AerSale - Q3 2023

Transcript

Operator (participant)

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

Jackie Carlon (VP of Marketing and Communications)

Good afternoon. I'd like to welcome everyone to AerSale's third quarter 2023 earnings call. Conducting the call today are Nick Finazzo, Chief Executive Officer, and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results.

Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission, SEC, on March 7, 2023, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investors section of the AerSale website at ir.aersale.com. With that, I'll turn the call over to Nick Finazzo.

Nick Finazzo (CEO)

Thank you, Jackie. Good afternoon, and thank you for joining our call today. I'll begin with a brief overview of the quarter and provide operational updates before turning the call over to Martin to review the numbers in greater detail. Our consolidated third quarter results improved notably over the second quarter and the prior year. In total, we reported sales of $92.5 million, an increase of 81% against third quarter 2022 sales of $51 million. This increase was largely the result of flight equipment sales in the period, which included $38.9 million of engine sales. Sequentially, sales increased as we were able to monetize the strong levels of feedstock acquired over the past 12 months, which included both engine and aircraft flight equipment sales during the period.

While we're pleased to see the increased volume, third quarter results trailed our internal forecast expectations, as several additional flight equipment sales slated for the third quarter are now expected to close in the fourth quarter. As we do each quarter, I would like to remind investors that our quarterly results tend to be lumpy because of the timing of flight equipment sales. Therefore, assessing full-year time periods and feedstock acquisition rates are both better analytical tools to our performance than year-over-year or sequential revenue patterns. Turning to profitability, Adjusted EBITDA in the third quarter was $1.9 million, compared to a loss of $0.5 million in the year-ago period. The improvement in EBITDA performance was the result of higher flight equipment sales during the period and better USM volume.

At the segment level, and beginning with Asset Management, third quarter sales were $65.1 million, compared to just $20.6 million in the prior quarter, in the prior year's quarter. Higher sales compared to 2022 reflected the monetization of feedstock acquisitions, with the growth stemming from increased flight equipment and USM parts sales, partially offset by lower revenues from our leasing portfolio. In the current year, we sold seven engines and one P2F-converted 757 aircraft during the period, compared with two engines and no aircraft in the prior year. In addition to the flight equipment sales delivered in the third quarter, there are two aircraft, a highly modified 737-800 and a P2F-converted 757 aircraft we expected to deliver in the third quarter that are now expected to be delivered in the fourth quarter.

Looking forward, with the aircraft and engines planned for delivery in the fourth quarter, we anticipate a solid finish to the year for flight equipment sales, with an additional 18 in the pipeline expected to close before year-end. Turning to an update on the cargo market, conditions continue to be unfavorable as higher interest rates and lower air cargo demand create a dramatically different backdrop than what we experienced during and immediately following the pandemic, when consumer demand for physical goods peaked. To date, we've sold 8 aircraft under our 757 P2F conversion program and currently have an additional 10 aircraft in inventory waiting for delivery or conversion.

Consistent with our communication last quarter, given the current end market conditions, we anticipate these will take longer to place than originally forecasted at the start of the year, and expect a higher mix of aircraft will be leased instead of sold. In our USM Parts business, airframe and engine part sales nearly doubled compared to the prior year, which is the direct result of the success of our feedstock acquisition program converting to sales. Year-to-date, we've closed on approximately $130 million of feedstock, with a total of $200 million acquired or under contract. This compares to the first nine months of 2022, which included just $34 million of feedstock. Elevated feedstock levels drove higher sales in the third quarter, which is expected to continue in the fourth quarter and into 2024.

Finally, in our leasing portfolio, we had no aircraft and 7 engines on lease during the period, compared to 1 aircraft and 17 engines in the year-ago period. Because we're continuously monitoring the best and highest use of our flight equipment, we opportunistically sold some of these assets, which provided a higher return profile than continuing to lease. In our TechOps segment, we reported sales of $27.4 million, compared to $30.4 million in the third quarter of 2022. Lower sales resulted from fewer aircraft in storage and the completion of several large customer programs at our aerostructures and landing gear facilities. This work at our landing gear shop has since been replaced by a larger, long-term program with a major U.S. airline that began in the fourth quarter.

At our Aerostructures shop, we're onboarding new customers to fill the additional capacity made available after moving into our new building, which is almost triple the size of our current facility. Turning to Engineered Solutions, we are near the conclusion of the FAA approval process of our enhanced flight vision system, AerAware. At this time, all tests have been completed and we're working through documentation review and completion of final checklist items in anticipation of issuance of the STC by the FAA. In addition, in late October, we announced that we received FAA approval for a 50% visual advantage over the naked eye, which will make AerAware the first and only product available with this level of visual advantage.

We're proud of this award as it validates the primary benefit of AerAware, offering a compelling value proposition to our customers as the system enhances safety, lowers operating costs by minimizing weather-related delays and fuel consumption, and provides associated environmental benefits by lowering carbon emissions. Turning to capital allocation, we have a healthy, almost unlevered balance sheet, enabling continued funding of our acquisition programs to sustain business growth. To date, we've acquired roughly $130 million of feedstock and ended the quarter with approximately $175 million of liquidity, consisting of cash on our balance sheet and remaining revolver capacity. Further, as we continue to monetize the feedstock already acquired, we anticipate an increase in free cash flow generation, net of any additional feedstock purchases.

In conclusion, our third quarter results have shown significant improvement over the previous quarter and the same period last year. Our growing feedstock availability is driving better quarterly performance and flight equipment sales. Given the success of our feedstock acquisition program in 2023, resulting in the significant volume of inventory we currently have available to convert to sales, we anticipate this trend to continue into the foreseeable future. We anticipate a strong fourth quarter as we finish the year, with flight equipment sales expected to continue their positive momentum. I would like to thank our employees for their dedication to AerSale and their efforts in delivering on our commitments to all stakeholders. Now, I'll turn the call over to Martin for a closer look at the numbers. Martin?

Martin Garmendia (CFO)

Thanks, Nick. I will start with an overview of our third quarter financial performance and end with our updated guidance for 2023. Our third quarter revenue was $92.5 million, which included $44.8 million in flight equipment sales, consisting of 7 engines and a P2F converted Boeing 757 aircraft. Revenue in the third quarter of 2022 was $51 million and included $2.7 million of flight equipment sales, consisting of only 2 engines and no aircraft. As we have pointed out during multiple earnings calls, flight equipment sales may significantly vary from quarter to quarter, and we believe monitoring our progress based on asset purchases and sales over the long term is a more appropriate measure of progress. Third quarter Asset Management revenue rose to $65.1 million because of the increase in flight equipment sales I just mentioned.

USM parts sales were up from the year-ago quarter because of higher demand and availability of feedstock, which was partially offset by lower revenue from leasing. TechOps revenue was down 9.8% to $27.4 million in the third quarter, from $30.4 million in the third quarter of 2022. Our TechOps business was adversely impacted by fewer customer aircraft in storage as compared to prior periods and weaker contributions from our Aerostructures and landing gear facilities. This was partially offset by greater revenue associated with increased on-airport MRO capacity dedicated to customer aircraft, which was enabled by outsourcing the P2F conversions of our 757 aircraft.... Third quarter gross margin was 25.4%, compared to 30.4% in the third quarter of 2022, primarily driven by the mix of flight equipment sales.

Selling general administrative expenses were $25.4 million in the third quarter of 2023, which included $3.2 million of non-cash equity-based compensation expenses. Selling general administrative expenses were $24 million in the third quarter of 2022, and included $4.4 million of non-cash equity-based compensation expenses. The increase in selling general administrative expenses were primarily driven by higher costs related to AerAware development and facility expansions. Third quarter loss from operations was $1.9 million and $8.5 million in the third quarter of 2022. Net loss was $0.1 million in the third quarter, compared to $9 million in the third quarter of 2022. Adjusted for non-cash equity-based compensation, mark-to-market adjustment to the private warrant liability, facility relocation costs, inventory reserves, and secondary issuance costs, adjusted net income was $0.9 million in the third quarter of 2023.

Adjusted for these same items, the third quarter of 2022 had an adjusted net loss of $1.9 million. Third quarter diluted earnings per share was $0.00, compared to diluted loss per share of $0.17 in the third quarter of 2022. Excluding the adjustments mentioned above, third quarter adjusted diluted earnings per share was $0.02, compared to adjusted diluted loss per share of $0.03 for the third quarter of 2022. Adjusted EBITDA was $1.9 million in the third quarter of 2023, compared to a loss of $0.5 million in the prior year period. The growth in adjusted EBITDA was a result of higher USM sales and a greater number of flight equipment sales.

Next, in terms of our cash flow metrics, cash used in operating activities was $168.1 million, resulting from a gross investment of over $200 million in newly acquired feedstock and make-ready costs to prepare inventory for sale, which should drive our revenue and earnings going forward. We ended the quarter with a substantial balance sheet, with $174.6 million of liquidity, consisting of $3.2 million in cash and available capacity of $171.4 million on our $180 million revolving credit facility, which can be expanded to $200 million. Finally, moving to our updated guidance for 2023. We now expect to generate revenue of $400 million-$420 million and Adjusted EBITDA of $40 million-$45 million in 2023.

Our revenue and Adjusted EBITDA guidance reflects current expectations for our core business and flight equipment sales slated for delivery before year-end. The exact timing of these flight equipment sales can vary by days or weeks based on a variety of factors. Therefore, because of the amount of asset sales that are planned to close by the end of the year, but with limited time remaining to do so, some of those could roll into the first quarter of 2024. We are pleased with the recovery in our sales in the third quarter, which was driven by the broad success of our feedstock acquisition program, and we remain confident that our purpose-built model and excellent execution capabilities will enable us to drive and generate long-term value for all of our stakeholders. With that, operator, we are ready to take questions.

Operator (participant)

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

Bert Subin (Equity Research Analyst)

Hey, good afternoon, and thank you for the question.

Nick Finazzo (CEO)

Good afternoon, Bert.

Bert Subin (Equity Research Analyst)

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

Martin Garmendia (CFO)

Yeah. So as far as overall guidance, at this point, we actually have anticipated delivery schedule, so that gives us better visibility into the potential flight equipment sales that we have scheduled for the remainder of the year. As we did note, there's a lot of different factors, including the customer and their ability to deliver, or to take possession of those assets, which is why we make the comment that potentially some of those assets could move into the fourth quarter. However, right now, they all have contractual agreements to end and to close this year, and we're moving forward to get those closed, kind of overall. On a positive note, these contracts...

These assets are under overall agreements, so if we are not able to close those in the current year, we are to expect those to close in the first quarter of 2024.

Bert Subin (Equity Research Analyst)

Okay. And then just on the, I guess, on the 2024 side of that, or I guess, just to clarify, can you say, I guess, how many of the 757s you have under contract? And then in terms of sort of teeing up expectations for 2024, you know, just, just where things stand, just because there's been so much movement in the timing of asset sales.

Martin Garmendia (CFO)

Yeah. As of right now, we have one 757 that's under contract to be sold in the current year, and then we have the remaining 757s that are still being marketed for potential lease or sale.

Bert Subin (Equity Research Analyst)

Okay. And then just as a follow-up, it seemed like positive commentary on the AerAware front. I know people seem like they're probably biting their nails trying to figure out when that's going to happen. It seems like when you got through the final test, end of August, it was going to be expected to be a pretty quick process. Can you just walk us through what's happened over the last six or so weeks? And I guess what your best visibility is into what happens between now and hopefully an STC being granted.

Nick Finazzo (CEO)

So what, what typically happens is, as you're going through the whole process of, of, obtaining an STC in anticipation of doing flight testing, you submit reports to the FAA. All the testing that you've done, how the flight testing is gonna demonstrate that the product that you're trying to certify complies with whatever the rules are. So you've got a number of reports, and if I recall, I think we submitted over 50 reports to the FAA for their review and ultimate approval. Typically, that is all finished by the time you start your flight testing, but that did not occur in our case.

It took the FAA, because of the complexity of this certification, it took the FAA, you know, many, many days to return documents to us, in some cases as much as six months, to get documents back to us. Because, you know, there wasn't certainty as to what type of tests we would do, that would satisfy the FAA. So a lot of back and forth with the FAA on the type of testing. That dragged on slightly past completion of flight testing, but not much, because by, you know, shortly, within several weeks after completion of flight testing, the balance of testing that we had to do was completed satisfactorily, and now we're just in the documentation phase. Now, in the documentation phase, it's every document is reviewed, every word is looked at.

If the FAA doesn't like us, the way you describe something in a sentence, that they should review it, we'll go back, we'll fix it, send it back to them. They have to review it again, and it's just taken incredibly long. There's a lot of people involved at the FAA, a lot, and again, because of the complexity of this. At the stage that we're at now, and what we've been working at, you know, since, I don't know, the last 5, 6 weeks or more, is just the documentation, completion, and editing that the FAA gives us and says: "Look, we need you to fix this." And it's minor stuff, but it's just time-consuming.

You know, there's really very little for us to do now except finish up the few documents that they've asked us to to revise or waiting on their comments on our revisions. And then it's a summary. You give them a summary and say: "Look, here's everything you asked us to do. Here's everything we did. Here's all the reports that we've submitted to you, that you've now approved," and that's it. You know, there's nothing left at that point for us to do. The last, very last thing we do is the summary report. And we're not there yet, but we're not there yet because we don't have all the comments back from the FAA on all the documents we've submitted, but we're substantially there. There are very few documents compared to the overall amount of documents that are outstanding.

And I see, I see, every day, including today, I see more and more reports are coming back as signed off.

Bert Subin (Equity Research Analyst)

Thanks, Nick, and thanks, Martin. Appreciate the time.

Nick Finazzo (CEO)

You're welcome.

Operator (participant)

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

Ken Herbert (Managing Director)

Yeah. Hi, good afternoon, Nick and Martin.

Nick Finazzo (CEO)

Hi. Hey, Ken.

Ken Herbert (Managing Director)

Hey, Nick. Maybe just wanted to follow up on the asset, you know, the asset sales. If I understood correctly, you've committed to $200 million. I think you've done $130 million of that year to date in terms of deploying capital. Do you expect much upside to that $200 million as we get into the end of the year? And maybe if you could just comment on sort of where you're seeing the opportunities and how's the pricing environment out there for the feedstock?

Nick Finazzo (CEO)

So we do anticipate to grow that $200 million in the balance of the year. It hasn't really changed much. The type of feedstock that we're acquiring requires a lot of work. It continues to be... I think it favors us because we have the capability to extract value out of flight equipment that needs a lot of work, versus others that are more financial buyers, that they don't have that capacity. They just they could buy an aircraft on lease, but buying an aircraft off lease with two engines that need to be repaired, heavy checks, et cetera, you know, that they don't have the capability to do that. They have to farm it out. Their costs are higher. So that so the opportunity to continue buying feedstock of the type we've seen all year remains.

You know, and even though this is a little bit counter to this, but even though the OEMs with the Geared Turbofan problem, and even still, how long it's taking to get all these MAXs delivered, even though that is keeping the older flight equipment in service and depriving us of a, you know, a big bow wave of flight equipment, mid-technology flight equipment that we expected to see by now. It will come, and it will come when the OEMs catch up. But in the interim, we're still getting the kind of stuff that fits our business model, that we can extract value out of. So I don't see any change in that.

You know, as we're thinking about, you know, we just finished a board meeting, as we're thinking about our acquisitions into 2024, at this point, I don't see any change over what we've seen thus far in 2023. You know, I see that continuing and accelerating as the OEMs resolve their problems and start delivering more new aircraft that have reliable engines.

Ken Herbert (Managing Director)

Yeah, I wanted to follow up on the Geared Turbofan issue, because it sounds like on the one hand, that would restrict, you know, availability of feedstock, to your comments there, but on the other hand, is probably really strengthening demand for material to support, you know, legacy engines, the CFM56 and the V2500 in particular. How does the net factor of the Geared Turbofan issues affect you? And are there, you know, opportunities that arise from that that you can maybe call out?

Nick Finazzo (CEO)

We purchased quite a few CFM56-5Bs that power the A320 CEO. And we bought most of those at parts value, thinking that eventually, that the amount of engines that went into the shop would, would, increase, and, and the demand for USM parts for the engine, specifically on the older technology, A320, would, would come back very strong. And that's a fact. We're seeing that. The issue we're having is a lot of the engines that we thought were going to end up as parts turned out to be engines that have good service life left. And we have customers that are interested in taking those engines, whether it be for purchase or for lease, that are gonna deprive us from having the USM to sell at the piece part level. And we don't care.

I mean, as long as the net value we receive out of that is the same or greater than we would get going the long haul for part-out, you know, we will sell or lease an engine that we bought at part-out value. But I do see that market is continuing to be strong. The question is, can you get engines today? You know, where are they gonna come from? And as I said, finding good serviceable engines today, very difficult to do.

I mean, when you're taking low time remaining parts engines, and you're selling them as whole engines or leasing them as whole engines to people because they can't, you know, they don't want to spend money on putting engines through the shop, you know, that's, that's telling you that there's gonna be less USM available to support all the engine shop visits that are, that are coming, or that are already here as a result of these older technology aircraft staying in service. So yes, there is an upside for the supply of USM parts, for the supply of whole engine, the whole engine trading and leasing, but there's a limited demand of that equipment. And so I, I don't, I don't know that we've quantified the, you know, the offset to that. What, what...

You know, what's better for us to have more USM available for sale or more whole assets to lease or sell, you know? I know that doesn't necessarily answer your question, but-

Ken Herbert (Managing Director)

No, no, that's helpful. I appreciate the, there's a lot of moving pieces there. If I could, just one final question, maybe for Martin. As we think about sort of the implied Adjusted EBITDA in the fourth quarter, is virtually much of the sort of sequential increase expected to come from whole asset sales, or are you expecting maybe more contribution in the fourth quarter from TechOps, from USM and other parts of the business?

Martin Garmendia (CFO)

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

Nick Finazzo (CEO)

Yeah, and I wanna add to that because I think it's an important thing to note. When we're buying engines at part-out value, and we then turn around and lease or sell them as a whole asset, it really does skew your perception of what our USM business is doing. You know, if we could, we would just be reporting whole asset sales of engines we bought for USM as part of our USM line. But the reality is, it's not USM, it's still a whole engine. But don't be, you know, don't be confused by the amount of whole asset sales when we're telling you that most of these assets were bought for parts.

And just because we're selling them as whole assets or, you know, whole flight equipment, doesn't mean that we don't have the opportunity to grow the USM business. It's just, it's popping up in a different segment. It's popping up as flight equipment sales rather than USM sales.

Ken Herbert (Managing Director)

Got it. Thanks, Nick. Thanks, Martin. I'll pass it back.

Nick Finazzo (CEO)

Okay, you're welcome.

Operator (participant)

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

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Hey, good evening, guys. Thanks for taking the questions. Just to stick with that final—How are you guys? Just to stick with that final thought, what, Nick, what's better for you, a whole asset sale or individual piece part sales? I mean, where do you think you can get better returns? I mean, obviously you can move inventory faster with a whole asset sale, but, you know, given this kind of tight market, you know, do you look at that equation of individual parts and pricing on parts? I mean, what—I guess simple question: What's more valuable for you? What generates better returns?

Nick Finazzo (CEO)

Well, we don't necessarily look at IRR because a short-term, a short-term sale of a, of an engine versus a longer-term, part-out process may produce a greater IRR, but it, but the quantum of the, of the net revenue would be much smaller. So we have to weigh, you know, forget, put IRR aside for the moment. So forget the IRR, because we make a much, much higher IRR if we quickly flip an engine. What we look at is, well, what's the dollar value of what we would get if we went long and we parted out the engine, and then we had sales of USM, versus what can we get today, you know, net of, of no additional time or acquisition costs? What dollar value or dollar volume can we get today?

We then may factor in a small interest-carrying factor in that, and if the net result of that is that we feel that, with or without interest, because I don't think that makes a big enough difference. But even with interest, if we feel that we can get the same or more money today selling it as a whole asset versus going the longer route and selling it as parts, we will almost always choose to sell the asset today, and then be struggling with you guys as to the amount of whole asset sales we have, because I think that just skews everybody's view of the business when you see a lot of whole asset sales, which produces a lot of volatility.

I could straighten that out if I went the longer route, but I don't think that's the right answer. I think the right answer is we get the same or better money on a short-term basis. That's where we go with, that's where we go with the asset.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Okay. Got it. That's helpful. Then just looking at, you know, the feedstock purchases, looking at the inventory of kind of aircraft frames, parts, you know, you're up to, I think, $326 million on the balance sheet. How should we think about that? I mean, it sounds like, you know, that could grow potentially into the fourth quarter. Then just trying to get a sense of how that inventory winds down and, you know, maybe drives cash flow next year and also helps the top line. Can you give us any color there?

Nick Finazzo (CEO)

Yeah, I would say from the USM side, we're already starting to see a pickup in overall sales volume. We're probably kind of approaching closer to about $8 million in overall monthly sales, so a run rate of about $100 million. Based on the volume that we have, again, if we keep the assets that we have identified as piece parts, that we could increase that overall volume to $120 million-$140 million of annual sales on the USM side, based on the level of inventory and historic kind of disposition rates kind of overall. We're also seeing opportunities to increase our leasing portfolio, again, taking demand on strength in certain platforms, such as the CFM56. And again, we have those assets.

A lot of them are being repaired and being ready to be put on lease. So with that feedstock, you're gonna see increases in USM, you're gonna see increases in the leasing portfolio, and again, there will always be opportunities to do whole asset sales as well, and you'll start seeing those benefits, flowing through 2024 and beyond.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

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

Martin Garmendia (CFO)

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

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Okay. Okay, got it. Last question, Nick, just as it relates to AerAware. You know, I know you had prebuilt some inventory, but how are you thinking about your kind of hardware supplier, Elbit? What’s going on over there? Obviously, they’re having a lot of reservice call-ups and, you know, just maybe frame sort of what the—any kind of supply chain choke points or getting product.

Nick Finazzo (CEO)

You know, Elbit, we've been in contact with Elbit. They've got their own contingency plans in place for events like this. So there's not... I guess the tragic part of this is they've never experienced this in recent times, but, you know, they've got their contingency plans in place. They are currently manufacturing product for us. We expect to get product delivered here imminently. They've got product sitting on the shelf for us, and we want it. So, so they're continuing to manufacture and deliver. Now, there's no way for me to be able to guess, you know, happen in all the eventualities, and I don't think it's even appropriate for me to comment on that.

But, you know, at this point, you know, we're not seeing, you know, we're not seeing any effect on our ability to get product, but, you know, who knows?

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Okay.

Nick Finazzo (CEO)

Who knows? Depends on what happens in Israel.

Michael Ciarmoli (Managing Director of Aerospace and Defense Equity Research)

Yeah. No, of course. Got it. All right, good stuff, guys. I'll jump back with you.

Nick Finazzo (CEO)

Okay.

Operator (participant)

The next question comes from Jack Ayers from TD Cowen. Please go ahead.

Jack Ayers (Equity Research Associate)

Hey, guys, this is Jack on for Gautam. Thanks for the question here.

Nick Finazzo (CEO)

Hi, Jack.

Jack Ayers (Equity Research Associate)

Hey, yeah, just kind of honing in here on the Q4 guide, and I know you mentioned you're kind of just baking in that one sort of asset sale in Q4. I just wanted to see kind of how customer sort of campaigns are going. I know you've talked in the past that you are having active discussions, so, you know, maybe like, at first glance, it seems like there's more downside or sort of more risk to a push-out, but could there be, you know, incremental upside if, you know, demand sort of strengthens here? Like, do you have the ability to, you know, basically monetize those 10 in inventory you've got? Or the magnitude you could do in Q4?

Nick Finazzo (CEO)

So we identified there are 18 individual pieces of flight equipment that we intend. So I think I'm answering your question, that we have scheduled, actually planned and scheduled to close between now and the end of the year. So all of those have dates associated with them, have delivery conditions, and we're working towards putting that equipment in the hands of our buyers, who have to go through their own due diligence process and inspection. We have taken into account the time that we have remaining and are confident that if everybody does what they're supposed to do, we'll get those assets delivered this year. Some of them invariably will fall out of this year, and they'll, they won't close this year for who knows what reason.

We had a closing in one of the quarters where the customer that was going to send us the money, his bank closed on the last day of the quarter when we were going to close. We ended up closing the first business day of the next quarter. So we don't anticipate anything like that this quarter. And when I identified 18, that doesn't take into account additional assets that keep popping up as opportunities to sell in the near term, I mean, even before the end of the year. So, you know, it, we may end up closing on 18, we may end up closing on more than 18, we may end up closing on less than 18. What we're telling you is that we've got 18 scheduled to close this year.

What's the probability of some of those will move out? I think that the probability is some of those will move out. How many? I can't tell. Will we replace that with others? The probability is yes. How many? I can't tell.

Jack Ayers (Equity Research Associate)

Okay. Yeah, I was kind of asking just specifically the 757 passenger freighter.

Nick Finazzo (CEO)

Oh, I'm sorry. The 757 is under-

Jack Ayers (Equity Research Associate)

Yeah.

Nick Finazzo (CEO)

It has been under contract. We had a delivery issue with one of the engines. We thought it would be delivered already. We've rectified the delivery issue on the engine, given them a substitute engine, and they're in the final phase of the acceptance of the aircraft.

Jack Ayers (Equity Research Associate)

Okay, got it. So is that incremental to the one you've already got under contract? I guess, like-

Nick Finazzo (CEO)

No, that is the one.

Yeah. Guidance only has one 757 P2F sale.

Jack Ayers (Equity Research Associate)

Okay. So, okay, no, that's helpful. And are there any other campaigns? Because I think you've got those, I guess now 10 remaining 757s. Like, is there any chance, you know, those discussions are progressing well, or just any color there would be helpful.

Nick Finazzo (CEO)

So we've got we are negotiating with 1-2 aircraft today. One is available, the next one is not, but is close to delivery to be leased. And then we have the prospect with the customer that's taking the aircraft this quarter, that they want a second aircraft, but they're not going to talk about that until they get their first aircraft in operation. Beyond that, we don't have anything that's pending. We have discussions with multiple customers, but we have nothing pending where I can point to and say, "Okay, we've got..." You know, that accounts for potentially leaving 7 of the aircraft uncommitted. But at this point, I'd tell you that, you know, it's 8 aircraft uncommitted, and... Well, no, it's 10 aircraft uncommitted.

Jack Ayers (Equity Research Associate)

Okay.

Nick Finazzo (CEO)

10 aircraft uncommitted, with discussions on 2 more, leaving 8 aircraft that we have yet to find homes for. And we're working on, but we don't, we don't have, you know, we, we don't have customers-

Jack Ayers (Equity Research Associate)

Okay.

Nick Finazzo (CEO)

- identified for those yet.

Martin Garmendia (CFO)

Yeah, just to give you a little color.

Jack Ayers (Equity Research Associate)

Got-

Martin Garmendia (CFO)

Fourth quarter, there'll be four deliveries of the 757. So those aren't available right now. They're being delivered in this.

Four deliveries from cargo conversion.

Nick Finazzo (CEO)

Yes. That will become available.

Martin Garmendia (CFO)

Yeah.

Jack Ayers (Equity Research Associate)

Okay, got it. Yeah, from your third-party supplier. Okay, that makes sense. And then just one last one on AerAware, and just conviction there with the FAA and whether, you know, a government shutdown in any case here in the next couple weeks could have any impact on potential timing there. Any color would be helpful. Thanks.

Nick Finazzo (CEO)

We've already been told by the certification branch that they will be shut down if the government shuts down. So I can only speculate that based on the last time there was a government shutdown, the government can only hold out a couple of weeks. So if that happens, and that's in another 9 days, if that happens on the seventeenth, and that lasts all the way through the end of November, it still leaves December for them to finish up the paperwork and issue the STC, but that would clearly delay it until December and potentially longer if... Well, and I can't imagine the government will stay shut down longer than that.

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

Jack Ayers (Equity Research Associate)

Understood.

Nick Finazzo (CEO)

With our luck, who knows?

Jack Ayers (Equity Research Associate)

Yeah. No, I hear you. Okay. Nope, that's it for me. Thanks, guys.

Nick Finazzo (CEO)

All right. You're welcome.

Operator (participant)

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

Bert Subin (Equity Research Analyst)

Hey, thanks for the follow-up. Just on the AerAware front, I guess just two real quick questions. Nick, is there any sort of possibility in your mind right now, the way things stand, that you think there's an STC approval or granting in 2023? And then aside from the STC question, can you give any color about how conversations are going with the future customers? Have those kicked off, or are you waiting for STC?

Nick Finazzo (CEO)

Okay, let's see. First question: possibility of STC approval in 2023. Possible. I've identified what we're going through at this point. It's out of our control how long the FAA takes to respond to the revisions that we send back to them. You know, and you'd think that they could, when they're asking us to make a minor change, look at it in a couple of days and get back to us. In some cases, they have. In some cases, oh, the guy's on vacation, the guy's sick, he's not in, he's too busy. You know, we're dealing with that, and I'm not complaining about the FAA because they've been... Really, they have been great to work with in this complex program.

So I can't tell you that that I have any reason to believe that we will get this certified in 2023. Neither do I have any reason to believe that I won't get it certified in 2023. It's just out of our control. We've done everything that the FAA has asked us to do and continues to ask us to do, but it's in their hands as to the pace and then, you know, add potential government shutdown and then the end of the year holidays to it. It is a possibility that we will not get it certified in 2023.

Bert Subin (Equity Research Analyst)

Okay. And then just-

Nick Finazzo (CEO)

I can't make that definitive because it could.

Martin Garmendia (CFO)

Second part was customer outreach.

Nick Finazzo (CEO)

Oh, customer outreach. So we have been continuing to fly with a number of customers, both customers that have expressed an interest and have been flying with us all along and some new customers that are interested. We, you know, we continue to get very positive feedback. All of the customers, you know, we press them and push and some get fed up a little bit and say, "Guys, come back to us when you have your STC." So we are getting a little bit of that pushback. You know, it's like, okay, you've been talking about this for a long time, as we've been telling you guys for a long time, and customers want to see it. And it's okay, got approval, great.

Now, it definitely changed the attitude of the people we've been dealing with when we got, when we finished our flight testing, because that let everybody realize that, okay, maybe we don't have the STC yet, but we better start figuring it out because a lot of work has to be done once the STC is approved before airlines are going to start taking it. They're going to have to do, you know, revise their flight, their flight training manuals, potentially changing their simulators. They're going to have to be discussing with the, with their FAA, the implementation of this new technology. So they know that they're interested and they want it, and that's what we've heard from a number of customers, that now is the time to, you know, start working on it, and they are.

I mean, we're getting a much higher level of activity from our customers. And ever since we finished the flight testing, then we've had, you know, in the entire time we've gone through the certification process, with the exception of one customer that's been with us from the very beginning. And that's the one that we think is, you know, call them our big boy customer because it's a big airline.

Bert Subin (Equity Research Analyst)

Very helpful. Thank you, Nick.

Nick Finazzo (CEO)

You're welcome.

Operator (participant)

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

Nick Finazzo (CEO)

Okay, guys, and everyone listening, thanks for all the good questions. Look, thank you for everyone on the line for joining our call today and for your interest in AerSale. With the third quarter, we're beginning to see positive results from the investments we've made in feedstock over the past year. We've judiciously used our balance sheet to overcome supply chain delays and organically build out our infrastructure of people and facilities. These investments have positioned us well to accelerate growth in this fourth quarter and into the future. We have confidence in our purpose-built, multi-dimensional, and fully integrated business model, and we're not discouraged by short-term earnings volatility. We're leaning into our future and are perfectly situated to thrive in a growing aftermarket. We are continuing to look at M&A opportunities to cost effectively expand customers, capacity, and capability.

Certification of AerAware will come, and we expect its commercialization will drive a steady base of recurring revenue well into the future. We're excited about all the opportunities ahead of us, and we're convinced the future is bright for AerSale. We look forward to keeping you updated on our progress. So everyone, have a good evening.

Operator (participant)

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