Good day, and welcome to the AerSale Corp. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jacqueline Carlon, Vice President of Marketing and Communications. Please go ahead.

Good afternoon. I'd like to welcome everyone to AerSale's Second Quarter 2025 Earnings Call. Conducting the call today are Nick Finazzo, Chief Executive Officer; and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter's results, we want to remind you that all statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectation for the business and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission, SEC, on March 11, 2025, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation materials made available on the Investors section of the AerSale website at ir.aersale.com. With that, I'll turn the call over to Nick Finazzo.

Thank you, Jackie. Good afternoon, and thank you for joining our call today. I'll begin with a brief overview of the quarter, then provide operational updates before turning the call over to Martin to review the numbers in greater detail. We performed better in the second quarter, driven in part by an increasing amount of ready-to-sell USM flowing from the feedstock investments we've been making, together with several flight equipment sales. Higher sales growth translated to increased profitability, particularly as we gained leverage in our model at higher volume. In total, we reported second quarter revenue of $107.4 million compared to $77.1 million in the year ago period. This also underscores the potential in our model as we improved recurring revenue through added assets in the lease pool and increased MRO capacity to provide more consistent results quarter-over-quarter. Excluding flight equipment sales, the balance of our business grew 25% to $74 million, again, driven by greater ready-to-sell inventory in our USM business and higher leasing revenue, partially offset by lower TechOps revenue as we continue working to transition our heavy MRO facilities. As we note every quarter, due to the nature of our business and the impact of flight equipment sales, our revenue levels tend to be volatile quarter-to-quarter, and we believe our business should be evaluated based on aggregate performance over a longer period of time with a focus on feedstock acquisitions and the value our team is able to extract from those investments. Second quarter adjusted EBITDA improved to $18.3 million compared to $3.2 million in the prior year. The increase reflects stronger execution across the business, including a higher volume of flight equipment sales, improved performance in USM operations and continued benefits from cost reduction initiatives implemented over the past year. Turning to segment performance, starting with…

Thanks, Nick. Our second quarter revenue was $107.4 million, up from $77.1 million in the second quarter of 2024. This included $33.4 million of flight equipment sales compared to $17.9 million in the prior year period. As we have noted in past calls, flight equipment sales can vary significantly from quarter-to-quarter, and we believe long-term performance is best evaluated based on the cumulative impact of asset purchases and sales over time. Second quarter gross margin was 32.9% compared to 28.2% in the second quarter of 2024. The year-over-year improvement reflects stronger execution across the business, including improved USM sales, a higher volume of flight equipment sales and continued operational efficiency gains across our platform that resulted from efficiency initiatives taken. Selling, general and administrative expenses totaled $22.8 million compared to $23.6 million in the second quarter of 2024. SG&A included approximately $700,000 in noncash stock-based compensation, in line with recent quarters. The reduction in total SG&A despite higher revenue stemmed from the cost reduction efforts taken over the past 12 months. Operating income for the quarter was $12.5 million compared to a $1.9 million loss in the same period last year. Net income was $8.6 million compared to a net loss of $3.6 million in the prior year period. Adjusting for stock-based compensation, facility relocation cost, restructuring charges and other nonrecurring items, adjusted net income was $9.4 million compared to an adjusted net loss of $2.6 million in the second quarter of 2024. Adjusted EBITDA was $18.3 million in the second quarter, up from $3.2 million in the prior year period. This improvement reflects higher revenue, stronger execution across the business, increased monetization of our feedstock inventory and continued cost discipline. Adjusted diluted earnings per share was $0.20 compared to an adjusted diluted loss per share of $0.05 in the…

[Operator Instructions] Our first question comes from Ken Herbert with RBC Capital Markets.

Nick and Martin, nice results. Maybe just to start off, it sounds like you saw a pickup in activity in assets you were able to acquire and obviously sell. Can you maybe give a little bit more detail on the types of assets you're seeing as we think about sort of the whole assets? And is the pace of activity in the second quarter something we could extrapolate into the back half of the year?

The type of equipment that we're finding that we can make sense out of is really more on the airframe and whether it be narrow-body or wide-body, and wide-body engines. Now why airframe? I think we've gotten really, really good at extracting value out of airframes regardless of whether it's narrow- body or wide-body. And we've developed a very strong market niche on the wide-body side. It goes all the way back to the first 747 transaction. We bought 21 747s in 2010 from Japan Airlines, and we've learned the wide-body engine market. Wide-body engines and wide-body aircraft scare a lot of investors. They're not familiar with it. It can be a tough market, not something I expected to build over the course of this business to the extent that we have, but that we have. And that's really been an advantage for us as we see 747s being retired, A330s being retired and the associated engines, whether they be the Pratt 4000s or the General Electric CF6 engines. We understand the market. We know how to sell -- we know where to sell the parts. We know what to do with the engines, whether we sell them as whole engines or break them down to the piece parts and sell USM parts. If you look historically over the last, let's say, 3, 4, 5 years and you look at where our engine sales and engine parts sales have come, it's widebody. It's substantially wide-body engines. So what is continuing, the fact that we can make sense, I think, better sense than most on the wide-body engine side, which generates candidly the most amount of revenue on the parts side. And we continue to struggle to make sense out of anything on the narrow-body side. Why is that? I mean…

Nick, that's very helpful. I think in the quarter, you called out that you did sell $33.4 million of flight equipment. Is that a run rate we should be comfortable with for the second half of the year? Or I know it can be very volatile and lumpy, but what's visibility in the next couple of quarters like for flight equipment sales?

That's not a question I'm going to answer yet. It's not that I don't want to answer that. Because we're evaluating the flight equipment that we have, and every time we have quite a bit that's already in inventory that's ready for sale or lease and that's in work that will be available for sale and lease. And we consistently make the determination, which is, are we better off to put something out on kind of the hybrid leases that we do, which is, like I said, it's like we're a Hertz rental car. We're not Ford Motor leasing company. It's not a long-term lease. It's a short-term lease. We take operational risk. We get a significant premium for doing that. And we have to decide based on our long-term view of the value of that engine, if we're going to put it out on lease, are we better off to sell it to somebody today who needs an engine, who doesn't -- who has the balance sheet to afford to buy an engine and they'll pay up for it. And we would collect all the revenue that we reasonably would expect to collect over the course of future years adjusted for risk. If we can collect that all upfront, it's really difficult to turn a deal like that down. And the reason I say it's really difficult is because we can do the same thing and collect similar revenue, taking into account risk over a longer period of time, and that will generate a lot more recurring revenue, which is what I know our investors and we all want to see more recurring revenue. So we're balancing, do we put the stuff out on hybrid leases and we take a little bit of risk? We understand what the risk…

We do have 22 engines. We have 11 engines that are currently being marketed for sale or lease, and we've had engines in repair, another 11 engines that will also be available for lease or for sale. So we have a good inventory level, and we feel confident. As Nick noted, now it's what opportunities do we want to pursue.

That's great. And if I could, Martin and Nick, maybe just two more quick questions. The first is, as you look at the balance sheet today, is there any areas you'd call out maybe at risk in terms of the carrying value of the assets on the balance sheet, whether it be engines or whole assets or any other equipment? And then second, maybe, Nick, if you could just comment on, obviously, your MRO business is coming through a pretty significant restructuring, sort of how we think about that progressing through the back half of this year and into '26?

I'll start with the balance sheet question overall. We evaluate all of our assets on the overall inventory -- sorry, in our overall balance sheet inventory, PP&E and intangible assets. And at this point, there's nothing that leads us to believe that there would be any impairment risk on those overall assets. We're seeing strong opportunities, both in passenger and we're starting to see an uptick in cargo demand. So that's going well for our 757 fleet. So right now, based on what we're seeing in the market outlook, we do not anticipate any impairments in our inventory position.

Regarding -- I'll answer the second part of that question regarding how we feel about our MRO operations, whether it be on-airport or the component MROs. As I mentioned earlier in the call that on the component MRO side, we have agonized, and I don't know what other word to use, but agonized over a 2-year -- it took us 2 more -- 2 years longer to finish our component and aerostructure shop than we anticipated, and it's just been agonizing for us. They're finally complete. We're moving into the aerostructure shop in the next couple of weeks. We have business to bring with us. We'll bring the business with us. I wish I could say we're already generating revenue because we're not. We're generating revenue, but not in the shop. We're still in the old shop. We expect with that tripling of capacity on the aerostructures side and adding the pneumatics capability on the accessory side that we will see -- that we will start to see new incremental business that we don't -- it's not like we have to go out and find customers for that. It's the same customers that we already have. It's just doing other products that they've got that we don't have the capability of today or in the case of aerostructures, it's taking on more. We're full to the rafters in our old facility for aerostructures. We can't even take any more business because we can't fit it. Well, thankfully, we'll be out of the old facility this month and into the new facility and able to expand the business. And we've got customers, big customers, major airlines that have approved our new shop and will be bringing us new work that we're not getting today. So very optimistic about those businesses starting to see significant expansion in the overall business over the next couple of months and accelerating as we get through the end of the year and we're in the new facility and we have customers coming to see them and we're demonstrating new capability. With regard to our on-airport MRO, and I'll talk specifically about Goodyear. For the first time in the history of us running that business, we have -- so there's 6 or 7 bays full right now?

Seven bays.

We have -- out of 8 bays in Goodyear, we have 7 bays full of aircraft. First time in the history of the business. So we've come a long way from 3 bays plus some spot business that we've received previously when we had a major customer program. Previously, we had a major customer program that sucked up most of our labor. And today, we've restructured our compensation so that we're able to attract the labor that we need to provide labor to fill that demand for labor for the 7 bays that we've got and 8 bays being readied for -- to be filled. And as we fill up our Goodyear facility with more recurring long-term revenue versus spot revenue that comes in, ad hoc revenue that comes in, we will then shift our focus to filling up our Millington facility. Now our Millington facility is basically 1 hangar, 2 bays, and we're talking with potential customers even to keep that facility busy over a multiyear period. But at this point, we still have 1 more bay to fill up in Goodyear. We're going to stay focused on that, and then we'll focus on Millington. In Roswell, I mean, thing about Millington is we spent a lot of money building out that facility, and we have a lot of credit against future rentals. So we're fine from a cash point of view in Millington, even though we're carrying a facility that we're not utilizing at this point. In our Roswell facility, we've just taken a second look -- a second and third look at Roswell to determine what can Roswell do best. And we think what Roswell does best is aircraft storage because of the vast storage field there and return to service of aircraft coming out of storage or going into storage, and taking in or parting out an airplane, whether it be for our own account or for third parties who've been storing aircraft in Roswell. With doing less work and involving fewer mechanics, we can make the same or more money than we could if we're trying to work heavy MRO in Roswell. We've got the expertise in Goodyear, and that will flow into Millington. And it's not that we can't do it in Roswell. We just think that Roswell is better suited for storage and aircraft dismantlement. So we feel good about all 6 of our MRO businesses, whether it be the 3 airport -- 3 on-airport or 3 off-airport.

If I could add, as Nick noted, Roswell is a perfect example of some of the efficiency measures that we've done, really looking at labor utilization, kind of maximizing our efficiency rates. So we're starting to see that benefit. Roswell is a great example where even though we're doing pretty much half the revenue overall, we're still meeting the gross margin overall requirements. And we've done that for Goodyear as well. So as we're seeing that expanded growth, we're getting those benefits and also in all of our component shops. So as these new capacity and capabilities come online, we'll start enjoying some of those higher margins as well.

Our next question comes from Sam Struhsaker with Truist Securities.

To start, you guys were kind of just speaking to this a little bit. The ongoing cost kind of cutting initiative and the margin benefit you're seeing from that, how should we think about sort of where you guys are in the trajectory of that effort overall in terms of ongoing or getting close to the end there?

I think overall from a cost perspective, we anticipate for the year to be about a $5 million to $6 million overall benefit. Halfway through the year, we kind of realized half of that overall. From a margin perspective, the benefit depends on the overall unit, but we're seeing about a 200-basis point overall improvement that we are anticipating. We expect those efficiencies will gain and we'll get better margin improvement also as we get more fixed work, especially at the heavy MROs. That will improve it because we'll have better cost absorption of our fixed cost. But it's something that we're continuing to look at. There's more opportunities, and I think we did that in a great time as we have this growth kind of in front of us to really be as efficient as possible as we grow.

Great to hear. Makes good sense. I think kind of staying on the margin line a little bit there. It sounds like the USM is getting somewhat more favorable. How should we think about kind of like the net impact of that on the margin you guys are getting there? Is it kind of net-net the same? Is there a bit of a positive impact or just kind of the puts and takes on that?

The overall margin on USM will vary depending on product mix, but any new feedstock acquisition that we're acquiring, we are not going away from our 25% IRR. So we expect that to stay overall stable as we continue to buy additional feedstock.

Okay. Got it. Makes good sense. And then I guess final question for me would sort of be AerAware, we -- should we think about any kind of contribution this year from that? Or are you guys going to kind of hold on that because it's a TBD situation?

Without a customer identified at this point, I think it's improbable that we could get an AerAware delivery, even one delivery this year. It's -- I guess it's possible if it's for 1 aircraft. What we're -- but as far as getting a program, we're not there yet. We're still working on refining the product, even though it's certainly usable in the condition that it's in. But what we need to do is we need to get the system installed on customer aircraft. And we know that even if we do so by saying, look, fly it, we won't charge you for it. We'll put it on your aircraft, which, by the way, we are offering to do. Fly it, put it on your aircraft. Why would we do that? Let the operator fly for 6 months. Because we need operational experience. We need the pilots to communicate with the air traffic control and say, hey, I have this system. It allows me to be dispatched in a -- to a lower visibility condition than you're allowing other aircraft to be dispatched. So let me use my system. Oh, I can land -- I can see the airport, others can't. So let me land in these conditions where they're diverting others. There clearly is a safety benefit associated with this besides just the ability to dispatch in lesser visibility conditions. And we expect our customers to start giving us some feedback on that. So even if, again, if we can find 3, 4 or 5 operators in different portions of the world that will use the system on a trial basis, we'll start getting operational experience with both the air traffic control systems and the operators. Now there is a ATR operator that's flying in -- it's not in Europe,…

No, that's totally understandable and everything -- it all makes good sense. And yes, I'm sure it's frustrating for you guys to get the momentum going, but totally understandable. And congrats on nice results.

Thanks, Sam.

Thank you. [Operator Instructions] We have no further questions at this time. I would like to turn the conference back over to Nicolas Finazzo for any closing remarks.

I want to thank Ken and Sam for their insightful questions and to our listening audience for joining us today. We look forward to keeping you informed at our next earnings call. I hope you all have a good evening. Thank you for listening. Good night.

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