Q3 2022 AerSale Corp Earnings Call
Greetings and welcome to the Air sale incorporated third quarter 2022 earnings call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. If you have a question. Please press the one followed by the four and your telephone at anytime during the.
<unk>.
Should you require operator assistance at any time. Please press star Zero as a reminder, this conference is being recorded today Tuesday November eight 2022, I would now like to turn the call over to Christian Gallagher Human resources Director. Please go ahead.
Good afternoon.
Youre welcome everyone to air sales third quarter 2022 earnings call.
The call today are.
Chief Executive Officer and Martin.
<unk> 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.
Statements regarding our current expectations for the business and our financial performance.
These statements are neither promises nor guarantees but involve.
Both 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, 2021 filed with the Securities and Exchange Commission on March 15 2022.
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 will also refer to non-GAAP measures that we view as important in assessing the performance of our business a.
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 Aircell website at IR Dot Aircell Dot com.
With that I'll turn the call over to Nick Finazzo.
Thank you Kristen good afternoon, and thank you for joining our call today ill.
Ill begin with a brief overview of the quarter, including operational updates and I will then turn the call over to Martin to review the numbers in greater detail.
As we do every quarter, we believe it's important to remind investors that our financial results are typically uneven quarter to quarter and we recommend our performance be analyzed on a full year basis.
This results from the nature of our flight equipment sales programs, which tend to occur at irregular intervals throughout the year.
The pacing of our revenue in 2022 is no exception to this phenomenon as the timing of flight equipment sales created record first and second quarters, followed by a lower third quarter with an anticipated strong finish to the year.
The underlying growth in volume of our business has remained robust throughout this period.
And I am pleased to report that all but two of our flight equipment sales that were contemplated when we issued our initial 2022 guidance earlier in the year have now closed.
Comment on the remaining two planned flight equipment sales in a few moments.
Turning to the details in the third quarter, we reported consolidated sales of $51 million, which compares to $73 3 million in the prior year period.
Our adjusted EBITDA during the period was a loss of $500000 compared to a gain of $13 9 million in the third quarter of 2021.
As I noted the lower sales during the period were entirely the result of the timing of flight equipment sales being pulled forward into the second quarter were delayed into the fourth quarter.
Year to date sales have grown 41% to $313 4 million and adjusted EBITDA has increased 16, 2% to $75 million.
Further excluding the effect on adjusted EBITDA from Cares Act support in the prior year.
Our adjusted EBITDA increased 53, 6% year over year.
We are proud of these results and we're in position to finish the year as we anticipated.
Turning to segment performance, beginning with asset management solutions third quarter sales were $20 6 million compared to $48 9 million in the prior year period.
During the quarter, our flight equipment sales were just $2 7 million, which included two engines compared to $27 4 million in the prior year period, which included three aircraft and one engine.
Looking forward, we have contracted for 12 additional Boeing 757, <unk> conversions from multiple providers, which will extend the <unk> program through the end of 2023.
Included in this 12 or the two aircraft I mentioned earlier that we're part of flight equipment sales in our original 2022 guidance.
We pulled these two aircrafts from sale as passenger aircraft in 2022 to higher margin opportunities for their sale or at least as Ptos converted aircraft in 2023.
In our U S and parts business airframe and engine parts sales were lower than the prior year period, mostly as a result of extended turnaround times for overhaul parts.
As we look out beyond the next couple of quarters, we anticipate <unk> sales to improve as we're able to execute on the broadening asset availability in the market.
In our leasing business revenue was flat compared to the prior year as more engines on lease nearly offset lower aircraft lease revenue.
In our Tech ops segment sales increased sharply by 24, 5% driven by improving results from our landing gear and component MRO, coupled with strong MRO performance at our Goodyear facility during the period.
Regarding era, where we're making steady and consistent progress towards certification.
We have now requested the FAA to schedule our final certification flights, which we expect will commence in the coming weeks.
While we're excited to begin our final flight testing, we caution investors that performance of the flight test requires specific weather conditions to demonstrate the system.
Potential weather delays and FAA availability, notwithstanding we anticipate we will receive our supplemental type certificate or STC. Shortly after completion of testing.
Certification of era, where we'll make air sale the first to certify a head wearable display as a primary flight display on a commercial transport aircraft.
As we're nearing the commercialization phase of Arrow, where we've continued to step up our marketing efforts with airline operators.
We're currently working with several potential launch customers to model the cost savings and efficiency benefits of the system.
The capabilities of <unk> are clear and compelling and.
In aircraft equipped with <unk> enhances safety and reliability is expected to have lower greenhouse emissions and can produce tangible cost savings two operators by limiting weather related congestion and delays.
Importantly, arrow, where product availability couldnt be timelier for airline operators and other commercial air travel stakeholders as the global airline industry struggles to meet higher passenger volume amid airport congestion and increasing weather related delays.
Aero were directly addresses and helps alleviate these important problems.
In summary, with just a couple of months left in the year, we're on pace to reach our full year financial guidance and are primed to deliver a strong fourth quarter.
We will soon bring <unk> to market with multiple potential launch customers our backlog of Boeing 757, <unk> conversions remains robust.
And we're very well positioned to continue our momentum into 2023.
Now I'll turn the call over to Martin for a closer look at the numbers Martin.
Thanks, Nick I'll start with an overview of our third quarter financial performance and end with our guidance for 2022.
Our third quarter revenue was 51 million, which included $2 7 million of flight equipment sales comprising a two engines.
Revenue in the third quarter of 2021 was $73 3 million and included $27 4 million of flight equipment sales, which consisted of three aircraft and one engine.
If we exclude flight equipment sales, our third quarter revenue would have been $48 3 million compared to $45 9 million in the third quarter of 2021.
As a reminder to investors we delivered a <unk> 747 freighter in the second quarter that was originally slated for the third quarter.
We also delivered the final internally converted 757 passenger to freighter or P. Two aircrafts in the beginning of the fourth quarter that was also originally planned for the third quarter.
As we have noted during multiple earnings calls our business may and often does fluctuate from quarter to quarter based on the timing of flight equipment sales. It is therefore important to monitor our progress based on asset purchases and sales over the long term.
Third quarter asset management solutions, or <unk> revenue declined 57, 9% to $20 6 million in the third quarter of 2022, primarily due to lower flight equipment sales.
Parts sales were also lower in the third quarter of 2022 due to extended turnaround times for overhaul parts during the quarter.
Leasing revenue of $7 8 million in the third quarter of 2022 was close to third quarter 2021 leasing revenue of $8 million as engine demand from wide body freighter operators, partially offset lower revenues from aircraft leasing with only one aircraft on lease during the current quarter.
Excluding flight equipment sales, our third quarter Ams revenue would have been $17 9 million compared to $21 5 million in the third quarter of 2021.
Within our USA parts business, we continued to see an increasingly favorable market for feedstock availability against the backdrop of growing demand for airframe and engine parts at airline Usn part consumption expense.
In addition demand for B 757, <unk> converted aircraft is expected to remain high and we are well positioned to monetize on an additional 12 B 757 aircraft in 2023.
Third quarter revenue from Tech Ops was $30 4 million an increase of 24, 5% from the third quarter of 2021 as a result of strong performance from our landing gear and component MRO.
At the beginning of the fourth quarter, we transitioned that pizza, let conversion program from our heavy MRO facility in Goodyear to multiple third party providers that will perform the additional 12 pizza with conversions.
This transition followed the completion of our final internal Pizza web conversion, which was sold at the beginning of the fourth quarter.
We expect this transition to improve our capacity for third party work, enabling us to generate additional revenue going forward, while maintaining the economics of our <unk> conversion program.
Offsetting the improvements previously noted on airport MRO activities at our Roswell facility declined due to fewer customer aircraft in storage as compared to the prior period.
Third quarter gross margin was 34% compared to 33, 6% in the third quarter of 2021.
Largely as a result of an unfavorable product mix driven by lower flight equipment sales, which typically have higher margins.
Selling general and administrative expenses were $24 million in the third quarter, which included $4 4 million of noncash equity based compensation expenses selling.
Selling general and administrative expenses were $22 8 million in the third quarter of 2021 of which $8 7 million were noncash equity based compensation expenses.
Loss from operations was $8 5 million in the third quarter compared to 2021 third quarter income from operations of $1 8 million.
Net loss was $9 million in the third quarter compared to a net loss of $1 6 million in the third quarter of 2021.
Adjusted for noncash equity based compensation mark to market adjustments related to our private warrants.
<unk> operating costs and relocation costs adjusted net loss was $1 9 million in the third quarter as compared to adjusted net income of $9 2 million in the third quarter of 2021.
Diluted loss per share was <unk> 17 for the third quarter compared to a diluted loss per share of <unk> in the third quarter of 2021.
Adjusted for noncash equity based compensation mark to market adjustments related to our private warrants secondary offering costs and relocation costs diluted loss per share was <unk> <unk> in the third quarter versus diluted earnings per share of <unk> 22 in the third quarter of 2021.
Third quarter, adjusted EBITDA was negative $5 million, while adjusted EBITDA in the corresponding year ago period was a positive $13 9 million.
Adjusted EBITDA was adversely impacted by the lower amount of flight equipment sales this quarter, which generally have higher margins.
They also did not receive any payroll support program proceeds during the third quarter of 2021 or 2022.
Year to date cash used in operating activities was $2 4 million through the third quarter compared to cash flow provided of $26 4 million in the third quarter of 2021.
The key driver of the decrease in cash generation was an increase in inventory purchases at advanced vendor payments in support of our Pizza Web conversion program as well as the reversal of $12 5 million of previously collected deposits related to our completed flight equipment sale that is reflected in cash flows from investing activities.
At quarter end <unk> had approximately $151 4 million of cash on its balance sheet and an undrawn revolver capacity of $150 million.
Finally, moving to our guidance for 2022 and summary.
As a result of our strong performance during the first three quarters of the year and having closed on all of the remaining flight equipment sales that had been contemplated in our full year guidance. We are reaffirming our 'twenty two guidance for revenue of 422 $450 million and adjusted EBITDA of $80 million to $90 million.
Looking forward beyond 2022, we expect flight equipment deliveries on our 757 Pizza web program to accelerate in 2023.
Coupled with meaningful contributions from arrow, where as we anticipate product deliveries to commence.
In summary, we are pleased and encouraged by the underlying performance of our business notwithstanding the timing related to flight equipment sales.
We remain confident that the strength of our purpose built model and our excellent execution capabilities will continue to exceed our expectations over the next few quarters.
With that operator, we are ready to take questions.
Thank you very much if you would like to register for a question. Please press the one followed by the four on your telephone.
<unk> <unk> pump to acknowledge that request.
If your question has been answered and you would like to withdraw your registration. Please press. The one followed by three once again to register for a question just one four on your telephone keypad and our first question comes from the line of Gautam Khanna with Cowen Your line is open.
Hi, Good afternoon, guys I had a couple of questions.
Good afternoon.
Hey, just first I was curious on the Q4 equipment sale.
What does it.
<unk> revenue item is that.
Let's start with.
So we don't give exact numbers on the overall flight equipment sales, but as Nick noted that will put us in a position to meet the overall guidance that we provided for the full year.
Got it includes bringing Jonathan the other thing I was curious just on Aero, where you could.
Kind of update US you mentioned weather permitting.
And all of that.
Is the software totally locked down at this point from what you know.
How long a process do you think you'll need to do the flight hours here.
And what's a realistic.
Timeframe.
Initial order.
Formal launch last fall.
Okay. So regarding I'll try to answer the three questions you asked.
Regarding whether and what would it what do we need to see when we fly this aircraft and demonstrated to the FAA.
<unk> they mentioned.
About specific weather was the FAA has told us that.
We've shown them video.
Different weather conditions board.
Fleet.
No.
<unk>.
Mark.
Sand, because we have seen storms and Goodyear and so they have seen that but the one thing that they insisted on that accept a lot of that video from testifying that we've done.
But they need to see the airplane and foggy conditions. So they need to see that we needed we need to chase when do we get the FAA on the airplane. We've got to go sign an area with Bob in the morning, or whatever and we've got to demonstrate the system to them. So.
This is a good time of the year for that they are small again.
Many sections of the country in the morning.
So when we get the FAA on the airplane, we're going to have to fly the airplane to wherever that fog is and demonstrated to them.
I cant predict for sure when winter aware, we're going to assign fog.
But that is we specifically are going to have to demonstrate the operation of the system and foggy conditions.
We are coming up on the end of the year as we as we have heard many times from the FAA as they approach the end of the year a number of of the FAA personnel and if they don't use their vacation time day lose it so I'm a little concern that we were ready airplanes ready.
Crews ready system is checked software's validated there are no technical reasons for us not to do our demonstration flights all of the things we have to do.
The FAA for the FAA to allow us to demonstrate the airplane we've done.
So now were in a waiting mode. We've asked the FAA for four days.
I have stated that that could happen and as soon as weeks.
So when could it happen I mean literally it could happen as soon as weeks are we likely going to started next week now could we start after Thanksgiving.
Why not.
Really up to the FAA to give us.
A lot in there and their flight schedule and to make sure that we have all the required FAA personnel on board.
Don't be Aircell holding up the start of those flight testing it'll just be.
Whenever we can get the FAA to allocate time for us to fly the airplane. So maybe we can change the weather Sydney, we keep all our required FAA people on the airplane for the duration of the flight testing and how long will the flight testing take.
We think not longer than a week and probably not more than a few days of flying but again, depending on availability of personnel and chasing whether.
It may take a week, but it won't involve it necessarily a week of flying.
With respect to when do we expect to get a launch order from one of a number of potential launch customers. Some very large some not so large.
We're talking 737 at this point.
We are also in discussion with potential customers for multiple other aircraft types and Oems for installing this system or similar system and brand new aircraft coming off the factory.
Coming off the Assembly line, let's put that aside thats it thats something that will happen in the future.
With respect to the 737.
We expect that once we have certification that we will get an order.
Likely within.
90 days I can't think of a reason why it should take longer than 90 days, especially with the customer that we've been showing the airplane to over the past year has been on a number of the of our slides.
Don't know why it would take longer than 90 days too.
To get an order we're already producing kits.
To begin installations for next year. So we're anticipating that we will have a demand for kits next year that we can start installing an aircrafts.
And so.
So.
I know that's not a short answer but I would expect within 90 days, we will get our first order afterwards certified.
Now that's not that's okay.
My Best guess.
That's fair. Thank you I was going to also ask on the U S. Im turnaround time, you mentioned some constraints there if you could just elaborate on.
What were the bottlenecks.
Have those been resolved or is that sort of.
Ongoing issue if you could just elaborate on that.
Yeah.
<unk> spent a lot of discussion internally about that on what can we do to it to get more availability of U S M and a frustrating answer is that.
Turnaround times for everything whether it be getting aircraft torn down in foreign locations or even U S locations.
Due to labor constraints things that would normally take 30 days 45 days to Terry on an airplane and we have to get in line. If we're not doing it ourselves could take 345 months to get an aeroplane torn down so that we get access to the U S M.
That we can then get refurbished whether we do it internally or whether we do it externally when we send out parts externally to get refurbished.
What would normally be at 45 to 60 day turnaround time.
In some in some cases, taking six months to get a part back. So we've got more we've got we have more inventory sitting at vendors.
In process being overhauled mostly engine parts than we've ever had in the history of the company.
That's because theres just the lead times or the turnaround times are still extended now how is that going to get fixed I don't think thats going to get fixed anytime soon I think thats.
It's a multiple year problem, how do we fix it we just keep feeding the system.
We're not we're not not buying just because theres extended turnaround times, we're buying we're tearing down we're getting the products out to the vendors to get them overhaul, we're putting them in the queue and when we get them out we will have had enough pre sell time property to sell them when we get them out so other than what we're suffering through right now.
Feed the feed into the system will eventually be consistent and the X and then the output will be consistent it's just not it's just not there today because we are.
So we are just acquiring equipment and putting it in we're still we're still in a wait mode.
We expect a steady flow of materials, starting to come out, but with extended turn times.
I think it's unavoidable I can't call.
When that's going to abate, but my expectation is.
It's potentially it's years before thats going to abate.
Thanks, guys.
Youre welcome.
Thank you. Your next question comes from line of Bruce <unk> with Stifel. Your line is open.
Hey, good afternoon, maybe staying on the on the era where conversation.
I know this has gotten moved out to the right a couple of times out of your control just due to sort of the constraints with getting the STC and getting that finalized.
Could you just give us maybe Nick what Youre bulk case is.
On approval and ultimately.
The resulting sales in and maybe what the bear cases.
Any potential that this would get moved to 2024 or do you think.
Pretty solidly in 'twenty, three and it sounds like from the conversation Youre, having with potential customers that you think that there could be demand to start getting those kids moving.
Okay. Okay.
That's a good question Bert thanks for asking.
The bull and the bear case, the bulk case, which doesn't feel like a bull case it feels more like a base case is.
The certification flight testing is imminent.
Again literally it could be in weeks.
Would it be in months I don't think so if I would have if I believed it would be in months.
Would have stated that.
In the next several months, we will get it certified I think it's in that or do our flight testing I think it's in the next several weeks.
Typically when flight testing or flight test certification is completed typically that's the last step in the certification process.
Once it's completed satisfactorily and we expect it to be completed satisfactory because we've flown the airplane already demonstrated that it does what what the required with the regulations require.
Typically at that point, you're approved you prove what you already know you demonstrated to the FAA when Thats completed.
They do all their homework they check all the boxes.
Within 30 days, you get an STC thats typical.
Let's take let's take best case Bull case.
It's.
It won't happen next week, because it's too early let's say and then you've got Thanksgiving coming up.
Soon thereafter, let's.
Let's say.
Let's say, we get it after Thanksgiving maybe early December we do our week of flight testing.
We finished no issues, we don't expect there to be any issues and we are coming up on Christmas break.
And.
Hopefully by then the FAA will have done everything they need to do from a documentation point of view to go through the process of issuing the STC got Christmas involved. So I don't expect that we're going to have it in December but I would expect if we do our flight testing in late November late this month or early December .
We will have the FCC in January .
And I think that that really is the base case to I don't even think thats. The bull case that the the bear case could be we can't get the FAA to commit to flight testing. This year. It flows into early January and then everything shifts from there then it's the same thing.
Get flight testing in early January when everybody comes back from vacation.
Then it's a week of flight testing 30 days to wait to get FCC issuance that I think the bear case.
<unk>.
Is the end.
Mid to late first quarter.
I don't have a bear case that says this would drag out.
Significantly there is no reason there is no reason for it to drag out the Fas has a responsibility to.
To do the flight certification testing for us and two issued U S. STC when when we've met all the requirements.
Just so you know.
The attitude of the FAA is very positive. They this is new technology.
This will be the first system with a head wearable display to be certified with this type of advanced technology.
It's what was envisioned as one of the.
Initiatives.
Next generation air traffic control system.
The FAA wants to get this system certified I think they all wanted to be a part of it but.
Remember in light of the Max the FAA as being Super cautious. So we got a lot of people looking at this which is good.
Other than the fact that we've had to suffer through how long it takes.
We will have a good solid proven system that <unk> comfortable with.
And we will have the certification of this system.
Latest I think first quarter latest the end of the first quarter.
I can't I have no reason to tell you that it would I can't think of a reason it would extend past the end of the first quarter.
So, let's say if the bear case plays out and this is sort of a.
March is when this is fully completed and you said sort of you would expect an order at 990 days. So maybe that puts you into the second quarter.
And thinking about that I know theres that regulation that you have to have at least half of the aircraft outfitted with this so if we're talking about a large.
Fleet of 737, something 300 fleet.
Airline.
How can you walk us through how that process would work. If you have to do 150 of these kits in order for that airlines use that how long that takes and sort of how that process plays out.
Yes, so there's two pieces to that one is manufacturer and availability of the.
Elbit components to Elbit, universal components, which be the the.
The camera the head wearable displays.
The <unk> the flight computer dictates that ties all of that into the into the main aircraft system. So that hardware has to come from elevate slashed universal.
So we have we are primed the pump there and placed an order for equipment to ensure that we'll have available equipment.
Elbit to commence installations.
Starting now I mean, we have a certain number of kits already in stock and there are kits being made available to us.
On an ongoing basis to fulfill the $33 billion order that we made earlier in the year.
We also are in the process of.
Building up our capacity to manufacture the install kits.
We've got multiple kits already.
That have been manufactured each month, that's improving month over month.
Our expectation is that will be.
Add capacity to build as many as 20% to 25 kits a month in starting in 'twenty four and so we are building to that capacity.
We will have kits for 'twenty three.
Assuming we have the hardware in 'twenty, three and an order in 'twenty three we expect to have substantial deliveries of kits in 'twenty three.
Okay.
Maybe changing gears just want to make sure I understand that.
Question, probably for Martin.
Can you just help us understand the cadence of maybe <unk> <unk> in 2023, <unk> sales one number of aircraft of that 12, I guess in total Thats 13, what number of those you currently own.
And sort of what your expectation is for that sales process and then maybe lastly, how should how should we think about engine sales just trying to get an idea for for the cadence.
The whole asset sales.
Sure. So of the 12 <unk> converted assets that we are doing and in fact, the first one is already ongoing at our third party facility.
We are deploying three facilities to do that work so delivery of those assets will be more evenly spread through 2023 and they were in 2022. So I know that will make probably life easier for you guys to a modeling that.
Overall of the 12 assets, we owned seven Nick noted, we strategically deferred two assets that we're going to be sold as passenger to freighter to put them into the pizza a conversion program to generate higher returns overall, while we're in negotiations already on and looking for the.
Additional five we're in negotiations to buy already three or four of those assets. So we're in a good position to have the full feedstock that is needed to fulfill that overall 12 aircraft demand from an overall engine perspective again, we continue to purchase engines in the overall market and obviously, we have inventory available as well.
Well overall and timing that timing was obviously as opportunistic as items go through it as a reminder, these are not new engines. These are used engine. So they're all sold in a spec basis. So we need to identify buyers. So as far as kind of a quarterly projections are that it's difficult to tell but we definitely have a.
A good amount of inventory available to us that will feed 2023.
Engine sales and leasing and <unk> sales through 2023.
And so just so I understand that cadence correctly, the <unk> would be one in <unk> and 11 next year or is that one plus 12.
That aircraft currently being delivered but it will not it will not sorry being converted it will not be ready for delivery until 2023. So all 12 aircraft are expected to be available for sale or lease in 2023.
Okay, Okay that helps.
Just last question for me.
Thank you, Tim maybe more of the sort of the core business of MRO and I know you walked through the U S. M. Part earlier, how do you expect that business to hold up sort of in this backdrop air travel demand has been resilient and capacity keeps coming back aircraft.
Aircraft for aging cargos.
Load, but still been strong like would you expect MRO now that youre, putting more capacity toward that to continue to build in.
Is there any sort of difference in trends that you're noting between component and an aircraft engine MRO.
So yes as you noted we've seen a lot of positive momentum.
That overall side, that's why we strategically moved the pizza, who have conversions to third parties and that's the best of both worlds. We continue to preserve the margins that we've been able to make in that overall program and have additional third party capacity overall.
And that's in the heavy MRO and our component I'm arose in our landing gear shop, we definitely have seen that increase in demand from passenger and still strong freighter overall demand. So we have a lot of capacity to continue to grow. So we continue to see that kind of forward projection through the remainder of 2022 and in through 2023.
Hi.
Thanks for all the time.
And as a brief reminder, <unk> to register for a question is this one four on your telephone keypad. Your next question comes from the line of Ken Herbert with RBC. Your line is open.
Yes, hi.
How are you doing this evening.
Good good good Ken good here.
Yes, Nick maybe just to start off on the.
On the 12 aircraft.
<unk>.
Converting next year, how many of those would you expect in 2023 to actually be be selling versus how many would you expect to just put out on lease for maybe say a little future date.
Don't know specifically what that is the we have been talking to a number of customers about outright purchases of the aircraft out there converted we have a number of customers that.
We are interested in leasing the aircraft after we convert them and then as you have seen previously if we put an aircraft out on a long term lease. There are there are plenty of financial buyers that would buy the aircraft with a lease attached so it's.
It's hard for me to be able to specifically tell you were going to sell so many airplanes, we're going to lease so many airplanes.
One way or the other we expect to place all of those airplanes next year in some form whether it be as a sale or as a as a lease if it's a lease.
It's possible, we'll keep some of those aircraft on lease depending on the circumstance, but more profitable if we put the aircrafts on lease will find a financial buyer to take the lease and then it will become a sale.
Okay and as you think about the these aircrafts going into the conversion process is there any risk that because of supply chain constraints or labor or anything else that you see delays on these aircraft coming out of the conversions.
No Fortunately.
The availability of kits has been.
Has been an issue and.
<unk>.
And we're not seeing any significant delay is not to say that there haven't been delays I think the secondary plane.
We were to put into conversion is delayed wall.
While the vendor that's going to do the work is.
Is working through their contractual issues not with us, but with the with the supplier of the kits.
So there are things that we will we will have a minor impact it may have minor delays on that equipment coming out, but we don't see anything major those kits.
We placed deposits for the kits.
<unk>.
That that we ordered where we're finding the vendor to do the installation and we also placed deposits on the conversions that are partner precision is actually doing on that and then they turn around and then Dave.
Florida that material from their vendors and we're not hearing of any significant delay in.
The delivery of the of the kits to perform the conversions and the conversions are on a really tight slots. So there is a limited amount of availability of people who can do the conversions.
They have the labor to do the conversions and they have available slots to do the conversion and they have lots of other work to do so you have you can't you've got to have your airplane and you got to have it in there at the time they have a slot and it goes pretty quick.
It's pretty efficient.
Yeah.
Okay. That's helpful.
And just with some of the.
Slower growth on the cargo market is obviously still fairly robust, especially for the 750 sevens, but are you seeing any any downward pressure at all on lease rates within that marketplace.
Not.
The overall marketplace.
On 750 Sevens, because there is a limited amount of aircraft out there I think we're going to have the last 12 or 13 airplanes that get converted and precision won't be doing any more 750 Sevens now there are <unk> hundred 20 ones out there being converted <unk> hundred 27.
737, Mgs and.
There is a lot of companies with book value problems that are converting airplanes to basically kick the can down the road.
We up the depreciation to I don't know, 15% to 30 more years, depending on how aggressive the OXXO lessees are being with that equipment.
And we are hearing that there is a lot of availability of 737 and <unk> hit.
Hitting the market and that that market is softening now.
Yes, that's part of the reason why youre not seeing us.
Do any 737 LNG conversions because right now the economics don't look good it looks like Youre just.
Trying to defer depreciation over a longer period of time by making a conversion investment.
Yes, I do believe there is downward pressure on the cargo market depending on the specific aircraft type 737, LNG. I think is an example of significant downward pressure because of the amount of availability of equipment.
Not seeing it on the 757 767, everything Thats out there again I've said previously that those are being committed by.
By the large.
Cargo carriers that operate large fleets of that tight there's very little availability of that it's forcing people to look at converting <unk> hundred <unk>. There are some parties out there that now or are looking at doing <unk> hundred 30 conversions, that's probably maybe not as good as the 767, but there.
B.
There will be seven there will be <unk> hundred <unk> converted as I said, there are <unk> hundred 20 ones out there doesn't quite do what an eight.
737 and <unk>.
757 does and is going to be a little similar to.
<unk>.
737, LNG, but theres not theres not as many of those being converted at this time to say that there is an oversupply of <unk> hundred 20 ones.
So I don't see I don't see a downward pressure on that market, yet until unless and I can say until unless and until.
Theyre becomes.
Eight.
Flood of those airplanes that had been post conversion on the market and unavailable on leased.
But I'm not hearing that on the <unk> hundred 21, yet doesn't mean it can't happen I'm just not hearing it.
So yes, depending on each aircraft type there are different pressures positive and negative.
On the narrow body side I think that overall I would describe that is.
There's a little bit of negative pressure on the.
There is a headwind on the narrow body side for a while too.
Too much supply versus the demand not seeing it on the kind of the hybrid airplane or the middle middle of the road airplane assessed 57 lots of demand on the on the wide body side on the 767% up.
Yes, Okay I appreciate all the color and just one final question if I could Nick when you look at you've made a few comments on the USA market and it sounds like the issues, you're facing are getting material out of shops too to resell it.
What are you seeing in terms of feedstock it sounds like youre seeing more feedstock, but are there.
Is that still supply constrained in terms of your ability to find.
Engines or other assets to put into the to the U S M pool or how is that trending.
So.
That's not that's a complicated answer and I'll try to give it to you divested I can.
What we're seeing today well we've been feeling for the last several years is an expected.
Significant supply of older aircraft coming into our space and being the feedstock for our USA. We continue to buy airframes, where the lessors are airlines are pulling off the serviceable engine and selling an airframe with maybe one on serviceable engine or just an airframe alone. So we're doing very well on the air.
Frame side, and we're and we're buying more airframes now for part out than we've ever bought and our history of new.
Newest airplanes going to thought about DCA, it's not about 737% to eight <unk> hundred <unk> <unk> hundred Twenty's.
Mid technology equipment, we're buying more airframes and we've everybody thinks that while there is definitely there.
It's definitely not a lack of supply of airframes airframes historically represent about a third of our U S M revenue.
Parts that come out of airframes, roughly a third of USF revenue engines parts would be roughly two thirds of U S. M rubbing how's.
However, we're not seeing.
Enough engines coming out that are ending up being parted out when we do get an engine for part out.
We are doing is a number of those engines that we're buying we may be buying them at par that prices, but we're not even parting them out ourselves.
We're refurbishing those engines and putting them back into service because we believe that there is higher value of those engines those kind of.
No.
Good good quality 737 engines <unk> hundred 20 engine CFM $56 $5 25 hundreds.
CFM 56 Dash Sevens.
And so we still see good quality engines, and if we have U S. M material that's available from other engines that we decided to part out.
Instead of sell the really good stuff to somebody else to lower their cost of overhaul were keeping it and we're putting it in our own engines to overhaul. So we're not.
We're not necessarily pulling that material and putting it into our USA business to sell to third parties, we're consuming a lot of it.
Yeah.
And so and so.
That's also keeping the amount of U S and it typically is represented two thirds of our.
Our U S and part sales were consuming it and it goes into a different form now post it to our whole engine that will go out on a lease while we put out an aircraft where where that value won't get recognized until we sell the aircraft at that engine is on so it's not that we're losing that value just we're not selling into the U S. M.
Side of the business so.
So.
So thats part of the issue with respect to the engines. The other part is between.
The engine problems on the <unk> hundred 20, neo or the 737, Max long prolonged recertification and the amount of time that it's taken to get all of those.
<unk> flying.
Finished 737, Max is back into service and the FAA requiring.
Recertify our issue the original certification of every 787 coming out that.
That whole supply chain just for those factors alone are are keeping the supply of that new equipment from getting into the market fast enough to displace the equipment that will ultimately come to us.
And I've talked to a number of the aircraft lessors, who indicated that in their view.
It's several years before that problem goes away. So there will be pressure on availability of USF material because of that.
As I mentioned, all the other external factors potentially going into recession.
The Russia situation.
All kinds of elements that are affecting the availability of feedstock to feed the engine side of the business, but that doesn't seem to be.
It doesn't seem to be as prevalent on the airframe side of the business.
No.
It's going to be hard we have to hunt, we got to figure out how to extract value out of every piece of whatever's available to us we got to figure out whether we should part out sell the parts to third parties part out used parts ourselves to return aircraft or engines to service.
So we've got to use our multi dimensional model really to figure out where the best value is and although it's easy to say well, we're going to have a lot of USF to sell I don't want to sell a lot of U S. And if there is a higher value for us to put it into integrated into us into a bigger component.
On aircraft engine.
So sorry for such a long answer, but it is a complicated issue and the antitrust complicated.
No I appreciate all the detail thanks, Nick.
You're welcome Ken.
And there are no further questions I will turn the call back to Nick's Donoso, Chief Executive Officer for closing remarks.
Alrighty well, thank you for listening to our call today.
Look we will continue to work hard and smart to meet and exceed expectations.
Nothing in the third quarter is reflective of our future prospects.
All is well with their sale and our future is bright.
Have a good afternoon everyone.
And all of that will conclude the conference call for today. We thank you very much for your participation you may now disconnect your lines.
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