I see that continuing and accelerating as the OEMs resolve their problems and start delivering more new aircraft that have reliable engines.
Kenneth Herbert: Yes, I wanted to follow-up on the geared turbofan issue, because it sounds like on the one hand that would restrict availability of feedstock to your comments. But on the other hand, it’s probably really strengthening demand for material to support legacy engines, the CFM56 and the V25, in particular. How does the net factor of the geared turbofan issues affect you? And are there opportunities that arise from that, that you can maybe call out?
Nicolas Finazzo: We purchased quite a few CFM56-5Bs, that power the A320 deal. And we bought most of those at parts value thinking that, eventually, that the amount of engines that went into the shop would increase and the demand for USM parts for the engine specifically on the older technology A320, would come back very strong. And that’s a fact, we’re seeing that. The issue we’re having is a lot of the engines that we thought were going to end up as parts turned out to be engines that have good service life left. And we have customers that are interested in taking those engines, whether it be for purchase or for lease that are going to deprive us from having the USM to sell the piece part level and we don’t care. I mean, as long as the net value we receive out of that is the same or greater than we would get going the long haul for part up, we will sell or lease an engine that we bought at part up value.
But I do see that that market is continuing to be strong. The question is can you get engines today? Where are they going to come from? And as I said, finding good serviceable engines today very difficult to do. I mean when you’re taking low time remaining parts engines and you’re selling him his whole engines or leasing this whole engines to people because they can’t — they don’t want to spend money on putting engines through the shop. That’s telling you that there’s going to be less USM available to support all the engine shop visits that are coming or that are already here as a result of these older technology aircraft staying in service. So yes, there is an upside for the supply of USM parts for the supply of whole engine — the whole engine trading and leasing, But there’s a limited demand of that equipment.
And so I don’t know that we’ve quantified the offset to that. What — what’s better for us to have more USM available for sale? Or more full assets to lease or sell? And I know that necessarily answer your question. But …
Kenneth Herbert: No, no, that’s helpful. I appreciate that. There’s a lot of moving pieces there. And if I could just one final question and maybe for Martin. As we think about sort of the implied adjusted EBITDA in the fourth quarter, is virtually much of the sort of sequential increase expected to come from whole asset sales? Are you expecting maybe more contribution in the fourth quarter from TechOps, from USM under the parts of the business?.
Martin Garmendia: Yes, I think it’s twofold. We definitely expect to see a continuation of improvement in the USM side of the overall business, but definitely to the visibility that we have from flight equipment sales, that will be the bulk of the overall increase that we have factored in into the guidance number overall.
Nicolas Finazzo: Yes. And I want to add to that, because I think it’s an important thing to note. When we’re buying engines at pardot value, and we then turn around and lease or sell them as a whole asset. It really does skew your perception of what our USM business is doing. If we could, we would just be reporting whole asset sales of parts that we — of engines we bought for USM as part of our USM line, but the reality is, it’s not USM, it’s still a whole engine. But don’t be confused by the amount of whole asset sales when we’re telling you that most of these assets were bought for parts. And just because we’re selling them as whole assets or whole flight equipment, it doesn’t mean that we don’t have the opportunity to grow the USM business. It’s just — it’s popping up in a different segment, its popping up as flight equipment sales rather than USM sales.
Kenneth Herbert: Got it. Thanks, Nick. Thanks, Martin. I’ll pass it back.
Nicolas Finazzo: Okay. You’re welcome.
Operator: The next question comes from Michael Ciarmoli from Truist. Please go ahead.
Michael Ciarmoli: Hey, good evening, guys. Thanks for taking the questions. Just to stick with that final thoughts — how are you guys. Just to stick with that final thoughts, Nick, what’s better for you? A whole asset sale or individual Piece Park sales? I mean, where do you think you can get better returns? I mean, obviously, you can move inventory faster with a whole asset sale. But given this kind of tight market, look at that equation of individual parts and pricing on parts. I mean, what I guess, simple question, what — what’s more valuable for you what generates better returns.
Nicolas Finazzo: Well, we don’t necessarily look at IRR because a short-term sale of an engine versus a longer term, heart out process may produce a greater IRR, but the quantum of the net revenue would be much smaller. So we have to weigh, forget put IRR aside for the moment. So if you forget the IRR because we make a much, much higher IRR, if we quickly flip an engine. What we look at is well, what’s the dollar value of what we would get if we went long and we parted out the engine? And then we had sales of USM versus what can we get today, net of no additional time or acquisition costs, what dollar value or dollar volume can we get today. We then may factor in a small interest carrying factor in that. And if the net result of that is that we feel that with or without interest, because I don’t think that makes a big enough difference.
But even with interest, if we feel that we can get the same or more money today, selling it as a whole asset versus going to the longer route and selling it as parts, we will almost always choose to sell the asset today, and then be having — and be struggling with you guys, as to the amount of whole asset sales we have. Because I think that just skews everybody’s view of the [technical difficulty] when we — when you see a lot of whole asset sales which produces a lot of volatility. And I could straighten that out if I went the longer route. But I don’t think that’s the right answer. I think the right answer is we get the same or better money on a short-term basis. That’s where we go with. That’s where we go with the asset.
Michael Ciarmoli: Okay. Got it. That’s helpful. And then just looking at the feedstock purchases, looking at the inventory of kind of aircraft frames parts, you’re up to, I think $326 million on the balance sheet. How should we think about that? I mean, it sounds like that could grow potentially into the fourth quarter. And then just trying to get a sense of how that that inventory winds down and maybe drives cash flow next year, and also helps the top line. Can you give us any color there?
Nicolas Finazzo: Yes, I would say from the USM side, we’re already starting to see a pickup in overall sales volume, probably kind of approaching closer to about $8 million in overall monthly sales, a run rate of about $100 million. Based on the volume that we have, again, if we keep the assets that we have identified as piece parts, that we can increase that overall volume to $120 million to $140 million of annual sales on the USM side, based on the level of inventory and historic kind of disposition rates, kind of overall. We’re also seeing opportunities to increase our leasing portfolio, again, taking demand on strength in certain platforms, such as the CFM56. And again, we have those assets, a lot of them are being repaired and being ready to be put on lease.
So with that feedstock, you’re going to see increases in USM, you’re going to see increases in the leasing portfolio. And again, there will always be opportunities to do whole asset sales as well. And you’ll start seeing those benefits flowing through ’24 and beyond.
Michael Ciarmoli: Okay, got it. And then Martin, you kind of hit on it. I think you said the $100 million run rate for USM. What was the actual USM dollar amount in the quarter? Or even if you can give us kind of the year-over-year. I think you did close to $20 million in USM last quarter.
Martin Garmendia: Yes, I think overall for the quarter, for USM sales, we were running around, let me see — give you that by around $20 million overall.
Michael Ciarmoli: Okay. Okay, got it. Last question, Nick. Just as it relates to AerAware, I know you had pre-built some inventory. But how are you thinking about your kind of hardware supplier, Elbit, what’s going on over there? Obviously, they’re having a lot of reservists call ups and just maybe frame sort of what the — any kind of supply chain choke points or getting product?
