AerSale Corp Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Quarter Summary: Underlying business trends improved. Leasing revenue increased due to an expanded lease pool, USM performed well with sufficient feedstock supply, MRO business grew 18% year-over-year, and MRO expansion projects are on track.
• Strategic Priorities: MRO facility expansions in Miami and Millington are progressing. The specialty lease pool was expanded by adding four engines, and the 757 P2F conversion program saw increased customer interest and bidding activity.
• Segment Details: Asset Management sales were impacted by lower flight equipment sales, while TechOps benefited from strong commercial demand. Engineered Solutions continued work on AerAware (enhanced flight vision system) and AerSafe (fuel tank flammability protection) systems.

Segment Performance

• Asset Management: Third quarter sales were $50.4 million compared to $65.1 million in the prior year. Excluding flight equipment sales, segment sales were up 36.9% year-over-year, driven by better feedstock availability and the addition of four engines to the lease pool. Year-to-date, $42 million in total feedstock has been acquired, below the annual target of $150 million, but sufficient inventory remains to support the business for at least 12 months.
• TechOps: Segment revenue increased 17.6% to $32.3 million in the third quarter, driven by strong commercial demand and continued improvement in the MRO business. MRO expansion projects, including the Miami component facility and Aerostructures facility, are on track to contribute to revenue and margins in 2025.

Guidance

• MRO expansion projects are expected to drive incremental revenue and improve margins in 2025 as investment periods conclude.
• Potential for significant near-term cash flow through monetization of 757 P2F aircraft, existing feedstock inventory, and increased contributions from MROs.
• Insurance claims related to a fire and a detained engine are anticipated to be paid by year-end.

Risks

• A fire at a USM inventory facility in Roswell, New Mexico resulted in a $67.6 million insurance claim (subject to a $10,000 deductible).
• An outstanding $5.5 million claim against war risk insurers for a detained engine.
• Challenges in acquiring feedstock due to OEM production delays, higher asset pricing, and competitive bidding reducing acquisition rates.

Question and Answer

• Q: On AerAware progress and feedstock bidding competition A: AerAware development is complex due to pilot training, simulator updates, and airline budgeting, but progress with a major carrier is advanced. Feedstock bidding is competitive, with competition from various entities including engine OEMs and private equity, and AerSale remains disciplined to avoid overpaying.
• Q: Fourth quarter outlook and MRO build-outs A: No consistent seasonality, but improvement in feedstock purchasing in the first quarter may benefit later quarters. MRO expansion projects will contribute to revenue and margins, with MRO facilities like Millington ramping up over time.
• Q: MRO volume and USM feedstock supply A: Millington is operational with ramp-up expenses due to training and tooling, but customers are being introduced. USM feedstock availability is lower than last year due to competitive bidding, but AerSale remains disciplined and expects to capitalize on future feedstock availability as OEM production normalizes.