Q2 2023 AerSale Corporation Earnings Call
And welcome to theirs.
Second quarter 2020.
Earnings Conference call.
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Question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Kristen Gallagher. Thank you may.
Ma'am you may begin.
Good afternoon, I'd like to welcome everyone to Air sales second quarter 2023 earnings call conducting the call today are Nick Fernando <unk>, Chief Executive Officer, and Martin Graham, India, Chief Financial Officer.
Before we discuss this quarters 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 stay.
<unk> 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 on March seven 2023, and it's other.
Bilings 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 our earnings presentation materials made available on the investors section of the air So web site 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 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 second quarter results were behind our internal expectations, resulting primarily from current soft demand in the cargo market for our P to fs converted 757 aircrafts and extended repair times for used serviceable material, which you'll hear me refer to as U S. M.
Total sales in the second quarter were $69 3 million compared to the prior year up $139 6 million.
This quarter included flight equipment sales of $13 3 million compared to $92 5 million in the prior year.
Aside from reduced flight equipment sales revenue across most of the company's business units continued to grow supported by a strong commercial environment and demand for our products and services.
I would remind investors that the year ago comparable period included record high company revenues from the sale of multiple aircraft.
As we have noted on each and every earnings call flight equipment sales are an important component of our end to end solution, but do create meaningful quarterly volatility in sales and profitability.
Further we allocate fleets feedstock to the business unit that can achieve the highest the highest risk adjusted rates of return.
Whether that be through whole assets leases or U S N parts.
Therefore, the sales channel can produce often did additional volatility quarter to quarter.
With that being said I am pleased to report that our acquisition of feedstock through the first half of 2023 has remained robust and on track with our expectations, having acquired or have been awarded over $200 million of feedstock compared to just $50 million in 2022.
We've been using our balance sheet to acquire this favorably priced feedstock and the level of inventory on hand to fuel future profitability now stands at over 300 million a record high.
This is an important leading indicator of our future performance, giving us confidence that the second quarter of 2023 should be the low point of this recent cycle.
Turning to profitability adjusted EBITDA in the second quarter of 2023 was a loss of 540000 compared to a gain of $41 1 million in the prior year period.
The lower adjusted EBITDA margin observed in the period resulted from fewer aircraft sales coupled with the expense of maintaining the strength of our multi dimensional fully integrated infrastructure at a high readiness level to support future growth.
At the segment level and beginning with asset management second quarter sales were $37 1 million compared to $114 5 million in the prior year period, resulting from lower flight equipment sales and no aircraft on lease.
In the current quarter, we sold a total of four engines and no aircraft compared to three engines and three aircraft in the second quarter of 2022.
Q2 of 2022 included two high value Pizza, who have converted 750 Sevens and one 747 freighter, which set a company record for a single aircraft sale in terms of both revenue and total net dollar margin.
We've continued to work through P to Fs conversions of our 750 Sevens and our revised 2023 outlook calls for three sales and three leases by year end compared to our prior forecast, which included the sale of six P to Fs converted 750 sevens and three leases.
This reduction to our full year outlook is the result of a significant softening in the cargo market. Following the pandemic surge experienced over the past few years.
Cargo operators currently suffering from reduced demand and an associated lack of liquidity has tempered the sale of our pizza, who have converted 750 sevens and will likely result in a heavier mix of leases versus sales in the near term.
Together these factors led us to reduce our full year estimates for fight equipment sales on the 757 program.
While this changes our forecast for 2023. It is important to underscore that we still see ample opportunity to monetize this inventory through alternative sales channels at target margins consistent with those channels.
In our U S and parts business airframe and engine parts sales both grew compared to the prior year, reflecting our heavy investment in U S M being repaired regardless of the extended repair cycle times.
The ability to use our balance sheet too to offset supply chain delays is now paying off as over the past six to nine months the steady stream of U S. M flowing through the repair process is now yielding ready high demand U S M, which in many cases has been pre sold while still in their repair cycle.
In the second quarter of 2023, we had no aircraft leasing revenue as we fully wound down our aircraft lease portfolio in response to market dynamics.
In the prior year, we had $2 1 million of revenue from aircraft on lease primarily related to a 737 and 747 freighter that have since been sold.
Comparing the sales mix of our products over time will yield varying results is we're agnostic to the type of monetization strategy, we utilized in our asset management business.
We steadfastly seek to maximize return maximize return on investment on feedstock through the highest return and current market conditions between the U S M parts leasing or the sale of whole assets.
Turning to our Tech Ops segment, we reported second quarter 2023 sales of $32 3 million, which was up 28, 7% compared to second quarter 2022 sales of $25 1 million.
Higher sales resulted from strong demand for services at all our MRO is with additional on airport MRO capacity at our Goodyear, Arizona facility made available by outsourcing the 757 Pizza Web program together with increased utilization at all facilities.
As mentioned earlier, we're seeing a favorable overall operating backdrop, and we anticipate a meaningful step up in operating tempo as our investment in feedstock works its way through the broader system.
Turning to engineered solutions, we continued to work towards final FAA approval of our enhanced flight vision system era, where.
If you recall during our last quarter's earning call final certification of the system will follow the completion of five sets of flight tests proving different aspects of the system performance and reliability.
Although we successfully passed the first four several imaging issues were identified that required minor modifications to both software and set of procedures to ensure the images projected onto our head wearable displays a line within the limits as prescribed by the FAA.
Identifying these issues and fine tuning the system is part of the certification process and the reason for extensive flight testing.
I'm pleased to report that we've made all the minor adjustments and modifications identified during flight testing, resulting in improved performance out of the system and our readiness to demonstrate these adjustments to the FAA.
Earlier this week the FAA notified us that they have accepted these modifications and requested an in person demonstration of the changes we made.
This demonstration has tentatively been scheduled for the weeks commencing August 14th or 20th subject to final paperwork and weather.
Immediately following the demonstration the fifth and final set of flight tests will commence and is expected to take approximately one week to complete.
I mean is that the successful completion of the final flight tests. The FAA typically issues N S. T C within 30 days.
Yeah.
Turning to capital allocation, we remain in excellent financial condition to continue to fund our feedstock program and sustained business growth.
In addition to over $200 million in feedstock closed under contract or LOI year to date, we ended the quarter with $34 6 million in cash and an undrawn $180 million revolver, which was recently upsized and expandable to $200 million.
Providing us with total current liquidity of $215 million.
Further as we begin to monetize the feedstock already acquired and coming available post repair. This will enable further expansion of our acquisition strategy.
Besides the acquisition of feedstock, we've been very active in pursuing M&A opportunities.
While it's too soon to share any specifics, we're targeting capability enhancing acquisitions that either complement our end to end solution enhance our footprint or increase our capabilities for engineered solutions.
As is the case with feedstock acquisitions, we're extremely disciplined in our approach and we will not overpay for an asset that has little post closing synergy.
To conclude despite the disappointing short term financial results and its impact on 2020 threes full year outlook, the fundamentals of our multi dimensional and fully integrated business model bestows air sale with a unique and unmatched platform to achieve significant growth in sales and profitability in the back.
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We're encouraged by the pace of our asset acquisition program, which combined with a near term approval of era, where should mark the second quarter as the low point in our future results.
We've navigated through some pretty turbulent headwinds so far this year, but the investments we've been making have provided us with a tailwind as we move into the second half of the year and into 2024.
I would like to thank all our employees for their dedication to air sale and for their efforts in delivering on our commitments to all our stakeholders.
Now I'll turn the call over to Martin for a closer look at the numbers Barton. Thanks.
Thanks, Nick I'll start with an overview of our second quarter financial performance and end with our updated guidance for 2023.
Our second quarter revenue was $69 3 million, which included $13 3 million of flight equipment sales comprised of only four engines and no aircraft revs.
Revenue in the second quarter of 2022 was $139 6 million and it included $92 5 million of flight equipment sales consisting of three aircraft and three engines out of which two aircraft were are still converted Boeing 787 freighter aircraft and the other a Boeing 747 freighter.
Excluding hold engine and aircraft flight equipment, our base revenue continued to generate significant underlying growth.
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.
Second quarter asset management revenue dropped 67, 6% to $37 1 million because of the significant variation in year over year flight equipment sales noted above.
Outside of flight equipment sales U S and parts sales improved from the year ago quarter as demand and availability of feedstock expanded while aircraft leasing revenue fell due to a planned reduction in the number of aircrafts in the leasing portfolio.
Tech Ops revenue was up 28, 7% to $32 3 million in the second quarter from $25 1 million in the second quarter of 2022.
Our tech ops business benefited from additional capacity dedicated to customer aircrafts are Goodyear on airport MRO facility as well as an increase in sales from our component MRO is as we have mentioned previously the transition to third party providers to perform the remaining 757 pizza west conversions at the beginning of the fourth quarter.
2022 opened up capacity at our Goodyear facility.
This transition has helped generate revenue and growth from expanding third party services at our Goodyear MRO.
Second quarter gross margin was 29, 1% compared to 39, 4% in the second quarter of 2022.
It was mainly the outcome of a sales mix that consisted of fewer high margin flight equipment sales.
Selling general and administrative expenses were $27 1 million in the second quarter of 2023 which included 3 million of noncash equity based compensation expenses.
Selling general and administrative expenses were $23 5 million in the second quarter of 'twenty, two and included $3 9 million of noncash equity based compensation expenses.
Second quarter loss from operations was $7 million, while income from operations was $31 5 million in the second quarter of 2022.
Net loss was $2 7 million in the second quarter compared to net income of $26 5 million in the second quarter of 2022.
Adjusted for noncash equity based compensation Mark to market adjustment to the private warrant liability facility relocation costs and secondary issuance costs second quarter adjusted net loss was 591000.
Adjusted net income was $31 7 million for the second quarter of 2022.
Second quarter diluted loss per share was eight <unk> compared to diluted earnings per share of 47 cents in the second quarter of 2022.
Excluding the adjustments mentioned above second quarter adjusted diluted loss per share was <unk> <unk> compared to adjusted diluted earnings per share up 56 cents for the second quarter of 2022.
Our adjusted EBITDA was a loss of 540000 in the second quarter of 23 compared to a gain of $41 1 million in the prior year period.
The decline in adjusted EBITDA was largely a consequence of lower flight equipment sales, which had strong margins.
Next in terms of our cash flow matrix cash used in operating activities was $129 2 million as a result of a gross investment of over 200 million in feedstock that will fuel growth opportunities going forward.
We ended the quarter with $34 6 million of cash and then Undrawn revolver credit facility, which we have recently renewed for a five year period, and upsized to $180 million with the ability to expand up to $200 million.
This additional capacity as well as more attractive advance and financing rates will help us to continue to fuel our growth.
Finally, moving to our updated guidance for 2023.
We now expect to generate revenue of $400 million to $440 million and adjusted EBITDA of $40 million to $55 million in 2023.
This updated guidance takes into account soft softer freight market demand that is anticipated to delay our previous estimates of the delivery and sale over 757 pizza west converted aircraft.
This guidance for 2023 does not include any potential sales of air where as the product is in its final stages of approval and will be updated once the FCC has issued an aerosol can assess initial order and delivery schedules.
Looking ahead, the long term underlying fundamentals of our business remain robust we are well positioned to capitalize on organic and inorganic opportunities and generate strong returns for our internal and external stakeholders going forward.
With that operator, we are ready to take questions.
Thank you.
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Our first question comes from Ken Herbert with RBC capital markets. Please go ahead.
Hey, good afternoon, Nick and Martin.
Afternoon, Ken.
Hey, Nick maybe just to start off as you look at the the EBIT guidance now for the full year you know it still implies obviously, a pretty substantial step up sequentially into the second half.
We're sort of almost halfway through August here can you just talk about the cadence we should expect maybe for the EBITDA in third and fourth quarter and sort of any anything you can say around asset.
Activity here into the third quarter to help with confidence on the EBITDA.
You want to answer that or you want me to answer Yeah. I'll start I think we can say is we already have two 750 sevens that are under contract that will be closing one in Q3 and Q4.
To that we have several whole asset deals that are also already under contract. We noted that we are starting to see a pick up and the availability of U S and material in fact of that material already twenty-five approximately $25 million of that material has already been pre sold so that is giving us confidence on the strength of the second half and we still have a significant.
Amount of additional inventory, that's being flowed through on being made available for sale, so with that notion with the almost $200 million of the over $200 million of feedstock that we have right now and based on the opportunities we're seeing in the commercial market, that's giving us the confidence that we will be increasing and that the second quarter will be the low.
Point and it will start going back to a more normal trajectory for the second half of the year.
Okay. That's helpful and if I could just just on air where it sounds like you know the USAA is comfortable with the proposed changes.
It sounds like the.
Demonstration flights should happen here in a couple of weeks.
You're still confident it sounds like in a in a sort of S. T. C. This year, but but just considering you know some of the challenges. We've had on this program Ah maybe Nick if you can just walk through sort of how you would characterize risk now on timing associated with air where sort of relative to where we were coming out of the first quarter.
Well, we we as you as you as we've discussed and Ive mentioned during prior earnings calls.
The more we fly the airplane the more of the little things pop up some of which are actual issues and some of which are questions. You know it shouldn't be displayed this way should it be discolor and so all throughout the process we've made.
Mine or tweaks to the system to get it to basically make the F. A happier that it is displaying the way they want it to display and even recently one of the display issues that we saw was was within limits, but they didnt like it and they asked us to to get it to make it better and we and we found a way to make it better so.
That unfortunately that took a couple of months to get to that point and we are to that point now every single item. That's been identified by the essays guys can you can't change desk and you make this better we've done you know the last the last two issues.
We've done we showed them in the lab that they worked we actually gets flight testing to verify ourselves at whatever whatever adjustment that they wanted us to make complies with their request and is within the limits that the FAA prescribes. So we've done that all internally how do you think he's ready to it they are ready to start flying they wanted to start flying.
Tuesday of this week, but theres a lot of paperwork that we've got a we've got to give the FAA to catch up to that so it is possible we'll start flying on next week, but if we don't have all the paperwork that we need to the FAA in time, it'll it'll pushback another week, but our expectation at this point based on their they're pushing US now hey, guys where radio.
Slides give us the paperwork, we need in and let's let's start flying first thing that the FAA will do.
Just to verify all of these minor adjustments that we've made.
They've been told about that they can actually see them on.
On the very first hour of flight.
And as long as they've seen it I mean, we've seen it already but as long as they see it they're willing to go ahead and start on that same day continue start on our last set of flight tests.
So expectation is we will demonstrate to them that the adjustments. We made are what they requested on what we've already seen and we will roll it right into our final set of flight tests. So when will that be when will that be finished.
I think that we've been told it to expect that that there was about a week of flying that the FAA will want to see.
And that could start as soon as next week or the week after.
And just finally on that final flight testing the fifth set of tests is that dependent upon certain weather conditions or what would be the gating factors on timing of the last set of test flights.
We don't have to chase whether anymore. So we've already proven the system works and weather so or this is just a operate the airplane in a normal airline type environment start out in one city fly to another city go to another city stop overnight start. The next day, you know flying a different rotation to demonstrate to the EF.
Hey that the airplane is functioning the pilots are able to use the system as they would if they were flying a normal airline type daily operation, It's really just to prove that over the period of time that they observe the airplane during the final set of flight testing that everything works the way. It's the way it has been working with the exception of the changes we've made and that all.
That continues to work throughout the duration of the flight testing.
That's just a reliability portion of it it's not necessarily it's really not to prove the system does what it's supposed to do is to prove that the system works for that period of time without it without an issue. The risk is obviously, if there's a mechanical problem with the airplane, which happens then we had nothing to do with air where that could delay you know if we have to fix it and we can't.
Get it fixed overnight or quickly that could delay the.
The completion of those test flights.
Something else were to come up and we put a lot of flying this airplane, but if something else were to come off that nobody has seen at this point.
Not expect anything to come up but if it did that they could then say guys. We saw something else and we want US. We we like we want to understand that it may not even be a true problem with the with the with the system. It just could be they don't understand it and that's in and we've seen that already where are we.
They thought things were incorrect and we proved to them, but it was within limits, but we made you know we ended up making it better as a result of their questioning some of these issues.
Great. Thanks, Nick I'll pass it back there Okay Youre welcome kit.
Okay.
Our next question comes from Bert.
Stifel. Please go ahead.
Hey, good afternoon, and thank you for the question.
Maybe just following up there on an era, where Nick what do you think would have to happen.
For the FAA to reject an FTC to say ultimately that this product is not allowed to go forward is that a possibility or would it just become a timing issue, where you just keep picking problems and sort of the worst case scenario.
Well because we're at the stage that we're at we've already demonstrated this system performs the way the FAA is prescribed for an enhanced flight vision system.
See there being a risk that the system is not certifiable the risk would be if we continue to have issues that come up where the FAA or whatever maybe they don't understand how something is displaying a particular way we see some other anomaly, we see a failure in the system that says okay, well, Hey, you guys were supposed to prove this thing with operate really.
I believe for a week and we had a problem go back figure out what the root cause analysis of the problem is or was and diamond we want to see it anymore and we'll continue flying after we understand why did you have this problem, we don't expect it but it is possible.
We have assurance, we have we have confidence based on the amount of time, we put on the airplane.
That we're not likely to have.
Repetitive recurring problems in a short period of time the issues that have been discovered it had been discovered over a prolonged series of extensive series of flight testing and some of it some of which was never noticed after hundreds of hours of flight testing.
The issues were so minor and again, it's like the better you make the system more perfect is that.
The easier it is to identify anything that isn't as good as something else and I think that's where we're at I mean, we keep finding little things that even though we're within limits, but but they're not as good as you would think they could be and we find that there's a way to fixed and make them, even better and that's what we've been doing.
So maybe on the flip side of that question, if we were to assume the.
Fifth or final flight tests were to take place the week of August 21st.
I guess the.
Assuming that that seems to be.
That process needs to be pretty straightforward, where you're just flying stimulating the typical flight typical pilot experience.
So after that assuming you were to get through that final test you would assume.
Our expectation is that <unk> will convene admiral and FTC at that is that fair. So if everything were to go well through that period, you could have at SDC.
By October 1st.
I think that's what we've been told that 30 days with no more than 30 days. After we complete our successfully complete our final flight testing.
Will be in a position they will be in a position to issues are SPC could it take longer.
Sure it could take longer should take longer no.
Got it okay, maybe just shifting over to the 75 seven.
Can you just give us an update on how we should think about timing.
Correct me if I'm wrong, you said three sales are expected. This year and then three will be put onto I guess short term leases.
And the remaining five I guess your expectation as the first half of 24, you just give us an update on timing for this and most of them are your expert.
Sure. So the three sales that are projected is Martin had mentioned earlier one of them has already closed or closing the first quarter two more under contract to close this year. We've got deposits got signed contracts airplanes are being.
Basically ready for delivery and the operators livery. So it's those airplanes are committed so that's.
Not to say, we won't sell more but at this point, it's unlike the last two years, where we where we basically had customers that wanted the aircraft and it was it was our ability or ability to make the sale was based on our ability to produce the aircraft.
And get it to the customer so right now we are hunting for customers were in the soft freight market.
We have not anticipated or projected I should say.
More than the three aircraft we have already under contract were in five months left of the year a little over five months left in the year.
Although we are talking to people and not to say that that we couldn't find.
Find somebody that would take all the rest of the aircraft because we've got multiple customers that we're talking to that would take one or all of the remaining aircraft. Just don't have anybody that signed a contract yet and we're not far enough along for us to have a high level of confidence that we're going to be able to do that and the balance of of this year as far as availability of air.
Craft.
We've got.
Initially we thought we would have nine aircraft available. This year, one has already been sold it that would be eight.
Now.
There are a number of the aircraft that are scheduled to be delivered out of conversion <unk>.
Later in the year in November or December could push into the next year and the ones that were scheduled prior to that could push into the later part of the year. So it is possible we'll have as few as six airplanes in total this year available to sell or lease and disk and this calendar year.
Basically because of the of how late it is in the year that we expect to get maybe the fifth or the sixth airplane, maybe we'll end up with with seven but it's tough when you're into the Thanksgiving Christmas New year's period.
To be able to deliver aircraft people for a whole variety of reasons people are getting ready for the.
The the the holiday.
Boom and freight.
Has issues on manpower availability due to vacation scheduling and and so it's and and other jurisdictions as well so.
It is as we get to the last couple of months of the year, especially middle of November on it's just tough to get an airplane delivered if we get one in that timeframe. So that's again the reason why.
A demand as soft so even if I had the demand today I couldn't delivered I don't have the aircraft to deliver.
But.
But the demand assault, that's kind of pushed into next year. So what do we expect to see next year, we expect to see <unk>.
Opportunity to place these aircraft excluding the ones that were already talking to to put on lease potentially more aircraft on lease.
We don't sell that will put the balance on these there's also considerations to look for other avenues to to to move this flight equipment.
We don't have to just move flight equipment has a converted aircraft we have options we can.
We can buy the conversion kits and defer the deliveries until later, we could sell or at least the engines do the deliveries when the market recovers I look the freight market is you know you've heard the Canary in the coal mine and.
Analogy the freight market is soft today as a result of a very soft.
Consumer market for for goods.
Consumers stop spending.
Really starting at the beginning of this year, so you're seeing a much lesser demand for consumer products, which are which are move typically by airfreight and other means but a lot of air freight moves that demand is.
Is down and as a result, the demand for these freighter aircraft today is down however, just like.
Freight is the first to suffer as consumer demand suffers as consumer demand returns phrased as.
You know, it's the first time.
First to recover so.
We expect as whether we go into any type of soft economic environment, and I don't even use the word recession or soft landing because I don't know what it will be it will be.
[noise] frayed will be the first to come out. So the later availability of these aircraft could dovetail well into demand, which we expect to improve as we get into 2024, but.
It's R. It's only a guess to know when we will see a dramatic improvement in cargo demand. It's I certainly don't see it this year.
Got it Okay, just a clarification and then I'll I'll pop over but as we think about the guidance you've put out there you've already sold one of the 77, so you're assuming the other two that are under contract.
Three that go on to lease and then the balance is USA I'm stepping up on Seedstock acquisition.
USA I'm stepping up continued growth on our MRO operations on both on airport and off Airport you know.
Component MRO is growing at a at a very pass very fast pace.
An airport Amarillo has stayed strong almost at capacity were looking will be adding more capacity with our millington facility in January that's 24, but.
We're looking to find ways to continue to add additional labor to our on airport Mro's and both good year and and Roswell to increase the throughput from out of those facilities.
So we see we see USA picking up we see an airport MRO staying strong and growing we see our component MRO business, saying you know growing at a very fast clip, we see our landing gear.
<unk>.
We could be getting into an issue with.
With with demand with the amount of demand we're seeing on the on the landing gear M. R O side that.
We'll have to figure out how to how do we accommodate the demand how do we gear up our capacity to accommodate the demand now we have used third party Mro's Ado landing gear work and will continue to do that if we can't do it but you know.
We're very excited about our ability to grow our.
Landing gear M R not to mention Airwear, which we expect to get certified and we expect to start seeing sales so whether we get those this year or not.
We didn't put any era, where sales and our revised forecast our guidance for 2000 twenty-three yet that is still possible, but it wouldn't be of a scale that would make a material difference.
Yep.
Welcome.
Our next question comes from feet Osterland wished <unk> Securities. Please go ahead.
Hey, Nick Martin <unk>. This evening, thanks for taking our questions.
Frequently I had a couple of <unk>.
First of all had a coupla on the U S. M markets, how much did your sales of use them grow year over year in the second quarter and are there any particular areas or products, where you saw relative strength for those <unk>.
I'm Gonna, let Martin answer that so he's he's digging out as the.
The amount is paper so he doesn't have to remember yeah growth and use them for the quarter was up 12% overall and that's kind of consistent with year to date, sorry, it's running around 10% and again, that's without the benefit of the feedstock. That's currently being repaired that we've had a bit of delay and so we expect that growth to be stronger.
And the second half of the year.
Let me elaborate a little further on that [noise].
As I mentioned, we've been using our balance sheet.
Really since the beginning of the year to acquire feedstock that.
Is going through an extended prolonged repair cycle and in many cases as much as a multiple of time from what it used to take pre COVID-19 to get U S M repaired and available for sale.
So we've been playing cash to buy inventory or to buy feedstock.
That in some pieces of which will will turn into Usn.
Pushing it through the repair cycle, which is which is very extended.
And.
The bulk of that material that we started buying last year that was not related to the 757 program is about $40 million last year and then the 107 million I think we announced in the first quarter that we had under contract for the first quarter.
We are just starting to see that material come available for sale now. So we've had it we we put it through the process to get it in a position to.
Turn into serviceable use them.
We fed the repair cycle machine, we suffered through the delayed extended repair cycle and we're just now starting to see the benefits of that so the so the relatively nominal improvement over last year and this quarter. It really is not a result is not a function of.
A lack of demand it's a function of the lack of availability of the feedstock coming out of U S. M, which is why we which is why we have such strong confidence in the second half of the year and into two and into 2024 at the rate we're buying.
That feedstock that we will see a substantial growth in R. U S M business, because all that material we've invested in in the repair cycle is now starting to come out and it will continue to come out all through the years I've said this before and I stand by the statement.
There is not enough good U S M to satisfy the demand for you is that the key is can you buy it at the right price and can you stomach. The long repair cycle. Then it takes two seated into or impair machine and wait until you get it out too.
23456 months later.
Very helpful color. Thank you and then I just wanted to ask one on Airwear as well just I'm assuming that the best case, you've talked about happens in the S. D. C is issued sometime near the end of third quarter or sometime in the fourth quarter. How quickly after that point could sales start to materialize are there any supply chain considerations here.
That would make sales initially rant slowly or is there a significant inventory of shipments that you could get ready to go soon after you get that approval.
So I can only speak for the installation kit that we had and I can tell you that.
A large order from from an airline will require a very prolonged.
Asian cycle getting the aircraft ready for.
Use of the system is just if you have an airline that's got hundreds of airplanes. There's just no way, we can reconfigure all those airplanes too except era, where in a month, it's kind of it's kind of spread out over the over the course of a year now we've already our plan was to have over 100 kids available this year.
There were well under way, we will probably do 150 160 kids that we have this year. So we'll be in a position by the end of this year to start installing you know.
150, plus kids, starting this year and moving into 2024 now that's the kiss and we can we can certify an airplane with a with a few sets of rotable components from Elbert Elbit will has its own lead time issues. You know there are built to order company as well.
We are but we're kind of getting ahead of it and making sure that we've got enough install kids to prime the pump and start putting getting airplanes capable of flying with air where system installed.
[noise] elbit when it gets an order a large order it will fear up its supply chain, which is just typical of the way. These large Oems do that supplied these this type of equipment they'll gear up their supply chain as fast as they can to big company I Dunno 8 billion nine, but I don't know exactly what the number is but it's it's it's a it's a multi.
Billion dollar company that has the capability and experience to gear up their supply chain that may or may not have anything to do with our ability to to sell our portion of the kid because that has to we've got to get the kids installed into airplanes first and in the case of a large order airlines are telling us well. They don't they don't really Wanna have you know a small.
Group of these airplanes flying.
With the system installed they don't want to start flying it until they have have to have their pilots all their pilots trained and have their aircraft equipped so from an elbow point of view that could take you know that could take a while to gear up their supply chain.
With respect to a smaller group of of.
Of airplanes and airlines somebody somebody that has 10 2030 40, even less than 100, you know that could come relatively quickly on our part we could satisfy that whole order.
We have we have order kids, we mentioned earlier that that we that we ordered $33 million worth of kids from Albert This year, which we expect to take delivery of it if the demand is there for this year.
Again, it's going to put pressure on Albert to produce the kids and you know we've been assured that they they can suit they can't meet the orders that we place with them and all we gotta do is get the orders so.
I don't know if that answers that answers your question, but for a small order we can start delivering this year, how many <unk>.
10, 2030, I think it's I think if you you need to thinking that order of magnitude.
Thanks, a lot very helpful color I'll pass it along here, Okay, you're welcome.
Ladies and gentlemen, just as a reminder, if you would like to ask a question. Please press one on your telephone keypad.
Our next question comes from Calvin Cannon Cohen and company. Please go ahead.
Yeah I was wondering if the EBIT a cut this year.
<unk>.
Apples to apples can we just add that to whatever the base level was going to be next year.
Because of the timing.
Peter ask conversions I E. It's just a push out and so.
I'll have a disproportionately soft twenty-three and a disproportionately strong twenty-four excluding era, where.
I think as we noted as we're looking at a soft freida market, we need to reevaluate, whether we will have the opportunity to sell those ptos as as full acid or the most advantageous avenue will be to put those aircraft on lease and as you know obviously that has a different financial impact in the short term overall, so we're still evaluate.
[noise] that so it's not a direct shift from one period to the other one I can't say based on on our value that we've put out we bought these athletes are even we put him on a leash there'll be lucrative Lisa is higher than the industry at 1% monthly lease rate factor. So we have to go down the lease path that it'll still be a product for all avenue for us, but it might generate a different result.
In the fiscal year.
Can you quantify the ta.
Monetization not happening this year.
Three aircraft.
We we haven't provided specific margin profiles on the overall assets what I can't say is if you look at looking at the midpoint. The overall decrease that is almost all attributed to the margins on those three overall assets without getting into specifics on specific margins on those specific assets.
And then Martin could you maybe.
Characterize rose based on maybe the last Coupla years, Ethan what's the base level of <unk> is in the business X.
Aircraft sales and engine sales I know, it's part of the mix, but I'm just curious if we were to strip that out what.
What's the underlying business does in terms of MRO and and the like.
I think as as naked as noted that that is challenging and that if you compare back to the period of Covid, obviously, our component I'm Rose R. U S M business pretty much everything that supported the the the kind of commercial passenger side was off and that was offset in fact, we had a mixed on being majority passenger driven two cargo driven.
Kind of overall, so we were able to react and go where the demand was which was in the passenger overall market and now we're seeing kind of a shift back into the passenger side as as much stronger demand will shift back into those overall items. So it's kind of hard to kind of know what a traditional item or excluding whole acids cause.
[noise] again whole acid is just one way that we monetize or feedstock and had we not done that we would've monetize those assets through the U S Sam or leasing channel.
And and last one for me when you guys acquired the 7571 of the.
Advantages you had was they were parked at a facility you control. It do you have anything in the pipeline.
That might be it that's currently parked at one of your centers.
That could be sold and that could also offer a kind of this.
Hometown advantage, if you will because you'll know the acid upfront or.
The competition and the like I didn't know if anything was coming out of a desert.
That might be for sale that's within your facilities.
And the south whatnot not at the scale of the 757 transaction, we did with American that that was a big that was a big chunk of your transaction, but there are aircraft that are located in our facilities both in Goodyear and Roswell, both both places.
That were aware of and that you know where where where.
We're submitting bids on those aircraft in those locations. We are closing on aircraft, they're located in our facility and we have aircraft that are flying into our facility that ultimately will end up being Ah the soldiers as part of an aircraft. So.
What kind of have a first.
Good look understanding of the condition of those aircraft as they get there with and people are flying airplanes into our facility knowing that we're interested in buying them and they just like to note. The fact that well at least I'll put it in their facility if they if they're the best bit are there it's right there it'll be easy for them to close.
And you know I think that's what advantage that we have.
Big Chunky group of aircraft not yet a bunch of individual ones yes.
No that I think are definitely our advantage now is the ability to buy equipment that needs work I think we've noted in her in the queue one call that the material that's coming out right now it's not material that easily can be put back in service. So now our competitive advantage is truly using our multi dimensional model and that we can extract the value much better than folks.
That type of equipment and that is truly being a competitive advantage at this point in the cycle.
I appreciate it thank you guys.
You're welcome Gotham.
There are no further questions at this time.
I would not like just turned it back over to the nurse.
C O for closing remarks, you Sir go ahead.
Okay, well, thank you to everyone on the mind for joining our call today and for your interest in Aircell. There are a few points that I feel should be reiterated.
Our business is purpose built and multidimensional, which enables us to drive growth and profitability across cycles, and even when certain parts of our business are under significant cyclical pressure.
This isn't always apparent in Arkansas dated results as our diversification and end to end solution allow us to shift quickly and efficiently into areas of strength.
This was most pronounced as we navigated through the pandemic as we were able to pivot early into the cargo market that had record demand, which drove record results through the second half of 2022.
Even it has the commercial side of the business was significantly impaired by travel restrictions.
These effects have unwound over the past 12 months and our go forward mix of business and growth drivers are substantially evolved as a result, but our prospects to add value to all stakeholders has never been stronger.
Our commercial side of the business has demonstrated strong growth consistently has it recovers we are entering the second half with record feedstock to support commercial demand we have expanded our MRO capacity to enable further growth. We are working diligently on our M&A program to expand capacity and <unk>.
Capability and the eventual certification of era, where will further drive our results.
These are the primary factors that give us confidence into the second half and enter 2024 and.
And we look forward to keeping you guys updated on our progress.
Thanks again.
Today's teleconference. You may disconnect your lines at this time, thank you for your participation.
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