FTAI Aviation Ltd.

Good day, and thank you for standing by. Welcome to the Q2 2023 FTAI Aviation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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 FTIA Aviation Second 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 in 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 was opened 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 supplement. 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 33rd dividend as a public company and our 48th consecutive dividend since inception. The dividend of 30 cents per share will be paid on August 29th based on the shareholder record date of August 14th. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA. We had another strong quarter with adjusted EBITDA of 153.1 million in Q2 of 2023, which is up 20% compared to 127.7 million in Q1 of 2023, and up 2% compared to 150.7 million in Q2 of 2022, where we had over 64 million of gains on sale in that quarter. During the first quarter, the 153.1 million EBITDA number was comprised of 125.9 million from our leasing segment and 30.1 million from our aerospace product segment and negative 2.8 million from corporate and other. Turning now to leasing. Leasing had a great quarter, posting approximately 126 million of EBITDA. The pure leasing component of the 126 million came in at 94 million for Q2 versus $91 million in Q1 of 2023. With strong demand for assets and the peak of the Northern Hemisphere summer season, we expect Q3 will grow incrementally. Additionally, on the acquisition side, we closed on 15 aircraft and 23 engines at very attractive prices, which will contribute to further growth in future leasing EBITDA. We remain confident in leasing EBITDA of 350 million to 400 million for the year, excluding gains on asset sales. Part of the 126 million in EBITDA for leasing came from gains on asset sales. We sold 69.6 million book value assets at a 31% margin gain of 31.9 million, benefiting from strong demand for assets globally. We have more asset sales coming in the remainder of the year, and continue to be comfortable assuming gains on asset sales of approximately $25 million per quarter or $100 million for all of 2023. Aerospace Products had yet another excellent quarter with $30 million of EBITDA at an overall EBITDA margin of 44%. We sold 37 modules in Q2 to nine unique customers comprised of three new customers and six repeat customers. 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 an expanding backlog of aerospace products business with leasing companies, MROs or maintenance and repair and overhaul organizations, and airlines. With that, I will turn the call back to Alan.

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

And thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

And one moment for our first question. And that first question comes from Josh Sullivan from the Benchmark Company.

Your line is now open.

Hey, good morning. Nice quarter here. Given the strength in the aviation leasing side and the issues the newest generation of engines are facing, and now we have RTX geared turbofan engine looking at some accelerated shop visit cycles into an already tight MRO market, I know you don't have any GTFs, but have you seen any of that GTF pressure starting to play out for demand in your products and services?

Yes. The airlines we talked to are all holding on to their old, last-generation equipment. So we've seen airlines decide to extend leases. They're looking for more assets of the A320 aircraft. CO family or the 737-800, those markets are very tight. It's very hard to get additional capacity. This is going to put more pressure on those fleets because you're going to have, you know, with the GTF, it's estimated you'll have 1,200 engine shop visits over the next 12 months, 200 in the next two to three months. So that's in the busy summer season, trying to schedule that between now and September is going to be extremely challenging. So anybody that has, you know, existing flying assets is going to keep them and they're looking for more and there'll be more demand for spare engines. So I think, as you point out, it's already a very tight market and this is going to turn, you know, the stress up, you know, another couple of levels in terms of putting more demand for the assets that we own.

And then maybe what are you seeing as far as the sale-leaseback market? You know, there are large deals in the bidding process. Maybe what does your pipeline look like or what really gets that market going again?

Yeah, it's interesting. It's picking up. We, I mean, previously, I think the last few calls, we've been saying that the best buys for us have been assets that are off-lease that have, you know, we can buy cheap and put, you know, cash flow attached to it and then create value that way. We're now starting to see that we're very competitive, again, on assets that are either on lease or with fairly spec transactions with airlines. And we think it's primarily because a lot of the mid-tier leasing companies are relying on debt financing provided by the ABS market, which is really not available. And it's very challenging for people to price out deals with no debt or with much higher cost debt. It's not that we've increased our pricing, it's that the market seems to have come to us. So we're seeing in several portfolio deals that are very attractive with cash flow attached and sale-leasebacks, which never seem to go away totally because airlines always need money. So those markets, I think for the next, at least for the next six to nine months, we see very good investment opportunities That's a fairly recent development.

Thank you for the time.

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

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

Good morning. Congratulations on a great quarter here. One question I'd be curious about, obviously, we're seeing some very strong performance at the module factory and new service materials driving this product segment. You're also seeing strong leasing EBITDA. If I look at the first half of the year at the segment level before corporate, you're annualizing at $585, $186 million of EBITDA already. And you've been talking about $550 to $600 at the segment level. I'm just curious how you're thinking about the confidence level around that range because You're growing rapidly and already running up closer to the high end of that range in the first half of the year.

Our confidence level is pretty high. Every quarter you have behind you, it's easier to look and hit the year. We have pretty good backlog at this point, as you can tell from my comments. I think that You know, if the environment doesn't, you know, swerve in some fashion, you know, against us, which doesn't look at all likely, we've got, you know, we're pretty confident in those numbers for the year. So that's good. And generally, you've got pretty decent visibility out, you know, three to six months on, you know, what activity is in the pipeline.

That's great. Maybe just for a little more context, obviously leasing, we have a good sense of where that is, and you probably have a good sense of the pipeline, but also on the M&A side. And then thinking just on the product side in terms of the drivers, that could be a little bit, you know, the confidence there. I'm curious how the back lot looks on the module factory side, if you're continuing to see the module volume demand continuing to step up the way you've been seeing it for the last few quarters.

Yes, as we've mentioned, we've had a high level of repeat customers. I don't think anybody that we've done business with has indicated they're going to do more. And many of those customers have already put in orders for the balance of this year and indicated what they might do next year as they have visibility on their shop visits. So it's very good. And we add new customers as well. As you can see, we continue to develop the repeat business, but we're also adding you know, each quarter we'll add, you know, a handful of new customers, which will also grow. So I think the backlog on modules is excellent, and visibility is increasing, and people, once they've used it, you know, can say, well, now I'm going to use it, you know, in all my shop visits, and that gives us, you know, a longer-term view into what the pipeline will look like. It allows us also, you know, helpfully to pre-build, So the more visibility we have about what the customer is going to do, the easier it is for us to increase our throughput and turn time because we can pre-position assets in that way. The other business is the USM, the use services and material business, and we see that increasing. We've been running as we indicated, we were probably did approximately 30 tear downs last year. We've been running at that a little bit higher than that in the first half of this year, but we're going to increase the rate of tear downs. And we've, we've taken a number of engines in, um, uh, to inventory and started the processes. And as you probably are aware, it takes about three to six months before you get revenue because you have to tear down the engine, um, label all the parts inspect, and many, many of those parts have to be repaired. they have to be sent out and then brought back so so we see that um level of tear down activity increasing to over 40 engines um uh by in this year and and see very very strong demand as um the original equipment manufacturers as you're probably aware put in a price increase in on august 1 of this year which was uh quite a bit earlier than they've previously done it so i guess If you annualize that rate increase, that's also well into the double digits. So new part prices are going up rapidly, so used serviceable material is very valuable. And we have probably the biggest supply of used serviceable material in the world, maybe other than the OEM, who doesn't like to sell USM anyway. That gives us quite a good tool to get additional business and cross-sell modules and other maintenance services. So we're going to take the USM activity level up in the next two quarters.

That's great. I really appreciate the answer and all the color there. And we'll jump back in the queue.

And thank you.

And one moment for our next question.

And our next question comes from Hilary from Canada from Deutsche Bank. Your line is now open.

Hi, Joe. Thanks for taking my questions. So in the aerospace segment, you know, the total revenue declined sequentially, but the EBITDA margin was a lot stronger than last quarter at 44%. versus 32% last quarter. Could you give us some color on what's causing that difference? And I guess just related to that, should we continue to expect some lumpiness going forward?

It's primarily mixed that it's hard to control that quarter to quarter, but it was favorable this quarter because we had slightly less used serviceable material sales and we also had more core modules that we sold, which tend to be higher margins. So we had less of the lowest margin and more of the highest margin. We would continue to suggest that 35% is still a good place to hold in the middle for modeling purposes. We think that's a sustainable number. It will not always be above to the degree it was this quarter, which was really just driven by mix. And then there's occasionally there's just an opportunistic sale that you happen to have the right asset at the right time for somebody who desperately needs it. So you can also see sometimes we intentionally make sure we have that asset. So that's part of the business.

Got it. Thank you. And then I guess on the start, since you got rid of the K-1s, FTI stock has gotten included in a number of indices and was recently included in Russell 2000 last month. Do you know if any other indices are looking to add you to their index? If you could just kind of provide more call on that. Thank you.

Hi, this is Alan. We think that the next one that we're going to be considered for is the S&P 600, and that could be as early as the end of Q3. and estimates are from the index folks is that that number could be another 12 to 15 million shares.

Okay, great. Great. That's very helpful. Thank you so much.

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

And our next question comes from Brandon Olinsky from Barclays. Your line is now open.

Hey, good morning, and thanks for taking the question. Joe, I was wondering if you could provide us an update on the products approval process with the FAA and where that stands.

Yes, everything is progressing and on the timeline that we've talked about previously, which is we expect the additional four products to be available around the end of this year. And other than that, we're not providing any more detail about the process around that.

Okay, but still on track for end of year. And strategically, Joe, I guess, how do you look to leverage that portfolio? Do you think it's going to be more powerful for you in your own assets, or is this going to be something that you think flourishes more, you know, third-party sales?

Both. I mean, I think we've always felt like, you know, we're going to use it and we'll be a quick adopter. So, and that, we believe, will facilitate other people adopting it. And as we saw with the CF680 engine previously, we put PMA in those engines and leased them. And no airline in the world had any issue with leasing an engine with PMA. And some airlines will say, well, we wouldn't necessarily put PMA in our own engines, but no one would not lease an engine. So similarly, we expect that to be similar in this market as it is. And that's why I think the integration of our products and the ability to cross-sell is very powerful in that we have a solution for everyone. There's nobody out there who can't offer something of value to help save on maintenance expense, which increasingly stands out on P&Ls of airlines, as you're well aware. the CASM numbers are going up and maintenance, and particularly engine maintenance, is one of the big drivers. So we think that our ability to offer a wide range of products to anybody that owns an engine or flies an engine is really powerful.

Okay, I appreciate that. And then on the capital side, I guess, are you comfortable with where you're running debt levels right now? And do you think you need a little bit more cash? So is there a capital required going forward?

We've had access. I mean, we have a revolver that we've always had access to that acts as our liquidity. And we've had good access to the debt markets and the preferred markets. So we think that, you know, the credit metrics are improving as we've told people we expect to be in the mid threes debt to total EBITDA, which we achieved. If you look at the numbers, we achieved that this quarter, which we were saying we were hoping to achieve that by the end of the year. So that's good. And we think that that will position us to be strong double B. In my experience, as long as you're strong double B, you pretty much always have access to capital. So we're very close to that and think we're in a good position. You know, the need for capital is really driven off of investment opportunities, which is a good thing. And as I mentioned, we are seeing an increase in opportunities, which we didn't really expect. But the world is funny and, you know, things are always changing. So we're well positioned, you know, if opportunities present themselves to, you know, further increase our position in the CFM 56 market. All right. Appreciate the response. Thank you.

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

And our next question comes from Frank Galante with Stiefel. Your line is now open.

Great.

Thank you. Appreciate you taking my question. I wanted to ask on, ask about PMA approval. for airlines in both the leasing and the module factory. So has there been a change in the past couple months on further PMA acceptance? And if possible, it would be helpful to sort of know of the LPT modules sold, what percentage of those have PMA in it?

I don't think we've sold any modules with PMA in it. Is that correct? we are flying in our least fleet, what, 15 or so engines? About 15 engines with PMA in the CFM56 fleet. We've had 100% of our CF680 fleet and Pratt Ford Nelson fleet has PMA in it, which always has been the case. So we've, you know, in the CFM56 fleet, we have... about 15 engines that we're flying and leasing to other airlines that are flying with PMA.

Is there any particular reason why there wouldn't be PMA in the LPT module from a customer or from a strategic market entry perspective?

No. And as I said, if you look at the development of the CF680 engine market, we expect it to be similar. So that ultimately, it's purely a matter of timing as to when an engine needs a restoration of the LPT. And when it does, that's when there's an opportunity to use the PMA. You wouldn't necessarily take an engine off wing that is not due for a shop visit and swap out good OEM parts for PMA. You just do it when it's ready and in the shop.

Okay. And then sort of switching it up, just from a generally higher interest rate environment, how does that, from your perspective, affect the lease business, particularly lease rates?

Well, it's had a – I mean, I would say our – You know, at the lowest rate, our cost of debt was, we did an issue of five and a half percent and estimates right now we're trading in this probably seven and a half percent range on cost of debt capital. So our, just to bring it to our personal, you know, um, situation, our cost of debt is up about 200 basis points, but I would say our return on assets that we're looking at deal wise is probably up four to 500 basis points. So. from an investment point of view, it's fine. We're more than covering the increased cost of debt. The other side of it is how does it affect the industry? And I alluded to that earlier, and I think a lot of sort of mid-tier leasing companies that used to go out and raise an equity fund and assume they were going to be able to leverage that with relatively cheap debt are struggling. That's hard. It's hard to get the debt. The debt is way more expensive than it was before by orders of magnitude, you know, not 200 basis points, but multiples of that. So the numbers don't work, which means that they're either not competitive or prices come down and all of that, you know, is what sort of leads us to be in a pretty good position because our cost of, you know, debt is up a little bit, not a lot. And we don't leverage each individual deal. So we're in an environment more like 2010 and 11 where, you know, he who has money or she who has money is, you know, in a good spot. So that's kind of the macro. You know, on the new aircraft side, we don't really participate in that market, so you'd be better to ask, you know, the people who have big new aircraft orders than us.

That's really helpful. Thanks very much.

Yep. And thank you. And one moment for our next question. And our next question comes from Brian McKenna from JMP Securities.

Your line is now open.

Great, thanks. so joe could you talk about the opportunity in the repair market i know you've spoken about this a little bit in the past but i'm curious how you're thinking about this opportunity today both in the us and then in europe as well and would you look to potentially do an acquisition here to create some more scale initially versus trying to build it organically from scratch yeah great question uh we since we last spoke up in montreal we have um

Tad Piper- made progress on the repair joint venture we took a trip through Europe and met with quite a few different you know options and we've narrowed it down, and so I think we are progressing with. Tad Piper- On that and and we had expected their hope that we would have something by the end of this year. Tad Piper- That would be in place, and I still believe that that seems you know doable and we're still very inches I mentioned we're increasing. our teardown activity fairly meaningfully, which means our repair volume is going to be up materially, which makes us an even better partner for people who have repair products. So I think it's only gotten better and the repair market is, you know, a lot of people are paying attention to it now because OEM parts prices keep going up and up and up. And so recycling or fixing or repairing is, pretty attractive, it's a pretty attractive business for everyone. So very excited about that. Would we, you know, buy versus build? And, you know, I think we're trying, you know, building something from scratch is probably the best overall economics, but it takes a long, long time. So I don't, I think we'd rather avoid that. And, you know, if we can get into something sooner, that would be better. it could involve investing some modest amount of capital um but it's i doubt that it's we're not gonna there's no one company out there that has the portfolio that we could you know sort of acquire and so it's it's probably more of a partnership uh structure got it very helpful uh and then maybe just a question on your externally managed structure so you clearly have had a long-standing relationship with fortress since since inception

But just given the growth trajectory of FTI and the size and scale of the business today versus just a couple of years ago, would you ever look to internalize the business and move out from under the Fortress umbrella?

Well, we get a lot of benefits from being part of Fortress, and we also are in the process of being sold. Fortress is under contract to be sold to Mubadala, which would likely not close until around the end of the year or so. It's really a decision the new owner would need to make on that front.

Got it. Thanks, Joe. And congrats on another great quarter. Thanks.

And thank you.

And one moment for our next question.

And our next question comes from Robert Dodd from Raymond James. Your line is now open.

Hi, guys, and congratulations on the quarter in the EBITDA. So, question, you partly answered it, I think, about capital allocation, right? I mean, obviously, you know, I usually ask about the dividend. The dividend is extremely well covered from free cash flow. Your leverage is now in the middle of your target range for that strong double B. I mean, what's the appetite for And is there any appetite for allocating capital for increasing the dividend? Or is it just the opportunities for investment in acquisition of assets are just much more attractive? I mean, can you give us, you've given us the delever acquisition dividend kind of priority order before, but you've already hit your leverage kind of target. So can you rank where you view the priorities on capital allocation now, given the leverage has improved significantly?

Yes, it's similar. I mean, the number one priority has always been investment opportunities. And as I mentioned previously, there's an uptick in activity there. So I think that has got our attention at the moment. So that's number one. We've never not been able to you know, buy assets that we wanted to buy. And so we want to keep that string unbroken. So that's number one. And secondly is making sure that we have the good credit metrics to maintain double B and to be strong double B, which, as you said, we're there probably a little ahead of schedule. So that's good. And then after that, you know, we would then look at dividends and stock buybacks. But I think the priority is still acquisitions, number one, debt level number two, and then equity activity.

Got it. And if I can, what would it take confidence-wise? You've been very clear. You're very confident in the guidance. What would it have taken, apparently, for you to increase the indication for the aerospace products? Obviously, 100 million plus is still your indication. You're at effectively 60 already for this year with a building pipeline so so are you just being conservative or the the comment where unless the market swerves against you are you worried about a market swerve or is it just pure conservatism well i'm always worried about a market swerve two of them but i didn't predict yeah you never know but i mean it feels very good and you know as i mentioned everything

we went from having everything working against us to having everything working in favor. So I'm, I'm happy about that. And I'm, you know, every day I wake up, I say, I hope this continues. So that, so no, we're not worried about it, but you always have to be worried about it because it's the airline industry. But, but no, I think it really is just the passage of time. This is still a relatively new business. We've got new customers and, feedback that is very positive and building orders. But, you know, I think time is really just, it's still in the early innings. It's actually really early innings for us and the industry. And I just think it's, you know, time is sort of what we really just need to continue to build a track record.

God, I appreciate that. Thank you.

And again, congrats on the four.

Thanks.

And thank you. And I am showing no further questions. I would now like to turn the call back over to Alan Andrini for closing remarks.

Thank you, Justin, and thank you all for participating in today's conference call. We look forward to updating you after Q3.

This concludes today's conference call. Thank you for participating. You may now disconnect. Music playing Thank you. Thank you. Good day, and thank you for standing by. Welcome to the Q2 2023 FTAI Aviation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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 EFTI Aviation Second 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 in 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 was opened 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 supplement. 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 33rd dividend as a public company and our 48th consecutive dividend since inception. The dividend of 30 cents per share will be paid on August 29th based on the shareholder record date of August 14th. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA. We had another strong quarter with adjusted EBITDA of 153.1 million in Q2 of 2023, which is up 20% compared to 127.7 million in Q1 of 2023, and up 2% compared to 150.7 million in Q2 of 2022, where we had over 64 million of gains on sale in that quarter. During the first quarter, the 153.1 million EBITDA number was comprised of 125.9 million from our leasing segment and 30.1 million from our aerospace product segment and negative 2.8 million from corporate and other. Turning now to leasing. Leasing had a great quarter, posting approximately 126 million of EBITDA. The pure leasing component of the 126 million came in at 94 million for Q2, versus $91 million in Q1 of 2023. With strong demand for assets and the peak of the Northern Hemisphere summer season, we expect Q3 will grow incrementally. Additionally, on the acquisition side, we closed on 15 aircraft and 23 engines at very attractive prices, which will contribute to further growth in future leasing EBITDA. We remain confident in leasing EBITDA of $350 million to $400 million for the year, excluding gains on asset sales. Part of the $126 million in EBITDA for leasing came from gains on asset sales. We sold 69.6 million book value assets at a 31% margin gain of $31.9 million, benefiting from strong demand for assets globally. We have more asset sales coming in the remainder of the year, and continue to be comfortable assuming gains on asset sales of approximately $25 million per quarter or $100 million for all of 2023. Aerospace Products had yet another excellent quarter with $30 million of EBITDA at an overall EBITDA margin of 44%. We sold 37 modules in Q2 to nine unique customers comprised of three new customers and six repeat customers. 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 an expanding backlog of aerospace products business with leasing companies, MROs or maintenance and repair and overhaul organizations and airlines. With that, I will turn the call back to Alan.

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

And thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

And one moment for our first question. And that first question comes from Josh Sullivan from the Benchmark Company.

Your line is now open.

Hey, good morning.

Nice quarter here. Given the strength in the aviation leasing side and the issues the newest generation of engines are facing, and now we have RTX geared turbofan engine looking at some accelerated shop visit cycles into an already tight MRO market, I know you don't have any GTFs, but have you seen any of that GTF pressure starting to play out for demand in your products and services?

Yes. The airlines we talked to are all holding on to their old, last-generation equipment. So we've seen airlines decide to extend leases. They're looking for more assets of the A320 aircraft. CO family or the 737-800, those markets are very tight. It's very hard to get additional capacity. This is going to put more pressure on those fleets because you're going to have, you know, with the GTF, it's estimated you'll have 1,200 engine shop visits over the next 12 months, 200 in the next two to three months. So that's in the busy summer season, trying to schedule that between now and September is going to be extremely challenging. So anybody that has, you know, existing flying assets is going to keep them and they're looking for more and there'll be more demand for spare engines. So I think, as you point out, it's already a very tight market and this is going to turn, you know, the stress up, you know, another couple of levels in terms of putting more demand for the assets that we own.

And then maybe what are you seeing as far as the sale-leaseback market? You know, there are large deals in the bidding process. Maybe what does your pipeline look like or what really gets that market going again?

Yeah, it's interesting. It's picking up. We, I mean, previously, I think the last few calls, we've been saying that the best buys for us have been assets that are off-lease that have, you know, we can buy cheap and put, you know, cash flow attached to it and then create value that way. We're now starting to see that we're very competitive, again, on assets that are either on lease or with sale-leaseback transactions with airlines. And we think it's primarily because a lot of the mid-tier leasing companies are relying on debt financing provided by the ABS market, which is really not available. And it's very challenging for people to price out deals with no debt or with much higher cost debt. So it's It's not that we've increased our pricing, it's that the market seems to have come to us. So we're seeing in several portfolio deals that are very attractive with cash flow attached and sale-leasebacks, which never seem to go away totally because airlines always need money. So those markets, I think for the next, at least for the next six to nine months, we see very good investment opportunities That's a fairly recent development.

Thank you for the time.

And thank you. And one moment. And one moment for our next question. And our next question comes from Giano Bologna from Compass Point.

Your line is now open.

Good morning. Congratulations on a great quarter here. One question I'd be curious about, obviously, we're seeing some very strong performance at the module factory and new service materials driving this product segment. You're also seeing strong leasing EBITDA. If I look at the first half of the year at the segment level before corporate, you're annualizing at $585, $186 million of EBITDA already. And you've been talking about $550 to $600 at the segment level. I'm just curious how you're thinking about the confidence level around that range because You're growing rapidly and already running up closer to the high end of that range in the first half of the year.

Our confidence level is pretty high. Every quarter you have behind you, it's easier to look and hit the year. We have pretty good backlog at this point, as you can tell from my comments. I think that You know if the environment doesn't you know swerve in some fashion, you know against this which doesn't look at all likely we've got you know. we're pretty confident in those numbers for the year so that's that's good in generally you've got pretty decent visibility out, you know, three to six months on you know what activity is in the pipeline.

That's great. Maybe just, you know, for a little more context, obviously leasing, we have a good sense of where that is, and you probably have a good sense of the pipeline, but also on the M&A side. And then thinking just on the product side in terms of the drivers, that could be a little bit, you know, the confidence there. I'm curious how the back lot looks on the module factory side, if you're continuing to see the module volume demand continuing to step up the way you've been seeing it for the last few quarters.

Yes, as we've mentioned, we've had a high level of repeat customers. I don't think anybody that we've done business with has indicated they're going to do more. And many of those customers have already put in orders for the balance of this year and indicated what they might do next year as they have visibility on their shop visits. So it's very good. And we add new customers as well. As you can see, we continue to develop the repeat business, but we're also adding you know, each quarter we'll add, you know, a handful of new customers, which will also grow. So I think the backlog on modules is excellent, and visibility is increasing, and people, once they've used it, you know, can say, well, now I'm going to use it, you know, in all my shop visits, and that gives us, you know, a longer-term view into what the pipeline will look like. It allows us also, you know, helpfully to pre-build, So the more visibility we have about what the customer is going to do, the easier it is for us to increase our throughput and turn time because we can pre-position assets in that way. The other business is the USM, the use service and material business, and we see that increasing. We've been running, as we indicated, we probably did approximately 30 teardowns last year. We've been running at that a little bit higher than that in the first half of this year, but we're going to increase the rate of teardowns. And we've taken a number of engines to inventory and started the processes. And as you're probably aware, it takes about three to six months before you get revenue because you have to tear down the engine, label all the parts, inspect, and many of those parts have to be repaired. they have to be sent out and then brought back so so we see that level of teardown activity increasing to over 40 engines um uh by in this year and and see very very strong demand as um the original equipment manufacturers as you're probably aware put in a price increase in on august 1 of this year which was uh quite a bit earlier than they've previously done it so i guess If you annualize that rate increase, that's also well into the double digits. So new part prices are going up rapidly, so used serviceable material is very valuable. And we have probably the biggest supply of used serviceable material in the world, maybe other than the OEM, who doesn't like to sell USM anyway. That gives us quite a good tool to get additional business and cross-sell modules and other maintenance services. So we're going to take the USM activity level up in the next two quarters.

That's great. I really appreciate the answer and all the color there. And we'll jump back in the queue.

And thank you.

And one moment for our next question.

And our next question comes from Hilary from Canada from Deutsche Bank. Your line is now open.

Hi, Joe. Thanks for taking my question. So in the aerospace segment, you know, the total revenue declined sequentially, but the EBITDA margin was a lot stronger than last quarter at 44% versus 32% last quarter. Could you give us some color on what's causing that difference? And I guess just related to that, should we continue to expect some lumpiness going forward?

It's primarily mixed that it's hard to, you know, control that quarter to quarter, but it was – favorable this quarter because we had slightly less used serviceable material sales and we also had more core modules that we sold which tend to be higher margins so we had less of the lowest margin and more of the highest margin we would continue to suggest that 35 is still a good place to hold in the middle as it you know for modeling purposes we think that's a sustainable number and Um, not, it will not always be above, you know, to the degree it was this quarter, uh, which was really just driven by mix. And then there's occasionally, there's just an opportunistic sale that you happen to have the right, the right asset at the right time for somebody who desperately needs it. So you can also, um, see sometimes we, we intentionally, you know, make sure we have that asset. So, um, that's, that's part of the business.

Got it. Thank you. And then I guess on the start, since you got rid of the K1, you know, FPI stock has gotten included in a number of indices and, you know, was recently included in Russell 2000 last month. Do you know if any other indices are looking to add you to their index? If you could just kind of provide more call on that. Thank you.

Hi, this is Alan. We think that the next one that we're going to be considered for is the S&P 600. And that could be at the end of, as early as the end of Q3. And estimates are from the index folks is that that number could be another 12 to 15 million shares.

Okay, great. Great. That's very helpful. Thank you so much.

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

And our next question comes from Brandon Olinsky from Barclays. Your line is now open.

Hey, good morning, and thanks for taking the question. Joe, I was wondering if you could provide us an update on the products approval process with the FAA and where that stands?

Yes, everything is progressing and on the timeline that we've talked about previously, which is we expect the additional four products to be available around the end of this year. And other than that, we're not providing any more detail about the process around that.

Okay, but still on track for end of year. And strategically, Joe, I guess, how do you look to leverage that portfolio? Do you think it's going to be more powerful for you in your own assets, or is this going to be something that you think flourishes more, you know, third-party sales?

Both. I mean, I think we've always... felt like you know we're going to use it and we'll be a quick adopter so and that we believe will facilitate other people adopting it and as we saw with the cf680 engine previously we put pma in those engines and lease them and no airline in the world had any issue with leasing an engine with pma and some airlines will say well you know we wouldn't necessarily put pma in our own engines but no one would not lease an engine so similarly we expect you know that you know to be this be similar in this market as it is and that's why i think the you know the integration of our products and the ability to cross sell is very powerful in that we have a solution for everyone there's nobody out there we can't offer something to a value to help you know save on maintenance expense which is an increasingly you know, stands out on P&Ls of airlines, as you're well aware. The CASM numbers are going up and maintenance, and particularly engine maintenance, is one of the big drivers. So we think that this, our ability to offer, you know, a wide range of products to anybody that owns an engine or flies an engine is really powerful.

Okay, I appreciate that. And then on the capital side, I guess are you comfortable with where you're running, uh, debt levels right now? And do you think you need a little bit more cash? So, you know, is there capital required going forward?

Uh, we've had access. I mean, we have a revolver, um, that, uh, we've always had access to that access our liquidity. Um, and we've had, um, good access to the debt markets and the preferred markets. So, uh, we think that, um, you know, the credit metrics are improving as we've told people we expect to be, you know, in the mid threes debt to total EBITDA, which we achieved. If you look at the numbers, we achieved that this quarter, which we were saying we were hoping to achieve that by the end of the year. So that's good. And we think that that will position us to be strong double B. In my experience, as long as you're strong double B, you pretty much always have access to capital. So we're... We're very close to that and think we're in a good position. You know, the need for capital is really driven off of investment opportunities, which is a good thing. And as I mentioned, we are seeing an increase in opportunities, which we didn't really expect. But the world is funny and, you know, things are always changing. So we're well positioned, you know, if opportunities present themselves to, you increase our position in the CFM 56 market. All right.

Appreciate the response. Thank you. Thanks. And thank you. And one moment for our next question.

And our next question comes from Frank Galante with Stifel. Your line is now open.

Great. Thank you. I appreciate you taking my question. I wanted to ask about PMA approval for airlines in both the leasing and the module factory. So has there been a change in the past couple months on further PMA acceptance? And if possible, it would be helpful to sort of know of the LPT modules sold, what percentage of those have PMA in it?

I don't think we've sold any modules with PMA in it, is that correct? We are flying in our least fleet, what, 15 or so engines? About 15 engines with PMA in the CFM56 fleet. We've had 100% of our CF680 fleet and Pratt Ford Nelson fleet has PMA in it, which always has been the case. So we've, you know, in the CFM 56 fleet, we have about 15 engines that we're flying and leasing to other airlines that are flying with PMA.

Is there any particular reason why there wouldn't be PMA in the LPT module from a customer or from a strategic market entry perspective?

No. And as I said, if you look at the development of the CF680 engine market, we expect it to be similar. So that ultimately, it's purely a matter of timing as to when an engine needs a restoration of the LPT. And when it does, that's when there's an opportunity to use the PMA. You wouldn't necessarily take an engine off wing that is not due for a shop visit and swap out good OEM parts for PMA. You just do it when it's ready and in the shop.

Okay. And then sort of switching it up, just from a generally higher interest rate environment, how does that, from your perspective, affect the lease business, particularly lease rates?

Well, it's had a – I mean, I would say our – You know, at the lowest rate, our cost of debt was, we did an issue of five and a half percent and estimates right now we're trading in this probably seven and a half percent range on cost of debt capital. So our, just to bring it to our personal, you know, um, situation, our cost of debt is up about 200 basis points, but I would say our return on assets that we're looking at deal wise is probably up four to 500 basis points. So. From an investment point of view, it's fine. We're more than covering the increased cost of debt. The other side of it is how does it affect the industry? And I alluded to that earlier, and I think a lot of sort of mid-tier leasing companies that used to go out and raise an equity fund and assume they were going to be able to leverage that with relatively cheap debt are struggling. That's hard. It's hard to get the debt. The debt is way more expensive than it was before by orders of magnitude, you know, not 200 basis points, but multiples of that. So the numbers don't work, which means that they're either not competitive or prices come down and all of that, you know, is what sort of leads us to be in a pretty good position because our cost of, you know, debt is up a little bit, not a lot. And we don't leverage each individual deal. So we're in an environment more like 2010 and 11 where, you know, he who has money or she who has money is, you know, in a good spot. So that's kind of the macro. You know, on the new aircraft side, we don't really participate in that market, so you'd be better to ask, you know, the people who have big new aircraft orders than us.

That's really helpful. Thanks very much.

Yep.

And thank you. And one moment for our next question. And our next question comes from Brian McKenna from JMP Securities.

Your line is now open.

Great, thanks. so joe could you talk about the opportunity in the repair market i know you've spoken about this a little bit in the past but i'm curious how you're thinking about this opportunity today both in the us and then in europe as well and would you look to potentially do an acquisition here to create some more scale initially versus trying to build it organically from scratch yeah great question uh we since we last spoke up in montreal we have um

Tad Piper- made progress on the repair joint venture we took a trip through Europe and met with quite a few different you know options and we've narrowed it down, and so I think we are progressing with. Tad Piper- On that and and we had expected or hope that we would have something by the end of this year that would be in place, and I still believe that that seems you know doable and we're still very inches I mentioned we're increasing. our teardown activity fairly meaningfully, which means our repair volume is going to be up materially, which makes us an even better partner for people who have repair products. So I think it's only gotten better and the repair market is, you know, a lot of people are paying attention to it now because OEM parts prices keep going up and up and up. And so recycling or fixing or repairing is, pretty attractive. It's a pretty attractive business for, um, uh, for everyone. So very excited about that. Would we, you know, buy versus build? And, you know, I think we're trying, you know, you know, building something from scratch, uh, is probably the best overall economics, but it takes a long, long time. So I don't, I think we'd rather avoid that. And, you know, if we can get in the, you know, in, into something sooner, um, that would be better. it could involve investing some modest amount of capital um but it's i doubt that it's we're not gonna there's no one company out there that has the portfolio that we could you know sort of acquire and so it's it's probably more of a partnership uh structure got it very helpful uh and then maybe just a question on your externally managed structure so you clearly have had a long-standing relationship with fortress since since inception

But just given the growth trajectory of FTIE and the size and scale of the business today versus just a couple of years ago, would you ever look to internalize the business and move out from under the Fortress umbrella?

Well, we get a lot of benefits from being part of Fortress, and we also are in the process of being sold. Fortress is under contract to be sold to Mubadala, which would likely not close until around the end of the year or so. it's really a decision the new owner would need to make on that front.

Got it. Thanks, Joe. And congrats on another great quarter. Thanks.

And thank you.

And one moment for our next question.

And our next question comes from Robert Dodd from Raymond James. Your line is now open.

Hi, guys, and congratulations on the quarter in the EBITDA. So, question, you partly answered it, I think, about capital allocation, right? I mean, obviously, you know, I usually ask about the dividend. The dividend is extremely well covered from free cash flow. Your leverage is now in the middle of your target range for that strong double B. I mean, what's the appetite for And is there any appetite for allocating capital to increasing the dividend? Or is it just the opportunities for investment in acquisition of assets are just much more attractive? I mean, you've given us the delever acquisition dividend kind of priority order before, but you've already hit your leverage kind of target. So can you rank where you view the priorities on capital allocation now, given the leverage has improved significantly?

Yes, it's similar. I mean, the number one priority has always been investment opportunities. And as I mentioned previously, there's an uptick in activity there. So I think that has got our attention at the moment. That's number one. We've never not been able to buy assets that we wanted to buy. And so we want to keep that string unbroken. So that's number one. And secondly is making sure that we have the good credit metrics to maintain BB and to be strong BB, which, as you said, we're there probably a little ahead of schedule. So that's good. And then after that, we would then look at uh, dividends and stock buybacks. But I think the priority is still acquisitions. Number one, uh, debt level number two, and then, and then, uh, equity activity.

Got it. And if I can one, one, uh, what would it take confidence wise? You've been very clear. You're very confident in, in the guidance. What would it have taken for you to increase, um, the indication for the aerospace products. Obviously, 100 million plus is still your indication. You're at effectively 60 already for this year with a building pipeline. So are you just being conservative or the comment where unless the market swerves against you, are you worried about a market swerve or is it just pure conservatism?

Well, I'm always worried about a market swerve. Two of them that I didn't predict. Yeah. You never know. But, I mean, it feels very good. And, you know, as I mentioned, everything, we went from having everything working against us to having everything working in favor. So I'm happy about that. And, you know, every day I wake up, I say, I hope this continues. So no, we're not worried about it, but you always have to be worried about it because it's the airline industry. But, no, I think it really is just the passage of time. This is still a relatively... new business. We've got new customers and feedback that is very positive and building orders. But, you know, I think time is really just, it's still in the early innings. It's actually really early innings for us and the industry. And I just think it's, you know, time is sort of what we really just need to continue to build a track record.

God, I appreciate that. Thank you. And again, congrats on the floor.

Thanks.

And thank you. And I am showing no further questions. I would now like to turn the call back over to Alan Andrini for closing remarks.

Thank you, Justin. And thank you all for participating in today's conference call. We look forward to updating you after Q3.

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