Q2 2024 AerSale Corp Earnings Call

Rachel Smith: Yes, this is going to be under Rachel Smith and the company. The company calling from is Aira, A-I-E-R-A. Thank you. Please hold for my call. Thank you so much. BF-WATCH TV 2021 BF-WATCH TV 2021, [music] BF-WATCH TV 2021, BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 BF- All participants will be in a listen-only mode.

Speaker Change: Good day and welcome to the Aerosol Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then 1 on your touch-tone phone.

Speaker Change: After today's presentation, there will be an opportunity to ask questions.

Speaker Change: To ask a question, you may press star, then 1 on your touchtone phone.

Operator: To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Kristen Gallagher, HR Director. Please go ahead.

Speaker Change: To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Kristen Gallagher, HR Director. Please go ahead.

Kristen Gallagher: Good afternoon. I'd like to welcome everyone to Airsales' second quarter 2024 earnings call. We are conducting the call today with Nick Finazzo, Chief Executive Officer, and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance.

Kristen Gallagher: Good afternoon. I'd like to welcome everyone to Ayrsales' second quarter 2024 earnings call. Conducting the call today are Nick Finazzo, Chief Executive Officer, and Martin Garmendia, Chief Financial Officer.

Kristen Gallagher: These statements are neither promises nor guarantees but involve known and unknown risks 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 Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 8, 2024, and its other filings with the SEC.

Speaker Change: Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance.

Speaker Change: These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results.

Speaker Change: Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section on Form 10-K for the year-ended December 31, 2023,

Speaker Change: filed with the Securities and Exchange Commission on March 8, 2024, and its other filings with the SEC.

Operator: 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 made on this call.

Kristen Gallagher: These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available in the Investor section of the AirSail website at ir.airsail.com. With that, I'll turn the call over to Nick Finazzo. Thank you, Kristen.

Speaker Change: 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.

Speaker Change: We'll also refer to non- GAAP measures that we view as important in assessing the performance of our business.

Speaker Change: A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investor section of the Airsale website at ir.airsale.com.

Nick Finazzo: Good afternoon, and thank you for joining our call. I'd like to begin today with a summary of the quarter and a review of our strategic objectives before turning the call over to Martin for a review of the numbers in greater detail. Our business continued to outperform prior year levels driven by stronger feedstock acquisitions in the back half of 2023. However, this improvement, notwithstanding, our overall operating performance is well short of our plan as we have much greater capacity to output sellable inventory than we are putting in through the acquisition of feedstocks.

Nick Finazzo: With that, I'll turn the call over to Nick Finazzo. Thank you, Kristen. Good afternoon, and thank you for joining our call. I'd like to begin today with a summary of the quarter and a review of our strategic objectives before turning the call over to Martin for a review of the numbers in greater detail.

Nicolas Finazzo: Our business continued to outperform prior year levels driven by stronger feedstock acquisitions in the back half of 2023. This included $17.9 million of whole asset sales in 2024 compared to $17.6 million in the prior year, driven by a steady inflow of sellable material post-repair, increased volume at our MRO facilities, and incremental sales of air safes. Adjusted EBITDA also improved to a $3.2 million gain compared to a $500,000 loss in 2023.

Martin Garmendia: Our business continued to outperform prior year levels driven by stronger feedstock acquisitions in the back half of 2023.

Martin Garmendia: This improvement, notwithstanding, our overall operating performance is well short of our plan as we have much greater capacity to output sellable inventory than we are inputting through the acquisition of feedstocks.

Nick Finazzo: In total, we reported second quarter revenue of $77.1 million, which was up 11.2% year over year from $69.3 million. This included $17.9 million of whole asset sales in 2024 compared to $17.6 million in the prior year.

Martin Garmendia: In total, we reported second quarter revenue of $77.1 million, which was up 11.2% year-over-year from $69.3 million.

Martin Garmendia: This included $17.9 million of whole asset sales in 2024 compared to $17.6 million in the prior year.

Nick Finazzo: Excluding whole assets entirely, our revenue improved 14.3%, driven by a steady inflow of sellable material post-repair, increased volume at our MRO facilities, and incremental sales of air safes. Adjusted EBITDA also improved to a $3.2 million gain compared to a $0.5 million loss in 2023. As we remind investors every quarter, due to the nature of our business and the impact of whole asset sales, our revenue levels tend to be volatile quarter to quarter, and we believe our business is best assessed based on aggregate performance over a longer period of time with a focus on feedstock levels and the value our team is able to extract from these investments.

Martin Garmendia: Excluding whole assets entirely, our revenue improved 14.3%.

Martin Garmendia: driven by a steady inflow of sellable material post-repair, increased volume at our MRO facilities, and incremental sales of AirSafe.

Martin Garmendia: Adjusted EBITDA also improved to a $3.2 million gain compared to a $500,000 loss in 2023.

Martin Garmendia: as we remind investors every quarter.

Martin Garmendia: due to the nature of our business and the impact of whole asset sales.

Martin Garmendia: Our revenue levels tend to be volatile quarter to quarter and we believe our business is best assessed based on aggregate performance over a longer period of time with a focus on feedstock levels and the value our team is able to extract from these investments.

Nick Finazzo: Before turning to our segment-level discussion, I'd like to take a moment to zoom out and assess where we are in our traditional core business, putting aside prospects for our revolutionary enhanced flight vision system, AirAware. I'll also provide some color on what we're doing to address challenges and how we intend to maximize current opportunities that are driving favorable improvement. I'll start with TechOps, where our MRO business has been a consistent performer and is well diversified to satisfy customer needs regardless of the commercial passenger or cargo backdrop.

Martin Garmendia: Before turning to our segment level discussion, I'd like to take a moment to zoom out and assess where we are in our traditional core business.

Martin Garmendia: Putting aside prospects from our revolutionary enhanced flight vision system, AeroAware.

Nicolas Finazzo: I'll also provide some color on what we're doing to address challenges and how we intend to maximize current opportunities that are driving favorable improvement. I'll start with Tech Ops, where our MRO business has been a consistent performer and is well diversified to satisfy customer needs regardless of the commercial passenger or cargo backdrop. We've made it a strategic priority to expand our MRO capacity through three projects that are also slated to come online toward the end of 2024 and into 2025. With regard to the volatility created by whole asset sales, we recognize the desirability of smoothing our operating performance from quarter to quarter.

Martin Garmendia: I'll also provide some color on what we're doing to address challenges and how we intend to maximize current opportunities that are driving favorable improvements.

Martin Garmendia: I'll start with TechOps, where our MRO business has been a consistent performer and is well diversified to satisfy customer needs regardless of the commercial passenger or cargo backdrop.

Nick Finazzo: In times of heightened airline capacity, our facilities are busy performing aircraft recommissioning services and routine maintenance procedures on aircraft and their components. As end markets decline, we serve as customers through aircraft decommissioning and storage services, as well as continuing to service aircraft components to allow operators to cost-effectively operate their remaining fleets. This has led to consistent performance across cycles as seen through the trough of the pandemic and through the current recovery.

Martin Garmendia: In times of heightened airline capacity, our facilities are busy performing aircraft recommissioning services and routine maintenance procedures on aircraft and their components.

Martin Garmendia: As end markets decline, we service customers through aircraft decommission and storage services, as well as continuing to service aircraft components to allow operators to cost-effectively operate their remaining fleets.

Martin Garmendia: This has led to consistent performance across cycles, as seen through the trough of the pandemic and through the current recovery.

Nick Finazzo: We've made it a strategic priority to expand our MRO capacity through three projects that are also slated to come online toward the end of 2024 and into 2025. First, we're in the final stages of installing the latest generation of equipment for the test and overhaul of pneumatic components at our Miami, Florida, accessory shop. This project expands our capabilities beyond just servicing hydraulic components. We expect adding capabilities on pneumatic components will more than double our existing revenue base, with new customers bringing us repair work on mid-life and current generation aircraft components.

Martin Garmendia: We've made it a strategic priority to expand our MRO capacity through three projects that are also slated to come online toward the end of 2024 and into 2025.

Martin Garmendia: First, we're in the final stages of installing the latest generation of equipment for the test and overhaul of pneumatic components at our Miami, Florida accessory shop.

Martin Garmendia: This project expands our capabilities beyond just servicing hydraulic components.

Martin Garmendia: We expect adding capabilities on pneumatic components will more than double our existing revenue base, with new customers bringing us repair work on mid-life and current generation aircraft components.

Nick Finazzo: Second, after a year and a half of planning and construction, we're also in the final stages of building out our new Miami, Florida, Aerostructures facility, which increases our footprint to almost 90,000 square feet from approximately 30,000 square feet at our old facility, while adding more state-of-the-art equipment and capabilities to increase sales and throughput. And third, as we've discussed in the past, we're in the process of filling volume at our Millington, Tennessee, on-airport MRO facility, which came online in the second quarter and consists of a single 112,000-square-foot hangar with two narrow-body bays.

Martin Garmendia: Second, after a year and a half of planning and construction, we're also in the final stages of building out our new Miami, Florida, Aerostructures facility.

Martin Garmendia: which increases our footprint to almost 90,000 square feet from approximately 30,000 square feet at our old facility while adding more state-of-the-art equipment and capabilities to increase sales and throughput.

Martin Garmendia: And third, as we've discussed in the past, we're in the process of filling volume at our Millington, Tennessee, on-airport MRO facility, which came online in the second quarter and consists of a single 112,000 square foot hangar with two narrow-body bays.

Nick Finazzo: This location provides us with on-airport capabilities in a central location of the United States and access to a qualified labor pool that will allow us to quickly scale up the facility. As these facilities begin to come online, although we expect they will contribute limited revenue in 2024, we anticipate significant step-ups throughout 2025, in total and at full capacity, which will occur incrementally as we build volume. We expect these expanded facilities to add at least $50 million in annual sales over the next few years.

Martin Garmendia: This location provides us with on-airport capabilities in a central location of the United States and access to a qualified labor pool that will allow us to quickly scale up the facility.

Martin Garmendia: As these facilities begin to come online, although we expect they will contribute limited revenue in 2024, we anticipate significant step-ups throughout 2025.

Martin Garmendia: In total, and at full capacity, which will occur incrementally as we build volume, we expect these expanded facilities to add at least $50 million in annual sales over the next few years.

Nick Finazzo: With regard to the volatility created by whole asset sales, we recognize the desirability to smooth our operating performance quarter to quarter. As we've discussed, whole asset sales add significant dollars to EBITDA given the large transaction value, but they come at the expense of quarterly volatility. To some extent, this will always be the case for AirSail, as we believe it is prudent to include whole assets in our purpose-built model to maximize return on an investment.

Martin Garmendia: With regard to the volatility created by whole asset sales.

Martin Garmendia: We recognize the desirability to smooth our operating performance quarter-to-quarter.

Martin Garmendia: As we've discussed, whole asset sales add significant dollars to EBITDA given the large transaction value, but come at the expense of quarterly volatility.

Martin Garmendia: To some extent, this will always be the case for AirSail, as we believe it is prudent to include whole assets in our purpose-built model to maximize return on an investment.

Nick Finazzo: That said, our long-term strategic plan calls for greater focus on building our specialized leasing platform and increasing volume through the sale of USM. The effect of this initiative will take some time as we build the feedstock and deploy the assets, but should aid in predictability in our operations over the long term. Regarding USM, market demand is very robust, and end user prices are favorable.

Martin Garmendia: That said, our long-term strategic plan calls for greater focus on building our specialized leasing platform and increasing volume through the sale of USM.

Martin Garmendia: The effect of this initiative will take some time as we build the feedstock and deploy the assets, but should aid in predictability into our operations over the long term.

Nicolas Finazzo: Regarding USM, market demand is very robust, and end user prices are favorable. We think it's strategically critical to remain disciplined in our acquisition approach as the environment can and does turn quickly as passenger and cargo demand fluctuates and new aircraft become available. In 2023, we were successful in deploying more than $130 million of capital to feedstock acquisitions, which have been steadily placed into the repair process and have resulted in a continuous flow of sellable USM, fueling our growth in 2024. Our timing was perfect to launch the 757 conversion program and a fantastic financial success in the early stages of the COVID pandemic, marking one of aviation's darkest periods.

Speaker Change: Regarding USM, market demand is very robust and end-user prices are favorable.

Nick Finazzo: However, despite high demand and favorable pricing, we've been in a tight feedstock environment for some time now, as fewer used aircraft are available, and competition is elevated amid reduced new aircraft OEM production and engine reliability issues. As we've discussed, feedstock is the lifeblood of our asset management business, so while we remain successful in finding and securing assets that can reach our ROI hurdles and are monetizing that inventory, which has driven improvements in our year-over-year results, it has been at a lower aggregate level relative to our available capacity. These time periods simply do not last forever, and we would anticipate improvement as OEM production and deliveries alleviate some of the aftermarket supply-side pressure.

Martin Garmendia: However, despite high demand and favorable pricing, we've been in a tight feedstock environment for some time now, as fewer used aircraft are available and competition is elevated amid reduced new aircraft OEM production and engine reliability issues.

Martin Garmendia: As we've discussed, feedstock is the lifeblood of our asset management business.

Martin Garmendia: so while we remain successful in finding and securing assets that can reach our roi hurdles and are monetizing that inventory which has driven improvements in our year-over year results it has been at a lower aggregate level relative to our available capacity

Martin Garmendia: These time periods simply do not last forever, and we would anticipate improvement as OEM production and deliveries alleviate some of the aftermarket supply-side pressure.

Nick Finazzo: We think it's strategically critical to remain disciplined in our acquisition approach, as the environment can and does turn quickly as passenger and cargo demand fluctuates and new aircraft become available. In 2023, we were successful in deploying more than $130 million of capital to feedstock acquisitions, which have been steadily placed into the repair process and have resulted in a continuous flow of sellable USM, fueling our growth in 2024. Year-to-date, we've sold 46.6 million units of USM, which is a 24.6 increase from the prior year.

Martin Garmendia: We think it's strategically critical to remain disciplined in our acquisition approach, as the environment can and does turn quickly as passenger and cargo demand fluctuates and new aircraft become available.

Speaker Change: In 2023, we were successful in deploying more than $130 million of capital to feedstock acquisitions, which has been steadily placed into the repair process and has resulted in a continuous flow of sellable USM, fueling our growth in 2024.

Martin Garmendia: Year-to-date, we've sold 46.6 million of USM, which is a 24.6% increase from the prior year.

Nick Finazzo: Longer term, and as supply-side dynamics allow, we have the capacity to more than double our feedstock program, which will serve to substantially improve our quarterly operating performance, allowing us to more consistently exceed our fixed-cost hurdle. Lastly, on our 757 passenger to freighter conversion program, we were early to the market during the pandemic and enjoyed multiple years of elevated asset prices as cargo carriers scrambled to find lift during a period where demand far exceeded the supply of available cargo capacity. This demand was further amplified by stay-at-home orders that fueled more volume of consumer goods through e-commerce channels.

Martin Garmendia: Longer term, and as supply-side dynamics allow, we have the capacity to more than double our feedstock program, which will serve to substantially improve our quarterly operating performance, allowing us to more consistently exceed our fixed-cost hurdles.

Martin Garmendia: lastly on our seven and fifty seven passenger to freaterghter conversion program we were early to the market during the pandemic and enjoyed multiple years of elevated asset prices as cargo carriers scrambled to find lift during a period where demand far exceed the supply of available cargo capacity

Martin Garmendia: This demand was further amplified by the stay-at-home orders that fueled more volume of consumer goods through e-commerce channels.

Nick Finazzo: Our timing was perfect to launch the 757 conversion program and a fantastic financial success in the early stages of the COVID pandemic, marking one of aviation's darkest periods. It carried our performance during extremely challenging times, resulting in one of the most successful programs in our company's history. Fast forwarding 18 months to today, we have seven remaining P2F converted 757s. But the demand backdrop has dramatically slowed for these types of aircraft as consumer trends normalized following the pandemic.

Martin Garmendia: Our timing was perfect to launch the 757 conversion program and a fantastic financial success in the early stages of the COVID pandemic, marking one of aviation's darkest periods.

Martin Garmendia: It carried our performance during extremely challenging times, resulting in one of the most successful programs in our company's history.

Speaker Change: Fast-forwarding 18 months to today, we have seven remaining P2F-converted 757s, but the demand backdrop has dramatically slowed for these types of aircraft as consumer trends normalized following the pandemic.

Nick Finazzo: This has led to a cooling of end-market demand for 757 freighters, which has slowed the monetization of these remaining assets. However, this effect happens in the normal ebbs and flows of supply and demand in the used aircraft market, and there remains a long-term use case for these assets. We're fortunate that within the 757 family of converted freighter aircraft, ours are among the youngest in age and the most recently converted 757s available on the market and, therefore, have a significant useful life and economic benefits over the much older existing 757 fleet.

Martin Garmendia: This has led to a cooling of end market demand for 757 freighters, which has slowed the monetization of these remaining assets.

Nicolas Finazzo: This effect happens in normal ebbs and flows of supply and demand in the used aircraft market, and there remains a long-term use case for these assets. After an 18-month lull in demand, customer interest in these aircraft is returning, particularly as cargo demand for the market niche R-757s are ideally suited for is recovering. We'll continue to monetize this flight equipment as we market to customers intent on expanding their existing fleets, upgrading from older equipment, or starting a new business through the sale or lease of whole aircraft or their engines. And three, additional stability through the expansion of our specialized lease and USM portfolio. Excluding whole asset sales in both periods, segment-level sales grew 21.1%.

Martin Garmendia: This effect happens in normal ebbs and flows of supply and demand in the used aircraft market, and there remains a long-term use case for these assets.

Martin Garmendia: We are fortunate that within the 757 family of converted freighter aircraft, ours are among the youngest in age and the most recently converted 757s available on the market and therefore have a significant useful life and economic benefits over the much older existing 757 fleet.

Nick Finazzo: After an 18-month lull in demand, customer interest in these aircraft is returning, particularly as cargo demand for the market niche R-757s are ideally suited for is recovering. We'll continue to monetize this flight equipment as we market to customers intent on expanding their existing fleets, upgrading from older equipment, or starting a new business through the sale or lease of whole aircraft or their engines. Taken together and looking through a longer-term lens, we expect to emerge as a stronger, more stable company driven by the following strategic priorities. One, a strengthened balance sheet as we monetize the remaining 757 freighters, enhancing our financial capacity to acquire more feed. 2.

Speaker Change: After an 18-month lull in demand, customer interest in these aircraft is returning, particularly as cargo demand for the market niche R-757s are ideally suited for is recovering.

Speaker Change: We will continue to monetize this flight equipment as we market to customers intent on expanding their existing fleets, upgrading from older equipment, or starting a new business through the sale or lease of whole aircraft and or their engines.

Speaker Change: Taken together and looking through a longer-term lens, we expect to emerge as a stronger, more stable company, driven by the following strategic priorities.

Martin Garmendia: One, a strengthened balance sheet as we monetize the remaining 757 freighters, enhancing our financial capacity to acquire more feedstock.

Nick Finazzo: A larger, more sophisticated MRO operation with an expanded footprint that will provide more predictable and recurring revenue. And three, additional stability through the expansion of our specialized lease and USM portfolio. These initiatives are designed to enhance our baseline revenue substantially above our fixed cost hurdles and smooth out quarterly volatility. Now, turning to our segments, and beginning with asset management, second quarter sales were 41.8 million, which increased 12.8% year over year.

Martin Garmendia: 2. A larger, more sophisticated MRO operation with an expanded footprint that will provide more predictable and recurring revenue.

Martin Garmendia: and three, additional stability through the expansion of our specialized lease and USM portfolios.

Martin Garmendia: These initiatives are designed to enhance our baseline revenue substantially above our fixed cost hurdles and smooth out quarterly volatility.

Martin Garmendia: Now, turning to our segments and beginning with asset management, second quarter sales were 41.8 million, which increased 12.8% year over year.

Nick Finazzo: Stronger revenue in the quarter mostly stemmed from better USM volume and an increase in engine leasing, as well as stable whole asset sales year over year. Excluding whole asset sales in both periods, segment level sales grew 21.1%. In the quarter, we sold five engines compared to four engines and two unserviceable airframes in the year-ago period. Margin on current sales were 7.6% better than in the prior year as a result of improved market demand.

Martin Garmendia: Stronger revenue in the quarter mostly stemmed from better USM volume and an increase in engine leasing, as well as stable whole asset sales year-over-year.

Martin Garmendia: Excluding whole asset sales in both periods, segment level sales grew 21.1%.

Nicolas Finazzo: In the quarter, we sold five engines compared to four engines and two unserviceable airframes in the year-ago period. Margin on current sales were 7.6% better than in the prior year as a result of improved market demand. Engineered Solutions also contributed to growth in the quarter, as we began delivering AirSafe kits to customers needing to meet regulatory deadlines to comply with an FAA Airworthiness Directive targeting aircraft fuel quantity indication system wiring, for which AirSafe is a cost-effective and efficient solution. We are continuing our marketing efforts on this project.

Martin Garmendia: In the quarter, we sold five engines compared to four engines and two unserviceable airframes in the year-ago period.

Martin Garmendia: Margins on current sales were 7.6% better than in the prior year as a result of improved market demand.

Nick Finazzo: Turning to our tech ops segment, second quarter sales continued to grow amid a strong commercial aerospace backdrop; segment revenue increased 9.4% to $35.3 million compared to the year-ago period. Growth was fairly widespread across our facilities, as we took advantage of available capacity.

Martin Garmendia: Turning to our TechOps segment, second quarter sales continued to grow amid a strong commercial aerospace backdrop. Segment revenue increased 9.4% to $35.3 million compared to the year-ago period.

Martin Garmendia: Growth was fairly widespread across our facilities as we took advantage of available capacity and, as I noted earlier, we expect to begin to see sales resulting from our incremental capacity investments toward the end of 2024 and into 2025.

Nick Finazzo: And, as I noted earlier, we expect to begin to see sales resulting from our incremental capacity investments toward the end of 2024 and into 2025. Engineered Solutions also contributed to growth in the quarter, as we began delivering AirSafe kits to customers needing to meet regulatory deadlines to comply with an FAA Airworthiness Directive targeting aircraft fuel quantity indication system wiring, for which AirSafe is a cost-effective and efficient solution. We expect airsafe sales to continue to increase in the back half of the year with an incremental step-up in 2025 and into 2026 as operators meet a November 2026 compliance deadline.

Speaker Change: Engineered Solutions also contributed to growth in the quarter as we began delivering air safe kits to customers needing to meet regulatory deadlines to comply with an FAA Airworthiness Directive targeting aircraft fuel quantity indication system wiring.

Speaker Change: for which AirSafe is a cost-effective and efficient solution.

Speaker Change: We expect airsafe sales to continue to increase in the back half of the year, with an incremental step up in 2025 and into 2026 as operators meet a November 2026 compliance deadline.

Nick Finazzo: To date, we have a backlog of over $13 million in orders for Airsafe and are continuing our marketing efforts on this project. I encourage anyone interested in understanding more about this product to view our Airsafe installation videos available on the Aircel website.

Speaker Change: To date, we have a backlog of over $13 million in orders of AirSafe and are continuing our marketing efforts on this project.

Nicolas Finazzo: I encourage anyone interested in understanding more about this product to view our airsafe installation videos available on the Aircel website. With some of our largest potential customers, we have a nice head start as we've been familiarizing them with the product through the approval process for several years. We look forward to updating you on our future progress. Now, I'll turn the call over to Martin for a closer look at the numbers. Martin? Thanks, Nick.

Speaker Change: I encourage anyone interested in understanding more about this product to view our airsafe installation videos available on the Aircel website.

Nick Finazzo: Turning to an update on Errorware, customer feedback continues to be overwhelmingly positive, and within our active sales pipeline, we're making progress with our potential launch customers. As we noted last quarter, the addressable market is diverse in size and types of operators, and each has a different approval process. With some of our largest potential customers, we have a nice head start as we've been familiarizing them with the product through the approval process for several years.

Speaker Change: Turning to an update on Errorware, customer feedback continues to be overwhelmingly positive and within our active sales pipeline we're making progress with our potential launch customers.

Speaker Change: As we noted last quarter, the addressable market is diverse in size and types of operators, and each has a different approval process.

Speaker Change: With some of our largest potential customers, we have a nice head start as we've been familiarizing them with the product through the approval process for several years. Other potential customers are just getting to know Airware since FAA approval last December .

Nick Finazzo: Other potential customers are just getting to know Airware since FAA approval last December. The commercialization time is proving to be much longer than we originally anticipated and highly dependent on customer availability. However, based on continued feedback, we remain confident that it is a question of when, not if, operators begin to adopt airware.

Speaker Change: The commercialization time is proving to be much longer than we originally anticipated and highly dependent on customer availability. However, based on continued feedback, we remain confident that it is a question of when, not if, operators begin to adopt airware.

Nick Finazzo: We'll be busy in the third quarter with multiple customers scheduled for visits or flight demonstrations, and we're encouraged that in several cases, these are with a broader group of internal decision-makers at the prospective customers. In closing, our business is improving from the lows of 2023 based on available ready-to-sell inventory flowing from our feedstock acquisitions, and we're optimistic about the back half as new MRO facilities begin to come online and drive incremental revenue and margins.

Speaker Change: We will be busy in the third quarter with multiple customers scheduled for visits or flight demonstrations and we are encouraged that in several cases it is with a broader group of internal decision makers at the prospective customers.

Speaker Change: In closing, our business is improving from the lows of 2023 based on available ready-to-sell inventory flowing from our feedstock acquisitions, and we're optimistic about the back half as new MRO facilities begin to come online and drive incremental revenue and margin.

Nick Finazzo: We're committed to driving cash flow through the monetization of our last 757s and remain disciplined in our capital allocation as we navigate through a challenged supply side for feedstock. I want to thank our dedicated employees for their hard work and our investors for their continued support. We look forward to updating you on our future progress. Now, I'll turn the call over to Martin for a closer look at the numbers.

Speaker Change: We're committed to driving cash flow through the monetization of our last 757s and remain disciplined.

Speaker Change: in our capital allocation as we navigate through a challenged supply side for feedstock.

Speaker Change: I want to thank our dedicated employees for their hard work and our investors for their continued support.

Speaker Change: We look forward to updating you on our future progress. Now, I'll turn the call over to Martin for a closer look at the numbers. Martin? Thanks, Nick. Second quarter revenue was $77.1 million, which included $17.9 million of flight equipment sales, comprising of five engines.

Martin Garmendia: Thanks Nick. Second quarter revenue was $77.1 million, which included $17.9 million of flight equipment sales, comprising five engines. Our revenue in the second quarter of 2023 was $69.3 million and included $17.6 million of flight equipment sales, consisting of four engines and two unserviceable airframes. Excluding flight equipment, the company continues to demonstrate underlying growth as its base revenue increased to $59.2 million from $51.8 million in the prior year. As we have pointed out in the past, flight equipment sales fluctuate significantly from quarter to quarter, and we believe monitoring our progress based on asset purchase and sales over the long term is more appropriate. Second quarter gross margin was 28.2% compared to 29.1% in the second quarter of 2023.

Speaker Change: Our revenue in the second quarter of 2023 was $69.3 million and included $17.6 million of flight equipment sales, consisting of four engines and two unserviceable airframes.

Martin Garmendia: Excluding flight equipment, the company continues to demonstrate underlying growth as our base revenue increased to $59.2 million from $51.8 million in the prior year.

Martin Garmendia: As we have pointed out in the past, flight equipment sales fluctuate significantly from quarter to quarter, and we believe monitoring our progress based on asset purchase and sales over the long term is more appropriate.

Martin Garmendia: Second quarter gross margin was 28.2% compared to 29.1% in the second quarter of 2023 as a result of sales mix and reduced margins at the company's component MRO facilities as the units gained efficiencies on recently awarded contracts.

Martin Garmendia: As a result, the sales mix and reduced margins at the company's component MRO facilities as the units gain efficiencies on recently awarded contracts. Selling general administrative expenses were $23.6 million in the second quarter of 2024, which included $1.1 million of stock-based compensation expenses. Selling general administrative expenses were $27.1 million in the second quarter of 2023 and included $3 million of stock-based compensation expenses. Second quarter 2024 loss from operations was $1.9 million, while loss from operations was $7 million in the second quarter of 2023. Gap net loss was $3.6 million in the first quarter compared to $2.7 million in the second quarter of 2023 with a decline cost from a lower mark-to-market benefit on the warrant liability and higher interest expense.

Martin Garmendia: Selling general administrative expenses were $23.6 million in the second quarter of 2024, which included $1.1 million of stock-based compensation expenses.

Martin Garmendia: Selling General Administrative Expenses were $27.1 million in the second quarter of 2023 and included $3 million of stock-based compensation expenses.

Martin Garmendia: Second quarter 2024 loss from operations was $1.9 million, while loss from operations was $7 million in the second quarter of 2023.

Speaker Change: The gap net loss was $3.6 million in the first quarter, compared to $2.7 million in the second quarter of 2023, with a decline cost from a lower mark-to-market benefit on the warrant liability and higher interest expense.

Martin Garmendia: Adjusted for non-cash equity-based compensation, a mark-to-market adjustment to the private warrant liability, and facility relocation costs, the second quarter adjusted net loss was $2.6 million, while the adjusted net loss was $0.6 million in the second quarter of 2023. Second quarter diluted loss per share was $0.07 compared to $0.08 in the second quarter of 2023. Excluding the adjustments mentioned above, second quarter adjusted diluted loss per share was five cents compared to three cents for the second quarter of 2023.

Speaker Change: Adjusted for non-cash equity-based compensation, mark-to-market adjustment to the private warrant liability and facility relocation costs, second quarter adjusted net loss was $2.6 million while adjusted net loss was $0.6 million in the second quarter of 2023.

Speaker Change: Second quarter diluted loss per share was $0.07 compared to $0.08 in the second quarter of 2023.

Speaker Change: Excluding the adjustments mentioned above, second quarter adjusted diluted loss per share was $0.05 compared to $0.03 for the second quarter of 2023.

Martin Garmendia: Our adjusted EBITDA was $3.2 million in the second quarter of 2024 compared to a loss of $0.5 million in the prior year. The increase in adjusted EBITDA was primarily due to higher revenue and lower expenses for the period.

Nicolas Finazzo: Our adjusted EBITDA was $3.2 million in the second quarter of 2024 compared to a loss of $0.5 million in the prior year. Additionally, in April of 2024, our secondary parts warehouse in Roswell, New Mexico was destroyed in a fire. In our 10th quarter, we recorded a balance sheet impairment of $6 million related to the loss. We look forward to updating the investor community in the coming quarters as we execute on our strategy to monetize the remaining 757s we have in our portfolio.

Speaker Change: Our adjusted EBITDA was $3.2 million in the second quarter of 2024 compared to a loss of $0.5 million in the prior year. The increase in adjusted EBITDA was primarily due to higher revenue and lower expenses for the period.

Martin Garmendia: Cash used in operating activities was $36.8 million, primarily due to cash deployed to increase our inventory availability. Furthermore, in April of 2024, our secondary parts warehouse in Roswell, New Mexico, was destroyed in a fire. This led to the loss of various USM parts, which carry a market value of $52.8 million and a book value of $6 million. In our 10th cue, we recorded a balance sheet impairment of $6 million related to the loss, and the non-trade receivable within deposits, prepaid, and expenses, and other current assets of $6 million, which we deem probable of recovery. Our maximum payout on our policy is $50 million, of which we have made a claim on the entire amount, subject to a $10,000 deductible.

Speaker Change: Cash used in operating activities was $36.8 million, primarily due to cash deployed to increase our inventory availability.

Speaker Change: Further, in April of 2024, our secondary parts warehouse in Roswell, New Mexico, was destroyed in a fire. This led to the loss of various USM parts, which carry a market value of $52.8 million and a book value of $6 million.

Speaker Change: In our 10Q, we recorded a balance sheet impairment of $6 million related to the loss.

Speaker Change: and a non-trade receivable within deposits, prepaid on expenses, and other current assets of $6 million, which we deem probable of recovery.

Speaker Change: Our maximum payout on our policy is $50 million, of which we have made a claim on the entire amount, subject to a $10,000 deductible.

Operator: As we look to the second half of the year, we expect to see continued demand in our tech ops segment, with further improvement in 2025 as we benefit from the MRO investments that Nick mentioned earlier. We look forward to updating the investor community in the coming quarters as we execute on our strategy to monetize the remaining 757s we have in our portfolio while deciding the best way to redeploy this capital as we navigate through a constrained feedstock environment, while ensuring that we remain disciplined capital allocators pursuing only opportunities that meet our ROI criteria and that benefit from our multidimensional value extraction model that is unique in the industry.

Speaker Change: As we look to the second half of the year, we expect to see continued demand in our tech ops segment, with further improvement in 2025 as we benefit from the MRO investments that Nick mentioned earlier.

Speaker Change: We look forward to updating the investor community in the coming quarters as we execute on our strategy to monetize the remaining 757s we have in our portfolio.

Speaker Change: while deciding the best way to redeploy this capital as we navigate through a constrained feedstock environment.

Speaker Change: while ensuring that we remain disciplined capital allocators pursuing only opportunities that meet our ROI criteria and that benefit from our multi-dimensional value extraction model that is unique in the industry.

Operator: Overall, we remain bullish on the long-term trajectory of the business as we continue to make progress with our go-to-market strategy for airware, increase airsafe sales, and continue to grow our USM, leasing, and MRO businesses in a robust market. With that operator, we are ready to take questions. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key.

Speaker Change: Overall, we remain bullish on the long-term trajectory of the business as we continue to make progress with our go-to-market strategy for airware, increase airsafe sales, and continue to grow our USM, leasing, and MRO businesses in a robust market.

Speaker Change: With that operator, we are ready to take questions.

Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Operator: If you are using a speakerphone, please pick up your handset before pressing the key. The first question comes from Bert Subin from Stiefel. Please go ahead.

Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2.

Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. The first question comes from Bert Subin from Stiefel. Please go ahead. Hey, good afternoon, and thank you for the questions. Nick, maybe just to start out on the inventory side, can you just give us some more color there, just trying to understand why we've seen sort of continued sequential increases in inventory. It seems like a market where there's certainly demand for USM and demand for whole assets. Can you just talk about why that's going up and not down right now?

Speaker Change: The first question comes from Bert Subin from Stiefel. Please go ahead.

Bert Subin: Some of it relates to completing the conversions on our 757s, so you're looking at the total inventory. Right? Yeah.

Speaker Change: Hey, good afternoon and thank you for the questions. Afternoon, Bert.

Nick Finazzo: As we complete those conversions, the costs of those conversions are being added to our inventory value. We are taking delivery of... AirAware kits are coming out of Universal, so that's adding some to our inventory as well. And, you know, we continue to be opportunistic in finding feedstock that we're acquiring for future sale as whole assets, leases, or breakdown to USM. However, the timing continues to take a while to turn that into sellable inventory.

Speaker Change: Nick, maybe just to start out on the inventory side, can you just give us some more color there just trying to understand, we've seen sort of continued sequential increases in inventory. It seems like a market where there's certainly demand for USM and demand for whole assets. Can you just talk about why that's going up and not down right now? Thank you.

Speaker Change: So some of it relates to completing the conversions on our 757s, so I mean you're looking at the total inventory, right? Yeah, as we complete those conversions cost of those conversions are being added to our inventory value. We are we are taking delivery of

Speaker Change: AirAware kits are coming out of Universal, so that's adding some to our inventory as well. And, you know, we continue to be opportunistic in finding.

Speaker Change: feedstock that we're acquiring for future sale as whole assets, leases, or breakdown to USM. The timing continues to take a while to turn that into sellable inventory.

Nick Finazzo: It's a combination of those three things as to why the Inventory School. So maybe as we think about, I know you guys are not giving formal guidance right now, but I feel like expectations have been a little all over the place as we think about sort of your revenue. But as you sit here almost, you know, now, I guess, a month and a change past halfway through the year, like, what are you seeing in the second half? I mean, is the second half shaping up better than the first half?

Speaker Change: It's a combination of those three things as to why the inventory is growing.

Bert Subin: So maybe as we think about, I know you guys are not giving formal guidance right now, but I feel like expectations have been a little all over the place as we think about sort of your revenue. But as you sit here almost, you know, now, I guess, a month and a change passed halfway through the year, like, what are you seeing in the second half? I mean, is the second half shaping up better than the first half? Are you starting to see some of the challenges you had sort of unfurl? And what's sort of the, just, I guess, broader viewpoint with the second half of it?

Speaker Change: So maybe as we think about, I know you guys are not giving formal guidance right now, but...

Speaker Change: I feel like expectations have been a little all over the place as we think about sort of your revenue, but as you sit here almost, you know, now, I guess, a month and change past halfway through with the year, like,

Bert Subin: Are you starting to see some of the challenges you had sort of unfurl? And what's, just, I guess, the broader viewpoint on the second half of the year? I think as we look at the second half overall, we're seeing good prospects from the ability to sell engines. In fact, we sold three engines in the first month alone at very good margins. So we're seeing opportunities there. As you noted in the inventory kind of pickup, a lot of that is also we're preparing inventory, including whole assets, for either lease or overall sales. So that's contributing to that.

Speaker Change: What are you seeing in the second half? I mean, is the second half shaping up better than the first half? Are you starting to see some of the challenges you had sort of unfurl? And what's sort of the just, I guess, the broader viewpoint for the second half of the year?

Speaker Change: I think as we as we look at the second half overall, we're seeing good prospects from ability to sell engines

Speaker Change: We sold three engines in the first month alone at very good margins, so we're seeing opportunities there. As you noted on the inventory kind of pickup, a lot of that is also we're preparing inventory, including whole assets, for either lease.

Martin Garmendia: We're starting to add assets to the leasing portfolio, which is also, again, one of our long-term strategies to start increasing that overall business. And, lastly, we're seeing improvements in our MRO side of our business. We've talked about some of the investments that we're making on the component MRO side and also that we won some significant contracts at the end of the year, so we're starting to get that volume to flow through.

Speaker Change: or overall sales. So that's contributing to that. We're starting to add assets into the leasing portfolio, which is also, again, one of our long-term strategies to start increasing that overall business.

Speaker Change: And then lastly, we're seeing improvements in our MRO side of our business. We've talked about some of the investments that we're making.

Speaker Change: on the component MRO side, and also that we've won some significant contracts at the end of the year. So we're starting to get that volume to flow through.

Martin Garmendia: We're improving our utilization of our labor, so improving our margin profile on that side of the business. And we're seeing a pickup on that side as well. And also, as Nick has noted in his remarks, some pickup on air safe sales as well. So all of these things are definitely in a forward projection and looking more favorable in the second half than in the first. Got it. Okay. Just one more, and I'll pass it back over.

Speaker Change: We're improving our utilization of our labor, so improving our margin profile in that side of the business. So we're seeing a pickup on that side as well. And also, as Nick has noted in his remarks,

Nick Finazzo: some pickup on air safe sails as well. So all of the things are definitely in a forward projection and looking more favorable in the second half than in the first half.

Bert Subin: On AeroWare, it seems like, you know, you guys have moved down this path in sort of marketing. It seems like the pilot testimonials are really positive, and obviously, it's an interesting product. You know, can you give us just an update on, I think it was STC was received in December, and so here we are in August. Where are we from an inning perspective, you think, in sort of landing that first customer? Is that something that you're thinking about as, like, a 2025 outcome?

Speaker Change: Got it. Okay. Just one more, and I'll pass it back over.

Speaker Change: On ERAWARE, it seems like, you know, you guys have moved down this path in sort of marketing. It seems like the pilot testimonials are really positive and obviously it's an interesting product. You know...

Speaker Change: Can you give us just an update of, I think it was STC was received in December , and so here we are in August , you know, like, where are we from an inning perspective, you think, and sort of landing that first customer? Is that something that you're thinking about as like a 2025 outcome? You said,

Bert Subin: You said it's when, not if, so I'm just trying to understand sort of what your confidence level is now that you've been through, you know, several months of the marketing process for the product. We're talking to both, you know, very large and very small customers. The easiest one to get, to get... Equipment delivered would be a small one.

Speaker Change: It's when, not if, so I'm just trying to understand sort of what your confidence level is now that you've been through, you know, several months of the marketing process for the product.

Nicolas Finazzo: We're talking to both, you know, very large and very small customers. The easiest one to get to, and I think one right after that. You know, those kits are now being produced and delivered and are in inventory to kind of make sure that we've got enough to fulfill any initial order that we get.

Speaker Change: We're talking to both, you know, very large and very small customers. The easiest one to get equipment delivered would be a small one. A larger customer is going to take much longer to be able to start spooling a large customer to

Nick Finazzo: A larger customer is going to take much longer to start spooling a large customer to reconfigure their airplanes, do simulators, get all their flight training done, etc. Doesn't mean we won't have an order, it just means that if it's a larger customer, it may be a while before they can actually start using the equipment. In the case of the customer that we've been dealing with for so long, I don't know.

Speaker Change: reconfigure their airplanes, do simulators, get all their flight training done, etc. It doesn't mean we won't have an order. It just means that if it's a larger customer, it may be a while before they can actually start using the equipment.

Speaker Change: In the case of the customer that we've been dealing with for

Nick Finazzo: It seems like since the very beginning, we started this whole certification process, they're still interested. We've got four different customers that will be flying our test aircraft starting this week, next week, two this week, and one next week, and I think one right after that. Two of those are large, and two of those are small.

Speaker Change: I don't know, it seems like since the very beginning we started this whole certification process. You know, they remain interested. We've got...

Speaker Change: We've got four different customers that will be flying our test aircraft.

Speaker Change: starting this week next starting this to this week

Speaker Change: and one next week and I think one right after that and two of those are large, two of those are small.

Nick Finazzo: It's so hard for me to predict which one of those will be the first to place an order and when we'll be able to deliver the product. However, we have the product. We've built up an inventory, as I've mentioned before. We have 150 kits of our own in stock, and we're receiving kits that we ordered from Elbit Universal. You know, those kits are now being produced and delivered and are in inventory to kind of make sure that we've got enough to fulfill any initial order that we get. When will we get that? I'm not going to commit to that. It could be, you know; I'll just give you an eye.

Speaker Change: So, it's so hard for me to predict.

Speaker Change: which one of those will be the first to place an order and when we'll be able to deliver product.

Speaker Change: You know, those kits are now being produced and delivered and in inventory to, you know, kind of make sure that we've got enough to fulfill any initial order that we get.

Speaker Change: When will we get that?

Bert Subin: It could be as soon as in the next several months. It could take us six months or a while. And I hate giving you that kind of answer, but I just really have no way of knowing...

Speaker Change: You know, I'm not going to commit to that because...

Speaker Change: It could be, you know, I'll just give you an idea. It could be as soon as in the next several months. It could take us six months or longer, and I hate giving you that kind of answer, but I just really have no way to know.

Nick Finazzo: But maybe just a clarification there, you don't think this is a situation where it's like multiple years, you think it's still measured in months? I don't think it's going to be multiple years, correct. I think the sale of this product will go on for five to ten years. I think this is a 5-10 year delivery to the industry. It doesn't mean it's going to take five to ten years, but it will, it will, uh... From the day we start delivering, I think that's probably going to be at least five years to ten years of deliveries, if not longer, especially as the product evolves and is upgraded. That's helpful. Thanks. As a reminder, if you have a question, please press star 1. The next question comes from Ken Herbert, RBC Capital Markets. Please go ahead. Yeah, hey, good afternoon, Nick and Martin. Good afternoon,

Speaker Change: But maybe just a clarification there, you don't think this is a situation where it's like multiple years, you think it's still measured in months?

Speaker Change: I don't think it's going to be multiple years, correct.

Speaker Change: I think the sale of this product will go out five to ten years, and I think this is a five to ten year delivery to the industry.

Nicolas Finazzo: It doesn't mean it's going to take five to ten years, but it will, it will, uh...

Speaker Change: It doesn't mean it's going to take 10 years, but it will, from the day we start delivering, I think that's probably, it's going to be at least 5 years to 10 years of deliveries, if not longer, especially as the product evolves and is upgraded.

Speaker Change: That's helpful. Thanks. Thanks. You're welcome.

Operator: As a reminder, if you have a question, please press star 1.

Speaker Change: As a reminder, if you have a question, please press star 1. The next question comes from Ken Herbert, RBC Capital Markets. Please go ahead.

Ken Herbert: Yeah, hey, good afternoon, Nick and Martin. Afternoon.

Kenneth Herbert: Hey, I wanted to Nick first ask you about sort of you're making some investments in your MRO capability. Looks like that business today is on sort of an annual, you know, call it 110 ish million sort of a run rate. But what's capacity utilization at with your existing MRO footprint sort of ahead of the, you know, the expansions you're making in the new facilities? I don't know the number off the top of my head.

Ken Herbert: Hey, I wanted to, Nick, first ask you about, sort of, you're making some investments in your MRO capability. Looks like that business today is on sort of an annual, you know, call it 110-ish million sort of a run rate.

Ken Herbert: But what's capacity utilization at with your existing MRO footprint, sort of ahead of the, you know, the expansions you're making in the new facilities?

Unnamed Speaker: I don't know that number off the top of my head, do you?

Nick Finazzo: I'll tell you right now that our utilization, we have a lot of capacity still available even without the overall improvements that we've made. In our landing gear facility, again, as a reminder, that was pretty much a new facility opened up about a year and a half ago. We've made inroads with new customers, bringing in new kinds of contracted gear that'll be coming in. So we're gonna start filling up that business. We're already seeing other prospects that potentially could even exceed our current capacity at that unit. At our accessory shop, one of the investments that we did in adding pneumatics is that it will also bring customers that would take advantage of hydraulic and other types of activities that we do.

Speaker Change: i don't know the number of p

Speaker Change: I'll tell you right now that our utilization, we have a lot of capacity still available even without the overall improvement.

Speaker Change: In our landing gear facility, again as a reminder, that was pretty much a new facility that opened up about a year and a half ago.

Speaker Change: We've made inroads with new customers, bringing in new kind of contracted.

Speaker Change: that will be coming in. So we're going to start filling up that business. We're already seeing other prospects that potentially we can even exceed kind of our current capacity at that unit.

Speaker Change: At our accessory shop, one of the investments that we did on adding pneumatics is that it will also bring customers that would take advantage of hydraulic and other types of activities that we do.

Kenneth Herbert: So we've been successful there in being able to gear up, and we absolutely have the ability not only to grow the existing facilities but, based on the investments that we've made, have an additional revenue stream, which is the $50 million that Nick noted in his remarks. Yes, I guess what I'm getting at is, I mean, if you fill the existing footprint and you layer in the new capacity, could the MRO footprint alone, sort of exiting 25, be, you know, potentially a $200 million business? And if we're looking at those kind of numbers, maybe just a rough ballpark of sort of normalized what kind of EBITDA margins do you think the MRO business should support?

Speaker Change: So, we've been successful there in being able to gear up, being able to get the overall qualified staff. And we absolutely have the ability, not only to grow the existing...

nignoted: facilities but also based on the investments that we've made have an additional revenue stream which is the fifty million dollars that nignoted in his remarks

Speaker Change: so we getess getting i mean

Speaker Change: If you fill the existing footprint and you layer in the new capacity, I mean, could...

Speaker Change: Could the MRO footprint alone sort of exiting 25 be a, you know, potentially a $200 million business? And if we're looking at those kind of numbers, maybe just rough ballpark of sort of normalized, what kind of EBITDA margins you think the MRO business should support?

Martin Garmendia: I think absolutely our plan, and as Nick noted, part of our strategic plan has been to grow the overall MRO business and to more than double that. And we're in a very good position with the Millington Additions, having a very good location in our Goodyear OnAirport MRO to be able to do that. As far as margin profiles go, obviously, that will vary depending on the actual customers that we bring in overall. So that's hard to kind of estimate at this moment.

Martin Garmendia: I think absolutely our plan, and as Nick noted, part of our strategic plan has been to grow the overall MRO business and to more than double that. And we're in a very good position with the Millington Additions having a very good location in our Goodyear OnAirport MRO to be able to do that. As far as margin profiles go, obviously, that'll vary depending on the actual customers that we bring in overall. So that's hard to kind of estimate at this moment.

Speaker Change: I think absolutely, our plan, and as Nick noted, part of our strategic plan has been to grow the overall MRO business and to more than double that. And we're in a very good position with the Millington additions.

nignoted: having a very good location in our Goodyear on-air port MRO.

Speaker Change: to be able to do that. As far as margin profiles, obviously that will vary depending on the actual customers that we bring in overall.

Kenneth Herbert: What I can say is we are right now in our P&L kind of absorbing a lot of these incremental costs to be able to bring in the business. So when it comes to facilities, we already have the expanded facilities. We're incurring those higher facility costs. When it even comes to personnel, we've had to make sure that we have qualified mechanics and technicians so that when we showcase the facilities, people can see that we have the talent and not only the equipment to be able to do the work. So what we're confident is as we start filling in those units, margin profiles will improve not only from a gross margin perspective but from an EBITDA perspective as well. Okay, that's great.

Martin Garmendia: What I can say is we are right now in our P&L kind of absorbing a lot of these incremental costs to be able to bring in the business. So when it comes to facilities, we already have the expanded facilities. We're incurring those higher facility costs. When it even comes to personnel, we've had to make sure that we have qualified mechanics and technicians so that when we showcase the facilities, people can see that we have the talent and not only the equipment to be able to do the work. So what we're confident is that as we start filling in those units, margin profiles will improve not only from a gross margin perspective but from an EBITDA perspective as well.

Speaker Change: So, that's hard to kind of estimate at this moment. What I can say is we are right now in our P&L.

Speaker Change: kind of absorbing a lot of these incremental costs to be able to bring in the business. So when it comes to facilities, we already have the expanded facilities. We're incurring those higher facility costs.

Speaker Change: When it even comes to personnel, we've had to make sure that we have qualified mechanics and technicians so that when we showcase the facilities, people can see that we have the talent and not only the equipment to be able to do the work.

Speaker Change: So, what we're confident is as we start filling in those units, margin profiles will improve not only from a gross margin perspective, but from an EBITDA perspective as well.

Martin Garmendia: Okay, that's great. Thanks, Martin. I just one final question as you look at the build-up of sort of inventory and all the acquisitions you're making in terms of the carrying value of some of this inventory might not match the market value as you look to eventually sell some of it. I'm just trying to get at sort of potential balance sheet risk as you look at what you've built and as you market test sort of what you've acquired over the last few years.

Martin Garmendia: Thanks, Martin. I just one final question as you look at the build of sort of inventory and all the acquisitions you're making in terms of, you know, whole assets and flight equipment. Is there any risk that, you know, the carrying value of some of this inventory might not match the market value as you look to eventually sell some of it? I'm just trying to get at sort of potential balance sheet risk as you look at what you've built and as you market test sort of what you've acquired over the last few years.

Speaker Change: Okay, that's great. Thanks, Martin. Just one final question. As you look at the build of sort of inventory and all the acquisitions you're making in terms of

Speaker Change: you know, whole assets and flight equipment.

Speaker Change: Is there any risk that

Speaker Change: You know the carrying value of some of this inventory might not match the market value as you look to eventually sell some of it. I'm just trying to get at sort of potential balance sheet risk as you look at what you've built and as you market test sort of what you've acquired over the last few years.

Martin Garmendia: No, we don't feel we have any risk. We look at our inventory cost-carrying basis all the time, whether it be fixed assets, you know, assets held for lease or sale, or USM inventory, and we don't feel we have any issue with the actual value of the equipment being less than, are both valued.

Speaker Change: No, we don't feel we have any risk. We look at our inventory cost-carrying basis all the time, whether it be fixed assets.

Speaker Change: ask us help for lease or sale or USM inventory and we don't feel we have any issue with the actual value of the equipment being less than our book value.

Martin Garmendia: Yeah, Ken, if I could add, we're very cautious when we allocate capital. We have a proprietary model.

Martin Garmendia: Yes, and if I could add, we're very cautious when we allocate capital. We're a proprietary model. We look at a 25% IRR.

Speaker Change: Yeah, Kenneth, if I could add, we're very cautious.

Martin Garmendia: We look at a 25% IRR. In fact, that's why, in probably the last amount, last couple, probably the last 18 months, we haven't bought as much feedstock as we would like, which is Nick's comment that we could process a whole lot more. But we always have exactly what you're talking about as a risk in our minds, which is why we always value the inventory, understanding how the market dynamics could change, and we're staying disciplined in that overall.

Kenneth: When we allocate capital, the proprietary model, we look at a 25% IRR.

Speaker Change: In fact, that's why probably in the last couple, probably the last 18 months, we haven't bought as much feedstock as we would like.

Speaker Change: which is Nick's comment on, we could process a whole lot more.

Speaker Change: but we always have exactly what you're talking about as a risk in our mind.

Nick Finazzo: which is what we always value the inventory, understanding how the market dynamics could change.

Martin Garmendia: I mean, just to give you an example, we bid on almost $600 million of feedstock in the current quarter, and we had a win rate of around 6%. So that's lower than our history, and we're okay with that because, again, we want to make sure that when we deploy capital, we are comfortable that we're going to recover the investment and make our expected return.

Speaker Change: and we're staying disciplined in that overall. I mean, just to give you an example, we bid in the current quarter almost $600 million of feedstock.

Kenneth: and we had a win rate of around six percent. So that's lower than our historical and we're okay with that because again, we want to make sure that when we deploy capital, we are comfortable that we're going to recover the investment and make our expected returns.

Operator: Perfect. Thanks, Martin. Thanks, Nick. You're welcome.

Kenneth: Perfect. Thanks, Martin. Thanks, Nick.

Kenneth Herbert: So that's lower than our historical average, and we're okay with that, because again, we want to make sure that when we deploy capital, we are comfortable that we're going to recover the investment and make our expected return. Perfect. Thanks, Martin. Thanks, Nick. The next question comes from Pete Osterland from Truist Securities. Please go ahead.

Kenneth: The next question comes from Pete Osterland from Truist Securities. Please go ahead.

Pete Osterland: Thanks for taking the question. So first, I wanted to ask about airware. I was just wondering how many kits you currently have in inventory and whether you're still building more inventory there and, just in general, how quickly your supply chain can ramp up delivery of kits if a major problem occurs. We have, as I said before, built 150 kits. We are not producing any more kits right now because we feel, realistically, it probably would take a year to put 150 kits in an airplane or in airplanes to start.

Pete Osterland: Hey, good evening. I'm on for Mike Ciarmoli tonight. Thanks for...

Unnamed Speaker: So first, I wanted to ask about airware. I was just wondering how many kits you currently have in inventory and whether you're still building more inventory there, and just in general how quickly your supply chain can ramp up delivery of kits if there is a major order.

Pete Osterland: But we have the capacity, because we have the infrastructure, and we have the people to basically ramp production of kits back up using our existing facility at the rate of between 10 to 20 kits a month, depending on how many people we want to put on it. And as I've also said before, Pete, we don't think we do it in the most cost-effective and efficient way. We think it's people who do some of the kit pieces that we work on, which are wire harnesses, complex wire harnesses.

Pete Osterland: taking the question

Pete Osterland: So first, I wanted to ask on airware. I was just wondering how many kits you currently have in inventory and whether you're still building more inventory there and just in general how quickly can your supply chain ramp up delivery of kits if a major order comes in?

Nicolas Finazzo: We have, as I said before, built 150 kits. We are not producing any more kits right now because we feel realistically it probably would take a year to put 150 kits in an airplane or in airplanes to start, but we have the capacity, because we have the infrastructure, we have the people to basically ramp production of kits back up using our existing facility at the rate of between 10 to 20 kits a month, depending on how many people we want to put on it. We think it's people who do some of the kit pieces that we work on, which are wire harnesses, complex wire harnesses.

Speaker Change: We have, as I said before, we've built 150 kits. We are not producing any more kits right now because we feel realistically it probably would take a year to put 150 kits in an airplane or in airplanes to start.

Pete Osterland: and but we have the capacity because we have the infrastructure we have the people to basically ramp production of kids back up using our existing facility at the rate of between ten to twentyks a month depending on how many people who want to put on it

Pete Osterland: and

Pete Osterland: As I've also said before, Pete, that...

Pete Osterland: You know, we don't think we do it the most cost-effective and efficient way. We think it's people who do.

Speaker Change: Some of the kit pieces that we've been working on, which are wire harnesses, complex wire harnesses. We think there are other companies that could do that maybe faster and more cost effective than we can.

Pete Osterland: We think there are other companies that could do that maybe faster and more cost-effective than we can. But we've not taken advantage of that because we wanted to understand completely what it would take to build a kit doing it our way, which, again, may not be the most efficient way.

Nicolas Finazzo: We think there are other companies that could do that maybe faster and more cost-effective than we can. We've not taken advantage of that because we wanted to understand completely what it would take to build a kit doing it our way, which again, may not be the most efficient way, but so we know we were able to produce roughly 15 sets a month, and we know what our cost is, and we're very satisfied that our cost is in line or lower than our original expectations.

Speaker Change: We've not taken advantage of that because we wanted to understand completely what it would take to build a kit, doing it our way, which again, that may not be the most efficient way. But, so we know we were able to, you know, produce roughly 15.

Nick Finazzo: So we know we were able to produce roughly 15 sets a month, and we know what our cost is, and we're very satisfied that our cost is in line or lower than our original expectation. And, candidly, we'd like to think that if we had to double or triple that capacity, we could farm that out to third parties, and that they would do it for a better price than our internal cost. That's helpful.

Speaker Change: sets a month, and we know what our cost is, and we're very satisfied that our cost is in line or lower than our original expectations.

Nicolas Finazzo: And candidly, we'd like to think that if we had to double or triple that capacity, we could farm that out to third parties, and that they would do it for a better price than our internal costs.

Speaker Change: And candidly, we'd like to think that if we had to double or triple that capacity, we could farm that out to third parties, and that they would do it for a better price than our internal cost would be.

Nicolas Finazzo: That's helpful. Thanks. And then I wanted to ask one on air safety as well. What does the competitive landscape look like there? Are there alternatives in the marketplace, or is air safety the only option in order for operators to comply with this FAA rule? So the option for

Nick Finazzo: Thanks. And then I wanted to ask one on air safety as well. What does the competitive landscape look like there? Are there alternatives in the marketplace, or is air safe the only option in order for operators to comply with this FAA requirement? So, the option for AirSafe comes from the OEM, which is a nitrogen system that removes oxygen from the fuel tanks that Boeing and Airbus incorporate in new aircraft deliveries.

Speaker Change: That's helpful, thanks. And then I wanted to ask one on air safe as well. What does the competitive landscape look like there? Are there alternatives in the marketplace or is air safety only option in order for operators to comply with this FAA requirement?

Nicolas Finazzo: So the option for Airsafe comes from the OEM, which is a nitrogen system that removes oxygen from the fuel tanks that Boeing and Airbus incorporate in new aircraft deliveries. And we have one competitor that produces a kit that also puts foam in fuel tanks to comply with the various regulatory requirements. That's a company we've been in litigation with now for forever, and litigation has not gone well for that company, but regardless, we've spent money defending it.

Nicolas Finazzo: So the the option for airsafe it comes from the OEM which is a nitrogen system that removes oxygen from the fuel tanks that Boeing and Airbus

Pete Osterland: And we have one competitor that produces a kit that also puts foam in fuel tanks to comply with the various regulatory requirements. That's a company we've been in litigation with now, forever, and litigation has not gone well for that company, but regardless, we've spent money defending it. You know, I don't think that company produces or sells as many kits as we do. But, you know, we do have competition.

Nicolas Finazzo: incorporate that in new aircraft deliveries, and we have one competitor that produces a kit that also puts foam in fuel tanks to comply with the various regulatory requirements. That's a company we've been in litigation with now for...

Nicolas Finazzo: forever.

Speaker Change: And litigation has not gone well for that company, but regardless, we've spent money defending it. And, you know, I don't think that company produces or sells as many kits as we do, but, you know, we do have competition.

Nick Finazzo: Very helpful. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Nick Finazzo for closing remarks. Everyone, I hope this discussion today has given you a better understanding of what we've been doing to position the company for substantial growth. The things we do are not easy. They take time and money.

Speaker Change: Very helpful. Thank you.

Nicolas Finazzo: sir

Nick Finazzo: And as we've suffered through this period of building, our investments will reap financial benefits in both the near and long term. Our experienced management team is committed to the long-term growth and success of the company and will continue to work hard and smart to create value for our shareholders. Thank you for listening today, and thank you Bert, Ken, and Pete for your thoughtful questions. Good evening, everyone. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Nicolas Finazzo: This concludes our question and answer session. I would like to turn the conference back over to Nick Finazzo for closing remarks.

Nicolas Finazzo: Everyone, I hope this discussion today has given you a better understanding of what we've been doing to position the company for substantial growth. The things we do are not easy. They take time and money, and as we've suffered through this period of building, our investments will reap financial benefits in both the near and long term. Thank you for listening today, and thank you Bert, Ken, and Pete for your thoughtful questions. Good evening, everyone.

Nicolas Finazzo: Everyone, I hope this discussion today has given you a better understanding of what we've been doing to position the company for substantial growth.

Nicolas Finazzo: The things we do are not easy. They take time and money. And as we've suffered through this period of building, our investments will reap financial benefits in both the near and long term.

Nicolas Finazzo: Our experienced management team is committed to the long-term growth and success of the company and will continue to work hard and smart to create value for our shareholders.

Nicolas Finazzo: Thank you for listening today, and thank you, Bert, Ken, and Pete for your thoughtful questions. Good evening, everyone.

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

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

Martin Garmendia: In fact, that's why, and probably in the last couple of, probably in the last 18 months, we haven't bought as much feedstock as we would like, which is Nick's comment. We could process a whole lot more, but we always have exactly what you're talking about as a risk in our minds, which is why we always value the inventory, understanding what the market dynamics could change, and we're staying disciplined in that overall. I mean, just to give you an example, we bid on the current quarter for almost $600 million of feedstock, and we had a win rate of around 6%.