Please standby. Good day and welcome to the AerSale Inc. Third Quarter 2021 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to, Kristen Gallagher, Human Resources, Director. Please go ahead..

Good afternoon. I’d like to welcome everyone to AerSale’s third quarter 2021 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 facts, 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, 2020 filed with the Securities and Exchange Commission on March 16, 2021, 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 metrics can be found in the earnings presentation materials made available on the Investors section of the AerSale website at ir.aersale.com. With that, I’ll turn the call over to Nick Finazzo..

Thank you, Kristen. Good afternoon to everyone on the line, and thank you for joining our call today. I’ll begin with a brief overview of the quarter, followed by operational updates and progress we're making on our engineered solutions products, AerSafe and AerAware. I’ll then turn the call over to Martin to review the numbers.

We produced strong results in the quarter, which was driven by the broad-based success of our 757 program and an increasingly supportive commercial aerospace end market as airline operations begin the process of normalization.

Our third quarter revenue was $73.3 million, which included $27.4 million of flight equipment sales, compared to $57.1 million in the prior year, which did not include any flight equipment sales. The increase in flight equipment sales was partially offset by lower leasing revenue, primarily related to an end of lease payment recognized last year.

A decline in TechOps revenue on account of lower aircraft storage and related maintenance activities moderated the increase in our asset management solutions revenue to some extent. Demand for passenger to freighter conversions remain strong, and our plans to monetize the remaining Boeing 757 fleet are on track.

Adjusted EBITDA in the third quarter of 2021 was $13.9 million or 18.9% of revenues, compared to $25.6 million or 44.8% of revenues in the third quarter of 2020. The company recognized $6.3 million in payroll support program proceeds during the third quarter of 2020. But there were no corresponding proceeds in the third quarter of 2021.

Our lower margins this quarter were largely due to the absence of these proceeds, as well as the contribution from the lease return condition payments we received last year. These results are in line with our internal expectations for the year, and we believe we're well positioned to deliver on our value proposition to our customers and shareholders.

Turning to segments specifics and beginning with asset management. We sold 27.4 million of flight equipment that included three aircraft and one engine in the quarter. Within our use serviceable material or USM parts business, airframe and engine parts sales were higher than the prior year period.

We are on track to monetize the strategic assets we've held as airlines continued to return aircraft into operation in order to keep up with the upswing in air travel. In line with previous quarters this year. Our leasing revenue was lower than the prior year period. Due to the expiration of 3 Boeing 747 passenger aircraft leases at the end of 2020.

In addition, the prior year period benefited from lease return payments that did not recur in 2021. Our aircraft lease fleet currently stands at five aircraft, two passenger and three freighter, all of which continue to perform well.

We remain in the market for asset purchases and expect attractive opportunities in 2022 as airlines assess their fleets following more normalized service levels.

In our TechOps segment third-party sales were down 10.9% due to lower volume at our Roswell storage facility, as airlines returned aircraft into operation and due to reduce capacity to perform third-party work our Goodyear facility.

At Good year, we took one of our eight hangar bays and associated labor force to support our Boeing 757 cargo conversion line given the strong demand for freighters.

As a result, all the value we added through the supply of labor, materials, engines and landing gear support are rolled into the cost of the aircraft and the recognition of any built in margin is deferred until the aircraft is subsequently sold.

Despite this margin deferral, our aircraft storage facilities remain at high utilization and the labor associated with the recommissioning of stored aircraft has consistently been at near capacity since the start of the pandemic.

Moving to engineered solutions, we continue to see incremental demand for our existing AerSafe product platforms, which includes the Boeing 737 Classic and NG 767 and 777 and the Airbus A318, 319, 320 and 321 family of aircraft. We are nearing a final FAA certification to receive an AerSafe STC for the 757 platform.

AerSafe serves as a fuel tank flammability reduction, otherwise known as the FTFR alternative to a nitrogen alerting system installed by Boeing and Airbus in new aircraft. AerSafe incorporates a military specification reticulated polyurethane foam system that achieves the technical requirements mandated by the FTFR.

In addition to the requirements of the FTFR, an airworthiness directive has been issued regarding the fuel quantity indication system in the 757s center fuel tanks with a mandatory compliance date of May 2022 which can be satisfied by installation of AerSafe.

As such, we expect demand for our 757 AerSafe product to accelerate as aircraft operators utilize our cost and time effective solution to comply with this regulatory requirements. We have also continued our work on product development and FAA approval of AerAware.

Our advanced technology Enhanced Flight Vision System incorporating a military style Head Wearable Display that allows pilots to see through adverse weather conditions.

We are progressing well towards certification, and at this stage AerSale has successfully integrated the multispectral camera, Head Wearable Display and other components manufactured by our partner Elbit Systems and its subsidiary Universal Avionics to an AerSale own Boeing 737-800 NG prototype aircraft.

We are also installing this system into AerSale own Boeing 737-700 NG. Concurrent with the Boeing 737 NG platform we're engineering the integration of the AerAware system into the Airbus A318, 19, 20 and 21 family of aircraft.

Due to the complexity of the technology and in part due to labor constraints with our partners, the pacing item for completion of our AerAware STC continues to be software verification and validation, with expected completion before the end of February 2022. Final FAA approval should be granted shortly thereafter.

After three sets of initial flight testing with the FAA, we have been verbally reassured by the FAA that our system is certifiable. Consequently, although we're disappointed with the length of time this has taken, this is not unusual for the approval of ground breaking advanced technology.

We’re highly confident it's not a matter of if rather it's only a matter of when we will receive an AerAware STC.

In the interim, we've been beefing up production capacity at our Miami PMA facility to produce all of the necessary parts to install the Elbit Systems, universal components in a 737, while we have limited visibility on the exact timing of final FAA approval.

We're excited by the massive market opportunity of AerAware and its potential to transform our business.

We expect AerAware Enhanced Vision Technology to become the gold standard on commercial aircraft, with its ability to improve safety, offer a very attractive return on investment to airlines, and reduce the carbon footprint of flight operations by minimizing flight delays caused by poor weather conditions, airport diversions, and airport traffic congestion.

Looking forward, we expect the ongoing recovery in commercial markets to continue albeit at a mixed pace as the impact of the COVID 19 Delta variant makes the outlook less clear. Our continued opportunities in the freighter markets, and we're seeing an increase in aircraft reactivations and aircraft made available for sale.

We're on track to monetize our Boeing 757 investment through the remainder of 2021 and the first half of 2022. And we expect to benefit from a pickup in MRO volume, due to the re-commissioning of commercial aircraft, greater demand for USM parts consumption for overhaul activity, and ultimately contributions from our AerAware product launch.

In the long-term, AerSale is excellently positioned. We operate a purpose built, fully-integrated, multi-dimensional adaptive aftermarket aviation model. That includes part procurement, flight equipment sales and leasing, MRO, FAA certifications, and aircraft storage and decommissioning.

Our unique model enables us to closely monitor the market, capitalize on opportunities and advance of our peers and drive internal and external value to all our stakeholders.

Our model and diversification have demonstrated AerSale’s ability to deliver exceptional results in dynamic and complex circumstances, and is the primary driver in our ability to increase our full year EBITDA guidance.

Importantly, this guidance increase, which Martin will detail in a moment is despite the aforementioned delay in the AerAware certification, and projected sales, which were included in our original forecast for 2021.

We have fully mitigated this delay by higher than expected margins in our 757 conversion program, where our value add was enhanced by taking advantage of the goods and services incorporated by all of AerSale’s core operating units.

Our unique ability to utilize all the value extraction methodologies of our multi dimensional integrated business models, enables AerSale to achieve positive financial results where our competition cannot.

Before turning the call over to Martin, I wanted to take a moment to address the numerous investor questions that we've been receiving, concerning our ability to redeem warrants that were issued as part of our spec transaction vis-à-vis Cares Act restrictions.

AerSale’s determination is that a redemption employing a cashless exchange of warrants or AerSale common stock does not violate the Cares Act. We submitted our position to the Treasury Department and just this past Friday afternoon received confirmation that, 'that cashless warrant redemption does not appear to be a compliance issue under the act'.

As such AerSale can exercise its right to redeem the warrants at the appropriate time as prescribed in our warrant agreements. I will not be making any further comments or answering any questions on when we will redeem the warrants until we're able to do so. And I have board approval to publicly issue a notice of redemption.

So at this time, I'll hand it over to Martin to go over the numbers before taking any questions. Martin..

Thanks, Nick. I will start with an overview of our financial performance before ending with an update on our guidance. Our third quarter revenue was $73.3 million, which included $27.4 million of flight equipment sales. Revenue in the third quarter of 2020 was $67.1 million and did not include any flight equipment sales.

As a reminder, our business may fluctuate from quarter to quarter and year to year based on flight equipment sales. And therefore it is important to monitor our progress on asset purchases and sales over the long term. Third quarter Asset Management Solutions increase to $48.9 million from $29.7 million in the third quarter of 2020.

The improvement was primarily on account of the above mentioned flight equipment sales. Consumption of used serviceable material or USM parts for maintenance was strong for the quarter as airlines continued to return aircraft into operation against the backdrop of the upswing in air travel.

The increase was partially offset by lower leasing revenues due to a least return payment recognized in the prior year. Looking forward, we expect the ongoing recovery and commercial markets to continue. I'll be it at a mixed pace as effects of the COVID-19 Delta variant makes the outlook less clear.

We are on track to monetize our 757 investment through the remainder of 2021 and first half of 2022.

Third quarter revenue from TechOps was $24.4 million, down from $27.4 million in the third quarter of 2020, primarily due to a shift in resources at our Goodyear facility away from third-party work, and towards our 757 cargo conversion line, as well as lower aircraft storage and related maintenance activities at our Roswell MRO facility as airlines returned aircraft into operation.

We are in a great position to benefit from additional reactivation work, heavy maintenance and cargo conversions going forward.

We expect to benefit from a pickup in MRO volume due to the recommissioning of commercial aircraft, greater demand for USM parts consumption for overhaul activity, and contributions from our innovative AerAware product launch. Third quarter gross margin was 33.6%, compared to 46.4% in the third quarter of 2020.

The decline was primarily due to the lease return condition payment recognized in the prior year. Selling, general and administrative expenses, net of payroll support program proceeds were $22.8 million, compared to $13.4 million in the third quarter of 2020.

The company incurred $8.7 million of non-cash equity compensation in the third quarter of 2021 with no corresponding equity-based compensation in the third quarter of 2020.

We also received $6.3 million in payroll support program proceeds during the third quarter of 2020, and did not receive any payroll support program proceeds in the third quarter of 2021. Income from operations was $1.8 million in the third quarter of 2021, compared to $19.3 million in the third quarter of 2020.

Net loss for the third quarter was $1.6 million, while net income was $14.7 million in the third quarter of 2020.

AerSale still incurred $8.7 million of non-cash equity based compensation expenses this quarter, as well as $2.1 million and mark-to-market costs related to our private warrants for, which there were no corresponding expenses in the year ago quarter. Adjusted net income excluding both of these items was $9.2 million.

Diluted earnings per share was a loss of $0.04 for the third quarter of 2021, and it's not comparable to the third quarter of 2020 due to the public listing of AerSale on December 23, 2020.

Excluding the impacts of non-cash equity compensation, and the mark-to-market on the private warrants, adjusted diluted earnings per share was $0.22 for the quarter of 2021. Third quarter adjusted EBITDA was $13.9 million or 18.9% of revenues, while adjusted EBITDA in the corresponding period in 2020 was $25.6 million or 44.8% of revenue.

Adjusted EBITDA benefited from $6.3 million in payroll support program proceeds during the third quarter of 2020, for which there was no corresponding benefit in the third quarter of 2021.

Adjusted EBITDA declined from the year ago period largely because of the absence of the corresponding payroll support program proceeds in third quarter of 2021, as well as the contributions from the lease return condition payment received last year.

Cash flow provided by operating activities was $17.7 million in the third quarter of 2021, compared to cash utilized of $18.3 million in the corresponding prior year period.

The main driver of increased cash generation during the quarter was lower net inventory purchases, as well as higher cash collections from accounts receivable and customer deposits. At quarter end, AerSale had approximately $62 million of cash on its balance sheet and that undrawn revolver of $150 million.

We believe, that this financial flexibility will allow us to opportunistically execute and fund our asset acquisition and merger and acquisition opportunities going forward. Finally, our guidance update in summary. Our revised guidance cost for revenue of $320 million to $340 million and adjusted EBITDA of $80 million to $90 million in 2021.

This guidance is based on an improvement in the AMS segment, on going demand for on airport MRO services, accelerating demand and cargo and e-commerce markets, increase request for passenger to freighter conversions and other TechOps products and services. The decrease in revenue guidance is related to the timing of flight equipment sales.

However, strong margin performance offset this decline and resulted in higher adjusted EBITDA. The ongoing going and continue to monetization of the Boeing 757 fleet acquisition is expected to be the main driver of the AMS segment.

We continue to expect to sell the majority of the available aircraft in 2021 and the first half of 2022, as a result of strong demand for cargo conversion aircraft. For TechOps in addition to higher MRO volume from the recommissioning of commercial aircraft, we expect increased contributions from demand for AerSafe product.

In summary, we are satisfied with our performance during the third quarter of 2021. We are increasing our full year profit guidance, because our profitability is exceeding our forecasts, as we recognize higher margins for our freighter aircraft, due to strong customer demand and our value add.

We expect a burgeoning recovery in the commercial markets to continue for the foreseeable future which will support strengthening demand for our products and services. With that operator, we're ready to take some questions..

Thank you. [Operator Instructions] And we will take our first question today from Gautam Khanna with Cowen and Company..

Yes. Thanks guys. Good afternoon..

Good afternoon..

I had a couple questions. First just on the, guidance change the revenue range and the EBITDA taken up.

Could you, is the entire $20 million EBITDA raise related to monetization of the 757s? And relatedly, the revenue reduction was that did what you did to prepare for the modernizations, if you can walk me for that?.

Yeah. So as Nick noted, part of the reduction in the overall revenues was one. We removed resources at our MRL facilities to focus on the conversion process. So that revenue will be recognized as we monetize on the 757 transaction.

In addition, as Nick noted, based on our original projections, we did have area where we originally included, we had taken those amounts out. So, looking at kind of what we had already deals that were in the overall pipeline. And we did reduce revenue slightly, due to the timing of the flight equipment sales.

But margins have been so far for sales that we have actually done and that we expect the remaining quarter have been much higher, than what we expected. Again, because we have been able to do much more value add by using all four sections of our business..

That makes sense.

And could you remind us on how many of them five 757s are remaining to monetize and engines and what the plans are for the ones that may not have a resale, but get them tarmac or do what you have to do just can you give us an update on where -- really have MOUs cetera?.

Sure we have the 24 actually 26, we parted out two airframes. First, the first two of the remaining 24 aircraft with engines. We have under contract or LOI, 22 of those aircraft. Martin can give you the details on 23--.

21..

We have 21, I'm sorry of those aircraft and two aircraft that -- three aircraft actually that we will schedule for spec Prater conversions should we don't have customers for, but we'll be looking for customers for those. So, we expect to monetize the entire package. We're not -- nothing is going to get parted out from the original 24.

As a matter of fact, we've got an additional 25 all of which will end up being placed as whole aircraft..

And then could you comment on the acquisition environment for equipment, what are you seeing? What are you betting on? Any way you want to frame it, but what are you seeing out there? I previously described the acquisition market as an incoming tide and the tide continues to come in.

We're not in a flood state yet but we are seeing incrementally almost every week, or aircraft that are becoming available at pricing that starts to work for us.

Now why is that? Is it because or aircraft are actually hitting the market or it's because aircraft have now been on the market for a year and a half and haven't moved and pricing is becoming more realistic to what the real market is. I think it's the latter.

I think that more aircraft are becoming realistically priced because they're not moving in this market. So, incrementally, gradually, we continue to see more aircraft coming onto the market. We're bidding on and that we're starting to win.

Now, what are those? And I've also mentioned this previously, what we're still seeing crap where the engines are stripped off and kept by the airlines or leasing companies and best primarily leasing companies and the airframes are being sold really which, in essence removes an aircraft from service by selling the airframe, but the engines remain and the cost is being placed on the engines.

It's not in all cases we are we are still acquiring whole aircraft with engines. But most of the aircraft that we're seeing that makes sense for us to acquire are aircraft that are either run out or close to run out.

And the ones that again the pricing works for us, they need a lot of work to put back into service or their only value as parts and where we feel it maybe this is why we're able to price these and win deals today because we can extract greater value out of that equipment than a pure financial buyer who's buying an aircraft that's ready for service, who potentially could find a lessee to operate that aircraft without having to do much to start generating that revenue.

For us, we've got to use our entire machinery to refurbish that aircraft into a whole aircraft, a whole an engine that's able to be released or sold into the marketplace. And that's the value asset I was -- Mark and I were describing earlier that we -- that we added to our 757 transaction. And that’s what its really going to take in our opinion.

If you're going to buy used aircraft that are off-lease that need a lot of work, it's going to take company with the infrastructure of AerSale to do all the work that's necessary under one roof to return those aircraft or engines to service. That's where we feel we have a competitive advantage over anyone else in our space.

And that's where the opportunity is going to lie with us. It's not going to be in a newish aircraft that needs no work. That could go into service with the next operator. There are plenty of financial buyers out there that will acquire that equipment and they'll hold it and wait for somebody to lease it at whatever price they can lease it out.

Because that's really a financial transaction, it's really not a -- you're not having to work the metal to add value, to create something that can be leased or sold..

Excellent. So I’ll get back in the queue. Thank you..

Sure..

[Operator Instructions] and we do have a follow-up from Gautam Khanna with Cowen.

Sorry, I didn't want to monopolize but I was going to ask also just do you have a placeholder target for what you expect to deploy for equipment buys next year that you could share with us. [Technical Difficulty] can you hear me guys/.

It'll be one moment..

Hi.

Can you hear me?.

Our apologies. Just as a brief interruption, please stand by..

Hi.

Can you hear me, sir?.

Yes we can hear you, be one moment..

This is Nick. So speaking….back on.

Yes sir, please go ahead..

Okay. This is this is Nick Finazzo speaking, we got cut off. The only thing that we heard was Gautam had – Kristen said he would stay -- he would get back in the queue. I didn't hear anything after that..

We do have Mr. Khanna – open to ask question..

Great.

Can you hear me guys?.

Yes. We can..

Terrific. Okay. Sorry about that. I don't know what happened.

Hey – I was going to ask, if you had a preliminary view on what would be the amount of capital you might deploy for equipment buys next year or maybe just over the next 24 months just based on the pipeline, what you're seeing? So it sounds like it's more promising, but any sense of sizing, what the opportunity might be?.

Yeah. It's a really hard question to answer. I can only tell you historically, we have deployed significant capital early on in our business $500 million in the first five years of our business. So by comparison, we – we can move so quickly today and monetizing whatever acquisitions we make.

I would expect over the next several years that we can just – we can deploy hundreds of millions. I can't tell you, if it's going to be a 100 million a year or greater or less. But based on our prior performance, where we had less infrastructure we were able to – we were able to on average, deploy 100 million a year on average.

So I think it's realistic to assume that we can double that at this time on an annual basis..

Okay. And then on – that make sense. On AerAware, so it sounds like, is that do you think it's first half of next year where we'll get approval? You mentioned kind of soon after the – all the testing is done.

But I just wonder like how, what is the lag there do you think? Like, how soon could this happen? Do you think it's the June quarter do you it's the September quarter next year? And then on the back of that any sense for what an initial order might be for the product based on your customer conversations?.

I feel like the boy who cried wolf on this side. I hate answering that specifically, so let me give you the milestones for us. We're waiting on validate – verification and validation of the software by our partner. And we've been told that we won't receive that – well, that we will receive that at the latest at the end of February.

So let's assume that's on time. And we get that – get it early, we get it at the end of February, if by the end of February the software is validated. But we are hoping is that prior to software validation FAA will let us perform our final flight testing.

So that – so that the issuance of the STC is not predicated on – well, they will be predicated on the validation of the software. But the flight testing will not be held up due to software validation, because the system works and we've been flying with it. We've demonstrated to the FAA now three times, so that they see that the system works.

The validation of the software it's just an audit process that's necessary to verify that all the testing has been done. So hopefully, we will get the FAA to fly with us, and do the final flight testing prior to the end of February.

If we're able to do that, our expectation is all that will be left will just be our validation of the – of the software once Elbit, Universal issues their certification. And we're working that concurrently with them.

So we would anticipate that may in the best case that we could be sometime in March, but more realistically, I think it's going to be -- I think it's going to be in the second quarter. Could it be -- could it roll into the third quarter? I can't imagine why it should roll into the third quarter. But it really depends on the FAA.

The FAA gives us the attention that they've been giving us, because they're waiting on us at this point too. If get that kind of attention and that remains because the interest level is there. We are hopeful that we could receive certification in the -- at the end of the first quarter or during the second quarter of next year..

Okay. The other question was just on the initial orders that you might receive on the back of that certification.

Do you have a sense for how big that might be based on your conversations with the customer?.

We we've heard multiple times that because the FAA will require airline to have half of its fleet with the AerAware system installed before they'll be able to use the AerAware system, that would be half of the -- it would be a minimum of half of the existing fleet of 737 aircraft. That would be both 737 NG and 737 Max is working on both.

And a 250 aircraft order would not seem to be reasonable with that some number that's been bandied about already. We don't have any specifics on that as I've mentioned previously. Our conversation has been primarily with one of our -- with our potential launch customer, but we have had discussions with other airlines as well.

But if our -- if the customer we've been talking to gives us a lot shorter. I would imagine that it would be 250 aircraft range..

Thank you very much..

You’re welcome..

That will conclude today's question and answer session. I'll turn the conference over to Nick Finazzo for any additional closing remarks..

Okay. Well, thank you all again for your interest in AerSale and listening to our call this afternoon. I look forward to speaking -- Martin and I look forward to speaking with you again when we do our fourth quarter earnings call. Have a good evening, everyone..

That will conclude today's conference. Thank you for your participation. You may now disconnect..