FTAI Aviation Ltd.

Good day, and thank you for standing by, and welcome to the Q1 2023 FTAI Aviation Earnings Conference Call. All participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Alan Andrini, Head of Investor Relations. Please go ahead.

Thank you, Justin. I would like to welcome you all to the EPSI Aviation First Quarter 2023 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer, and Angela Nam, our Chief Financial Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplements. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements, and to review the risk factors contained in our quarterly report filed with the SEC. Now I would like to turn the call over to Joe.

Thank you, Alan. To start today, I'm pleased to announce our 32nd dividend as a public company and our 47th consecutive dividend since inception. A dividend of $0.30 per share will be paid on May 23rd based on a shareholder record date of May 12th. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA, We began the year well with adjusted EBITDA of 127.7 million in Q1 2023, which is up 3% compared to 123.5 million in Q4 2022 and up 184% compared to 45 million in Q1 2022, which had been adversely affected by Russia's invasion of Ukraine. During the first quarter, The 127.7 million EBITDA number was comprised of 107.6 million from our leasing segment, 27.4 million from our aerospace product segment, and negative 7.3 million from corporate and other. Turning now to leasing, leasing had a good quarter, posting approximately 108 million of EBITDA. The pure leasing component of the 108 million came in at 91 million for Q4, up from 85 million in Q3. With strong demand, that's actually for Q1, I'm sorry, came in at 91 million for Q1, up from 85 million in Q4. With strong demand for assets and the commencement of the northern hemisphere summer season, we expect Q2 will continue to grow. We remain very confident in leasing EBITDA of 350 million to 400 million for the year, excluding gains on asset sales. Part of the 108 million in EBITDA for leasing came from gains on asset sales. We sold 92.2 million book value of assets for a gain of 16.5 million, slightly below our expectations. But we have more asset sales coming in Q2 and the rest of the year and are comfortable assuming gains on asset sales of approximately 25 million per quarter or 100 million for all of 2023. Aerospace products had another excellent quarter with 27 million of EBITDA. We started these activities at the end of 2020 and in the last six quarters have booked approximately 120 million of EBITDA without any contribution from PMA. We see tremendous potential and continue to feel good about generating 20 to 30 million in quarterly EBITDA and think 100 million plus in 2023 EBITDA remains very doable. We feel confident about this number because we're seeing a rapidly expanding backlog of aerospace products business with other leasing companies, maintenance and repair organizations, and airlines. With that, let me turn the call back over to Alan.

Thank you, Joe. Justin, you may now open the call to Q&A.

And thank you.

And one moment for our first question.

And as a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

And our first question comes from Josh Sullivan from Benchmark Company.

Your line is now open. Hey, good morning.

Good morning. And congratulations on the results and progress here. So you're now annualizing EBITDA at some good rates, and you walked through some of the components there. Just curious if the 550 to 600 EBITDA guidance is still the right framework at this point as well. Yes.

Yes.

That was a yes? Sorry, I broke up there.

Yes, that was a yes. Sorry, it was a one-word answer, maybe. But, yes, as we indicated, if you add up each one of the segments, you know, it's very much on target. And, you know, we think as we're heading into the strong, you know, season, Q2, Q3, that there's probably some upside in these numbers as well.

Got it. And then just within the gain on sales here, you know, I know they can be lumpy quarter to quarter, as you mentioned, but was there any particular program that moved around or how should we think about those gain on sales moving forward?

No, it is lumpy. And typically you get a lot of transactions that target closing, you know, towards the end of the year and some of them they slip over in the Q1. So Q1 is usually the slowest because you've emptied out your bucket of deals usually. So It's not unusual for Q1 to be a bit slow, and then it builds through the year, and most people have annual budgets that end in December, so you tend to see it growing towards the end of the year.

Got it. Thank you for the time. Thanks.

And thank you. And one moment for our next question. One moment for our next question.

And our next question comes from Juliana Bologna from Compass Point. Your line is now open.

Good morning, and congratulations on a great high-quality beat this quarter. The first question I was curious about asking was around PMA. I'm curious if you have any updated thoughts around PMA or if there's any, you know, Any change in your opinion there, and if there's any update around the timetable compared to what you've laid out in the past?

No, there's no significant real change in the timeline or what we outlined before, which is we expect all four products to be ready for final submission in the middle of this year. And I would say good progress has been made. on every front that you need to achieve to be able to do that. So there's no change in what we've said previously, and I would just say good progress on all fronts towards getting those parts in the market.

That's great. And then a slightly different area that probably doesn't get much focus. You still have those two offshore assets that are in the other category. I'd be curious if there's any update around potential thought process around maybe selling one or two of them this year. And then also, I'd be curious if those have any financial impact in the quarter, positive or negative in the results.

I'm sure that there was a little bit of a negative impact of probably 3 million in Q1 because we had some repairs that needed to be done on one of the larger vessels. So that was a bit of a drag on the numbers this quarter, and the ship is back in service. So we expect the next two quarters to be good. So that should reverse. In terms of selling, we're actively evaluating it and still believe that most likely the best timing to do a transact would be towards the end of this year, around the end of this year, given that the larger vessel just started operating in the well intervention market, and the more credentialized it becomes, the wider the universe of potential buyers. And that market has, you know, recovered a lot. So I feel, you know, better and better about, you know, being able to achieve that this, you know, on that timeline towards the end of this year.

That's great. Thank you for taking my questions, and I'll jump back into you. Thanks.

And thank you.

And one moment for our next question. And our next question comes from Frank Gallanti from Stifel.

Your line is now open.

Great. Thank you very much for taking my questions. Congrats on the nice quarter here. I wanted to ask sort of on the aerospace business, can you sort of talk about what the component, I guess the makeup or the mix of that $27 million of EBITDA, like how much was modules, how much was USM,

Yes, so this quarter it was about two-thirds from the module factory, one-third from USU Serviceable Interior, USM. It was a little bit more USM this quarter than there has been. We've been predicting that market is picking up given parts shortages and price increases, so that's a good thing. We've indicated we'll probably be targeting about 40 teardowns a year, and we make approximately a million per teardown, so $40 million in EBITDA divided by 4 would be 10. So there's a little bit of upside, I think, going forward for USM. And then I think there's a lot of upside, as I've mentioned before, our module factors. We have a strong backlog of customers, some of whom are fully committed, and some have just given us verbals that they're looking for programs of eight or more modules a year. And the number of airlines indicating that keeps growing. We feel very good about the repeat customer mix, which in Q1 there were probably seven customers out of the ten who were repeats and three that were new customers. So we're progressing, you know, as we expected in terms of both growing the number of customers as well as growing the number of modules per customer.

Great, and I actually wanted to follow up on that comment. And is there a sense for, the question is really around customer stickiness, sort of like a churn number. I know it might be early in the business to sort of get a sense for that, but do you have like a percentage churn that the business is currently operating under? Or I guess another way to think about it is, Is there a way to quantify how much capacity those, what, 26, so 29 customers that you've used before, like, are you at 10% of their shop visits? Are you at 5, 25, 50? Like, is there a lot more room to grow in those customers, the 29 customers that you've worked with in the past?

Yes, there's a lot of room to grow, and as you've indicated, well, first of all, I would say there's no churn in that we've not lost any customers. Nobody that has used the product has said to us or indicated that they wouldn't use it again, so that's a very good thing, and people like the product, and if you look at their total number of shop visits, you know, starting out, you're talking about airlines that have, you know, potentially anywhere from, you know, 10 to 100 shop visits a year, and so that's 30 to 300 modules per year. So we're barely, if you're talking about doing four going to eight, you're still at a very small percentage of their total available shop capacity opportunities. So we think that that number will continue to grow. We haven't lost any customers. We think people, once they use it, they will repeat it again. And in particular, as shop visit time, time in the shop keeps growing and getting longer, the more cost savings a module swap presents to the airline. So we think the advantage of using them will only continue to get better and grow in the coming years.

And just one clarifying question. You said 10 to 100 shop visits a year. Is that per customer or for the 29 customers in aggregate? No, that's per customer. Thanks for the clarification. I really appreciate it. Thank you.

And thank you. And one moment.

And one moment for our next question. And our next question comes from David Zazula from Barclays.

Your line is now open.

Hey, thanks for taking my question. I guess first on the aerospace products business, I think a lot of the investors we talk to are concerned about a macro slowing. I guess we'd be interested in your assessment of the sensitivity of those businesses to a slowdown in the macro. Do you think it would reduce or increase demand or how you think customers would respond?

We don't think it'll have much of an effect because one, Because of COVID and the fact that airlines stopped doing shop visits for basically two years, most green time has been burned off. So there's very little available green time in fleets. As a matter of fact, in the last month, we've had two or more airlines indicated that they need between 20 and 30 engines because they have nothing left. The tap is, the bucket is empty. So I think that mitigates any type of macro slowdown. And then secondly, you always hear that if there is a macro slowdown, the focus on cost cutting accelerates. So more and more companies then go into a mode of like, what can I cut? What can I reduce? And we offer cost savings. We're very direct about, we can save you money on your shop visit, or you can even avoid a shop visit by doing a module swap. So So we think that it's a great product if airlines really need to hunger down and focus on cost-cutting.

Great. And then additionally, CFM 56, I think you guys have done very well there. A lot of life left in that project. But as you're thinking long-term, are you evaluating any other – further generation engines, ecosystems to get into. How are you thinking about that? What would you think of for long-term timing, and how would you evaluate among the different potential projects as you look on down the line?

Yes, we are thinking that. We have two engines that we're particularly focused on right now, which we think are great candidates to do similar things that we've done on the CFM56. We don't really, we see the sweet spot for the CFN-56 really running from 2024 to 2030. It's probably been extended out now because of delays in new aircraft delivery, difficulty with new engines, you know, staying on wing as long as people thought they would, supply chain disruptions, freighter conversions, all those factors are making the CFM 56 life expectancy look longer and longer. So we don't feel that we need to divert attention from the organization, but as I say, somebody in every company needs to be thinking five years ahead. And so we do have two engines that we're working on. I'm not going to disclose what those are, but feel like those would be excellent candidates for us to consider adding when the time is right to do that.

Great. Thanks very much. And thank you. And one moment for our next question.

And our next question comes from Hillary Concando from Equity Analyst. Your line is now open.

Yes. Hi, Joe. Thanks for taking my question. So you previously mentioned that you were looking at other maintenance related products to develop this year. And I think you mentioned something about repair in like one of the industry conferences. Would you be able to talk a little bit more about that where you are in the process? And is this something that we can see, you know, happening this year?

Yes, that's a great question. It is something that we're very actively engaged and working on. I'm very excited about the repair market opportunity. It's growing quite rapidly. It's got a lot of support from both cost savings, where you can, you know, essentially you could repair a part for, you know, 20% of the cost of a new part. So it's a great opportunity. and there's a number of companies that are continuing to develop more and more repairs. So we love the repair market. It fits perfectly into our portfolio. It also plays well on the ESG side in that you're not making a new part. You're saving the old one. It's a recycling opportunity. So ESG is good. It's very pro-repair business. In terms of progress, we do have a couple, I'd say two or three, specific opportunities which were running down. And as I said before, we hope that we can conclude, you know, do something material on the repair side this year in 2023. Great.

That's great to hear. And then I had another question. In your presentation, you noticed that there's, you know, strong backlog from airlines, less stores, and MROs. I was wondering if you could provide a little more color regarding where you're seeing the most demand. I would think there's a strong demand coming from the airlines, but I was wondering if lessors are just as willing to use materials. And I guess related to that, when you do get all your PMA parts approved, Do you think that lessors would be – there would be strong demands on the lessors as well? Because I would think that lessors may be a little more sensitive about using non-OEM parts since they have to market those products. I just wanted to get your thoughts.

Sure. So there's a few questions there. And on the last part, the PMA question and lessors, I do think there's growing acceptance and there's actual evidence of that. In the CF680 engine, which I've talked about, is a great case study. And we bought 80 of those engines. We put PMA in all of those engines. We've done over 100 leases, never had any operator not take that engine because of PMA. And we've sold 53 of them, or 54 now, where the prices were very competitive or as good or better than if it was all OEM equipment. And ironically, many of the buyers of those engines were the leasing companies. And so sometimes you can go ask them if they have PMA in their engine, and they will say no. But they actually do. It's just they don't know it. So I think that the same, you know, fact pattern will play out in the CFM56 engine as well. So I do believe that there will be growing acceptance in that. In terms of where the activity, I mean, the good news is there's growing activity from all three categories. You have airlines, as I mentioned, a number of airlines have used up all their green time, and so they're looking at summer schedules, and then they're deciding to keep the NGs and the CO fleets longer, so they need more engines, or they might be doing a an airframe overhaul that they didn't think they were going to do that now they need, you know, engines for the next five years. So airlines are clearly, you know, demand for engines is very strong. MROs as well because shops are filling up and sometimes shop turn times are slowing down or extending. So they need more engines to be able to do the shop visits that they have in-house and want to bid for. And then leasing companies, really two different activities one is we buy a fair amount of off leased assets from leasing companies so a lot of leasing companies don't have you know the ability to put a lot of assets out if they're off lease particularly engines and so we're a great buyer and then we can solve end of lease return comp issues with module swaps and we're doing more and more of that so at the end of a lease If an airline owes a lot of money, cash, as a return compensation because the engine they're going to give back doesn't have a certain number of hours in the cycles, we can help solve that by doing a module exchange for less than what the cash outlay would be otherwise. So we have a lot of products and solutions that we can offer, and the leasing companies are sort of accepting of all of those because they're just trying to get things done and move on.

Great. Thank you. That was really helpful. Thank you.

And thank you. And one moment for our next question.

And our next question comes from Brian McKenna from J&P Security. Your line is now open.

Thanks. Good morning, everyone. So what's the outlook for asset acquisitions for the remainder of the year? It seems like it continues to be a good environment to acquire assets, particularly for assets off-lease. And then is there any increase in opportunity for sale leasebacks, given that we're likely going to see a softening economic backdrop here at Broadway?

Yes, you're right on both counts. We're seeing a lot of off-lease assets available that we continue to be one of the best buyers for because we have the ability to scrap airframes and just lease engines, which a lot of other people don't. And so, uh, we're acquiring, you know, two, two package deals right now that, that, uh, fall right into that category at great prices. And then a lot, a lot of, you know, one offs, you know, uh, leasing companies trying to clean up, you know, assets that they want to just, you know, get rid of and move on. So that, that areas, um, uh, is, is pretty active. And we also, in the module business, you know, probably half of our module sales involve us taking back a module in return or as an exchange. So we're not really depleting the inventory on half of those transactions. We then take the run-out module and then put it back through our factory and do it all over again. So we're able to replenish that. And then you're right, there still are a number of airlines, you know, the COVID and Russia-Ukraine were pretty big jolts to the aviation system. And so there are airlines that have been, you know, sort of living on the edge for quite a while. And sale leasebacks are returning in terms of activity because it's a great way of, you know, raising capital. And we've done quite a bit of that. And so particularly end of, if an airline is looking at, you know, if they have a new aircraft order and they're looking at phasing out a fleet, it's a way of raising cash today and forward selling their airplanes. So, you know, So we see all those areas of activity and the good news about, you know, the CFM 56 market is there's 20,000 of those engines in the world. So it's enormous and will be for many, many years. So.

Super helpful. Thanks, Joe. And then just the question on capital and liquidity, you know, if the preferred market opens up again over the next few quarters, would you look to raise some additional capital through this part of the market? And then on liquidity more broadly, is there a minimum level of cash you'd like to run the business at?

We typically run around $25 to $50 million in cash, and then we have availability on a revolver, so we feel that that's very comfortable and have been doing that. In Q1, we actually paid down debt, so that was a good result in the quarter. We generated a lot of cash flow. And Um, so, so, and, and in terms of the preferred market, you know, we will look to that periodically. We love, we've always liked that market, uh, when it's open and, um, if it, if it, uh, becomes available, we'll look at it again for sure.

Got it. Thank you.

Thanks.

And thank you. And one moment.

One moment for our next question. And our next question comes from Robert Dodd from Raymond James.

Your line is now open.

Hi, everybody. Congratulations on the quarter. Back to that capital question, if I can. I mean, obviously, you paid down debt. You're now on just Q1 run late EBITDA. You're at four times debt to EBITDA IPF. things go right by the end of the year, you could be pretty close to three. So, I mean, can you give us, given where that leverage path is heading, can you give us any idea what you plan to do with the potential additional, at least from a metric perspective, additional capital you could have available while being in your ranges? Like, is it accelerated? asset purchases, accelerated inventory build in the module swap, or maybe a dividend increase? Or can you give some idea of how you're thinking about allocating what could be an increased capital availability as we go through the conceptual capital availability?

Yeah, I would speak in terms of priorities. Our first priority, as you mentioned, is to be sort of in the three and a half times debt to total EBITDA which we think gets us into the solid strong double B with all agencies. So that's number one priority. I think that's, we've been consistent about that. And so right now that is, that's what we're shooting for. And obviously we're on track to do that with these numbers. So, so that's good. Then the second priority is, has always been investments. You know, when you can generate 20 or 25% unlevered returns on new investments, those are things we never, We've never not been able to do a deal we wanted to do, so that is obviously having the firepower to do that is critically important from an earnings growth point of view. And then beyond that, we would look at, you know, all other options, including a dividend increase, stock buyback, or further debt payout. It's sort of, it would be, you know, we'd take a look at what the market opportunities are at the time and what the various security prices are. We also have securities we could buy back as well other than just common. So we've got a lot of different opportunities, and we would like to be able to avail ourselves of those if things get disrupted.

I mean, just to that point, on the inventory of the modules, I mean, I think I've asked about this before. You've talked about it before. Are you revising up? um the the inventory level you'd like to keep or would you revise up the inventory level uh you'd like to keep up modules and parts etc if if demand plays out the the way you expect it to or do you just the way you turn them on the uh the components doesn't necessarily demand higher inventory levels yes it's more the latter we don't think i mean right now we're running

The aerospace products business with between 150 and 200 million of capital or working capital, which we turn frequently. And we think as we grow the business that that number probably goes up to 250 to 300. But we're talking about doubling and tripling the volume with that. So it's not very capital intensive. It really is driven more by inventory turns and you become more efficient as you have more volume.

Thank you.

Thanks.

And thank you. One moment, please. And I am showing no further questions. I would now like to turn the call back over to Alan Andrini. You're available.

Thanks, Justin. And thank you all for participating in today's conference call. We look forward to updating you after Q2.

This concludes today's conference call. Thank you for participating. You may now disconnect.