aircraft are being returned to service. So that's creating a fantastic opportunity for us. While we have that work, we also are generating repetitive work from some of the customers that we've historically dealt with. And we've got 757s in work and we've had leasing company aircraft in work and 767s in work. So You know, we're in a much different position than we were in six, eight months ago, where we had just completed a heavy check line, a multiple aircraft heavy check line for a major airline, and had to backfill all that work. Now, as we move into 2026, with the amount of work that we see, it's going to be tough for us to take much long-term revenue in there because there'd be so much short-term revenue. So the key for us is to make sure that we make available enough, you know, slots of work so that we can attract long-term customers and then have a variety of, you know, between the eight bays we have in Goodyear, have a variety of long-term customers and short-term customers that we can satisfy that come in and out and provide a nice mix of revenue opportunity, one being a little more steady, the other being maybe a little bit higher margin, the shorter-term business. That's in respect to Goodyear. With regard to Millington, we've intentionally not done anything in Millington up until now. I mean, at this point, we said until we fill up Goodyear, we're not going to commit resources to Millington until we feel like we need to. Well, we need to now. And we've had a customer come to us that has initially indicated to us we signed an LOI, It's a regional carrier that has agreed to give us a number of their aircraft to start, and based on our performance, do their entire fleet. That's a program that will run anywhere from six months if it's just an initial program to as long as three years covering over 100 regional aircraft. So we feel pretty optimistic about Millington at this point. So if you look across our on-airport facilities, we feel like we were in excellent position to start filling those facilities up and generating significant revenue that we haven't seen, which we haven't seen to date, the amount of revenue that we're looking at today and in 26 across those facilities.

That's really great, Kyle. I appreciate it, and that sounds great. I guess you kind of touched – sort of on this topically in terms of engines, you guys mentioned you have, I think nine available and I guess 10 under repair. And I was just curious if you had any sort of line of sight or kind of how you're feeling about demand for that in general, and maybe timeline on converting those 10 engines that are undergoing repair before they're actually available for, you know, they're fully ready to go. Thanks.

I don't know that I know. I don't know that I know specifically how long each of the 10 engines will take, but my guess is they're, We've got engines that are coming available in the next month or so and probably not longer than several months after that. So I would guess that those 10 engines will all be out by the end of the first quarter of 26. But then there will be more that will go in as we continue to acquire engines to repair. What's going on with the engine shops today is it's taking a ridiculously long time to get anything through the shop. And so we're just having to bear through that. It doesn't change the fact that when we need an engine to get work, we're going to put it in a shop. If we feel we can get higher value out of it as a whole engine, we're going to put it through the shop. What was the other part of that?

I think just general, like, kind of, I guess, demand trends you guys might be seeing within.

Oh, yeah, yeah, okay. Yeah. Demand is insatiable at this point. You know, whether we're talking about a narrowbody engine, whether it be on a 737NG, an A320, there is more demand that there are available engines at this point. So if you've got a good engine, and then, you know, even on the widebody side, Pratt & Whitney PW4000s that go on 767s and 747s, and on some Airbus aircraft, and same thing with GE CF680s. We can't get them, you know, the issue we have is as we get them through the shop and we want to put them out on lease, We have customers that are coming up to us and they want to buy them for cash. And so we're having to weigh, wait a minute, do we sell this for cash or do we put it on a long-term lease? The preference would be to put it on a long-term lease. So the issue we face is not a lack of demand, but what do we do with that? So it's difficult to answer the question, so how do you view your engine situation on a go-forward basis? Are you going to have more trading opportunities and more leasing opportunities? And the answer is we have opportunities for both. The question is where are we going to put the asset and where will we get the highest margin on a risk-adjusted basis?

Sounds like a good problem to have at least. Fair enough. Appreciate the time, guys. Okay, no problem. You're welcome.

Once again, if you have a question, please press star, then 1. This concludes the question and answer session. I would like to turn the conference back over to Nick Finazzo for any closing remarks.

All right, thank you. As we've explained, even without any whole asset trades, airware sales, or incremental revenue from our facilities expansion projects, our operating margins have continued to grow. I believe this validates our unique, multidimensional, and fully integrated business model. And as our businesses continue to develop, will put us in an excellent position to achieve substantial growth in the years ahead. As always, I want to thank Stephen and Sam for their questions, which I believe provide additional insight into our business model and progress to date. I very much appreciate your interest in listening to our call today and look forward to bringing you up to date during our next earnings call. I wish you all a good evening. Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.