FTAI Aviation Ltd.

Good day and welcome to the Q4 2023 FTAI Aviation Earnings Conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would like to hand the call over to Alan Androni, Investor Relations. You may begin.

Thank you, Michelle. I would like to welcome you all to the FTAI 4th quarter and full year 2023 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer, Angela Nam, our Chief Financial Officer and David Moreno, our Chief Operating 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 broadcast. 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 annual report filed with the FCC. Now I would like to turn the call over to Joe.

Thank you, Alan. To start today, I'm pleased to announce our 35th dividend as a public company and our 50th consecutive dividend since inception. The dividend of 30 cents per share will be paid on March 20, based on a sharehold record date of March 8. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We ended the year strongly with adjusted EBITDA of 162.3 million in Q4 2023, which is up just over 5% compared to 154.2 million in Q3 2023, and up 31% compared to 123.5 million in Q4 of 2022. During the fourth quarter, the 162.3 million EBITDA number was comprised of 121.8 million from our leasing segment, 54.6 million from our aerospace product segment, and negative 14.1 million from corporate and other. Now let's look at all of 2023 versus all of 2022. Adjusted EBITDA was 597.3 million in 2023, up 40% versus 428.1 million in 2022. Turning now to leasing, leasing had another good quarter, posting approximately 122 million of EBITDA. The pure leasing component of 122 million of EBITDA came in at 99 million for Q4 versus 102 million in Q3. Additionally, on the acquisition side, we acquired at attractive prices 229 million in new equipment comprised of 10 aircrafts and 33 engines, which will contribute to further growth in future leasing EBITDA. We're very comfortable in producing approximately 425 million of leasing EBITDA for 2024, excluding projected gains on asset sales of approximately 50 million. Part of the 122 million EBITDA for leasing came from gains on asset sales. We sold 33.5 million book value of assets at a 40% margin for a gain of 22.7 million in the quarter, benefiting from exceptionally strong demand globally for our portfolio of assets. And we remain comfortable assuming gains on asset sales continuing at approximately 12.5 million per quarter, or 50 million for all of 2024. Aerospace Products had yet another excellent quarter with 54.6 million of EBITDA and an overall EBITDA margin of 34%. We sold 61 modules in Q4 to 17 unique customers comprised of 6 new customers and 11 repeat customers. We see tremendous potential in Aerospace Products and feel good about generating EBITDA for 2024 towards the middle or higher end of the $200 million to $250 million range. We continue to expect strong growth in Aerospace Products as customers experience the clear benefits of our MRE products and programs. We are both expanding the number of customers and usage per customer at an accelerating pace. Additionally, we are very pleased with the introduction, acceptance of, and demand for our second focus engine, the V2500. With this, we have the ability to become the leading full-service aftermarket power provider for all 737NG and A320neo aircraft globally. Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be between $675 million to $725 million, not including corporate and other. With that, I will turn the call back to Alan.

Thank you, Joe. Michelle, you may now open the call to questions and answers.

Thank you. If you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself in the queue, please press star 11 again. Our first question comes from Christine Lee-Wag with Morgan Stanley. Your line is open.

Hey, good morning, everyone.

Good morning.

Hey,

Joe, you know, on the leasing portion, we saw a sequential decline in revenue. Can you talk about what drove this slight step down?

Yes, the biggest driver was we

had four aircraft, A320s, on lease to Bamboo Airlines, which we terminated in the third quarter last year, so they were taken back. They were off-lease for Q4, and they'll be off-lease for Q1. That represents about $5 million per quarter of EBITDA. And the reason we did that is that the credit wasn't great, and we had other opportunities to put those out on lease at higher rates and better terms. So ultimately, it's very NPV-positive for us, but it had a negative impact on revenues in EBITDA and Q4 and will also affect Q1 of 2024.

Thanks. And, you know, Joe, you know, saying that you were able to release these assets at a higher monthly lease rate and better terms, can you talk about the overall environment that suggests that, you know, it seems like demand continues to outpace supply? So is there a general view when you've got assets up for release? Like, how much of a step up in the monthly lease rates are you seeing for those assets?

Well, it depends on, you

know, when the lease was originally done, but in general, lease rates for aircraft are up anywhere from 20 to 40%. So if the operator is either not a great operator or the operator isn't willing to pay market rates, then you move the assets. It's always more expensive to move than to keep it where it is, so you favor extensions over new leases. But in this case, we just didn't have confidence in the company, so we decided it was better, much better, to move them.

Great. Thanks. And if I could squeeze one last question. In the quarter, you were able to acquire 33 engines and 10 aircraft. Can you talk about the availability of assets in the market? I guess to some degree you guys are very unique because you're the asset owner and you also have an MRO capability. Does this give you an edge in being able to buy assets that maybe other, just pure leasing assets or operators may not be interested in?

Yes, absolutely. We, particularly on the engine side, if an engine is tagged unserviceable, it's very, there are very, very few buyers for that engine other than pure part-out companies, which typically pay, you know, very low prices. And so we're uniquely positioned because we can take an engine that's tagged unserviceable and repair it. And it could be, the best situation is that it's unserviceable because of only one module, in which case, you know, we get the other two modules at a discount when it's really not, it shouldn't be trading at a discount, but they do because it's coupled with an unserviceable module. So we are, we can buy anything. And so when people put up, you know, packages and some buyers like to nitpick and they'll say, I want that one, I want that one, but I don't want that one. The seller's like, I don't want to deal with that. I want one buyer. And so we're able to acquire, I think, much more effectively than other people for that reason. There's nothing we can't, you know, digest.

Great. Thank you for the call, Larry.

Thanks. Thank you. Our next question comes from Josh Sullivan with the Benchmark Company. Your line is open.

Hey, good morning. Morning. So I just wanted to get some color on the market response for lease rents, you know, after DFA put in the production cap on the max earlier this year. And I guess maybe it would be helpful to also understand just how lease rents have walked from pre-COVID levels to today. Sure. David?

David Moreno. We'll take that. Hi, Josh. So lease rates typically are 60,000 plus maintenance reserves. During COVID, there were special arrangements made, let's say, power by the hour or rates that were 45 to 50,000 plus maintenance reserves. Those days are now long gone. That's for one CFM 56 engine. Yes, that's per engine. Today, those days are long gone. Lease rates are up 75 plus maintenance reserves. And those continue to rise as there's a shortage of CFM and B2500s today in the market.

And the cap, as you mentioned, the cap on the max production means that people are going to keep their NGs and COs longer because they can't meet their growth projections with the new aircraft. So that cap is likely to extend the imbalance between supply and demand for at least a couple of years.

And then secondly, I know you've talked about the parts business averaging around 35% EVDA margins. Obviously, 50 plus is a good result this quarter in EVDA. But what are the moving parts around maybe EVDA per module?

So

it's

a function of

mix. Certain modules, we have higher margins on, particularly the core. It'll be a function on the size of the customer. And it'll be a function on the timing and the urgency which they need the modules. So it sort of all goes into the mix on a quarterly basis. And we've been averaging about $500,000 per module in each of the quarters. We've had a couple of times where we've had some positive surprises because another reason is we often can buy things really cheaply. As I mentioned, we buy a package of engines. We might end up with a very low basis in a module that produces an outsized gain for that reason. But I would say that the $500,000 has been pretty steady over the last couple of years and is a good assumption going forward until we have more PMA.

Thank

you for the

time. Thank you.

Thank you. Our next question comes from Miles Watson with Wolf Research. Your line is open.

Thanks. Joe, could you talk about the V2500 MRE program, where it's being worked, how big could the contribution be? And then in respect to your comment that your vision for FTI is to be the leading full service aftermarket power provider globally for the NG and the CFM and the 56 and the V2500 engine, can you just give us a picture of what does that mean in terms of quantum, who is the leader today?

Sure. So maybe a bit of history. We have owned the V2500 for several years, so it's not that we just discovered. We've had about 50 to 60 engines in the portfolio for a while. Starting about six months ago, we got particularly interested in it with the GTF powder metal issue coming on the scene. It was obvious that many of those V2500 operators who had thought they would be phasing those engines out over the next three to four years were going to end up keeping them much, much longer. And that's the main driver that piqued our interest in that engine. So about six months ago, we started hiring people, building up our engineering talent and expertise, talking to MRO partners, lining up assets to buy. And it's been very, very successful. It's fallen in place probably a lot better than I would have ever expected. As the demand for shop is extremely high, and a lot of operators who don't have the capital or the ability to shop those engines today. So there's a tremendous opportunity for us to step in and do that. We have today about 15 engines in maintenance shops. We're using two different shops right now. There's multiple providers that we've discussed, and it's a bit of a test drive right now where we've got some very attractive short-term deals. And ultimately, we will select probably a long-term partner on the MRO side or two to work with over the next few years. But we haven't done that fully. We also are very close on a large fleet deal where we would take over the management of engines on over 30 aircraft for an airline, V2500s. And we would then be responsible for engine exchanges. So as we have used the term MRO, we maintain, repair, and then exchange. So when an engine is run out, needs a shop visit, the airline gives that back to us, and we give them an engine that's been through a performance restoration as hours and cycles that they need to keep flying. So that we're fairly close on, I expect, in the next few weeks. And we have a couple of other deals like that. So the prospects are pretty exciting. And it is, you know, it does sort of give us a complete offering for anybody that operates a 737NG or an A320CO, we can provide CFM56 or V2500 power. And that really is our mission is to provide to airlines flexibility in the power they need so that we always have an engine available if they need it. And if they have too many, they give it back to us without a fight over return compensation. So that's very compelling for a lot of airlines. And then we provide them immediate and tangible cost savings because they don't have to manage a shop visit. They don't have to have an engineering department. They don't have to go provision spares. And they don't have to find out that the shop visit they thought was going to cost a million dollars cost $4 million. So there's a growing recognition that that is an easy thing for airlines to buy into, is we can save them time and money and provide them great flexibility. As we say to them, what don't you like about that? You know, which part of it is unpalatable? And there isn't a part that's unpalatable. So it's a great sell. That's what we're shooting for as our reason for being as a company is to provide that leading provider of aftermarket power to the global industry for those aircraft. In terms of contribution next year, I think the V2500 should add 25-minute EBITDA easily with some upside. So we're still early on. And as I mentioned, we've got a couple of large deals that could swing it one way or another. But it's off and running and I think very well received and great timing because of the need for that engine.

Thank you. Our next question comes from Juliano Bologna with CompassPoint. Your line is open. All right.

Congratulations on another great quarter. For my first question, I'm curious why you think you're seeing accelerated acceptance in the aerospace area.

Well,

I think

people that have used it have experienced the fact that they've saved time and money and they have a great amount of flexibility. And they often come back afterwards and say, I wish I had known about this before. I mean, why wouldn't I want to do this? And so once people experience the ease with which they can avoid a shop visit, which is usually very painful for people, no one I've talked to in the airline industry ever has told me after a shop visit, that was a great experience. So they all have scars. And I think what we provide is the easy button. And it's caught on. And then word of mouth also helps because once one airline does it and they go to conferences and they have people in their engineering departments at other airlines, they tell them you should look at this and it worked really well. All of that just keeps building the momentum.

That's great. And then another little question. Can you give us an update on the PMA initiatives and program?

Sure. So great progress continues. We're very happy with the development and what we've seen in the test results, which actually speaks to the performance of those underlying parts when they're in operation, which is critical and very important. So all good on that. Obviously on the timing side, the FAA runs a very rigorous process. It's been an extremely successful program for them, PMA. They've never had any safety issues, but they are extremely careful and thorough. So it's inherently very difficult to predict when the actual completion of those approval processes are received. But we're very excited and we definitely are 100% sure it's worth the wait.

That's very helpful. And then one last one. Are you still seeing discounts for off-lease assets? It looks like you bought a lot of off-lease assets in the fourth quarter.

Yes. As I mentioned, if

you have an asset that needs maintenance, you immediately, if it's off-lease and it needs maintenance, you've narrowed the field of buyers down to like a handful of people. And so that dynamic has not yet changed, and I'm not sure it will. I think people are still, most of the people we see in the marketplace with capital to invest are looking for assets that are on-lease that don't need maintenance. So that's really where we, and as I said, we can fix anything, and we relish fixing things. That's how you add value.

That's great. That's very helpful. Thank you so much, and I will jump back in the queue.

Thank you. Our next question comes from Frank Galacci with Stiefel. Your line is open.

Great. Thank you for taking my questions. I wanted to talk about sort of FTI Aviation's competitive positioning in the module swap business. So first on the V2500, do you see not having PMA, first-party PMA? Can you sort of talk about that dynamic relative to the CFM56? And then from a broader perspective, it's my understanding that you can get module swaps from other people, other MROs, other airlines with MROs, to do module swaps. And that this is sort of not a new function. And so from my perspective, it feels like PMA is the sort of competitive advantage here. And I don't see that or the modularity on the V2500 relative to the CFM56. That's sort of my perception of it. Can you sort of talk about where I'm misunderstanding that or those dynamics?

Sure. Well, there's a couple of concepts in there that are mixed together. But there is PMA available for the V2500. So that's an option for us to be able to utilize PMA. We don't have the same arrangement where we develop the PMA. So we would be more of a consumer on a commercial basis with the manufacturers if we decided to use that. So that's an opportunity for cost savings on the V2500. There are other opportunities such as use serviceable material that we have a good line of sight to be able to utilize. There are some repairs that we are working on and our engineering team is working on. There are favorable agreements that we've struck with some of the maintenance shops. And so when you add it all up, and it's not the same playbook exactly as the CFM56, but it's the same process of going through the cost of shop visit and figuring out where you can take out costs and where you can do things smarter and better, we think we can perform a full restoration of the V2500, which today has a full list price of about $10 million. We think we can do that for $7.5 million. So it's roughly about a $2.5 million savings available for us or for our customers or for both of us. If you compare that on the CFM56, the savings with full PMA availability on our favorable terms, a shop visit today is roughly about $6.8 million, and we think we can bring that in at about $3.25 million or so. So dollar amount-wise, CFM is better and it's percentage-wise better, but V2500 is still good. The second question is about module availability. You can find modules on an ad hoc basis from an MRO. We actually buy some, we've bought modules from MROs, and they buy from us. And because you don't always have the module you're looking for in inventory. So that is one of the content of the advantages of our module factory is we have in our fleet over 400 CFM engines. That's 1200 modules. There's no one that has anywhere near that availability that I'm aware of. So inventories of modules in a repaired state is a competitive advantage. I say repaired state because we do repair them and restore them, and if they're not repaired, then they're pretty worthless from

an airline's point of view.

So it's a package. It's all of those things above. And when we say, people say, what are you? And we say, well, we're an MRE. We maintain, repair, and exchange, which is very different than anybody else in the industry. And then we combine that with the ability to provide power. We have the ability to deliver what I think is our ultimate competitive advantage, which is flexibility and cost savings. That's our pitch.

OK,

that's helpful. Sort of thinking about the customer experience then a little further on the module side. In the last, I guess, in 4Q 22, the deck had said that you guys had sold over 100 modules to 26 customers. And based on this release, it said 178 modules to 30 customers. And if you sort of go through the press releases and look at each sort of quarter, you said there are new customers, there are five or two or six in this quarter. You sort of add those up to 26. You get to 40. So is that

so

from my understanding, then there were 30 customers, 22 customers in 2022, 30 customers in 23. But that sort of leaves 10 customers that didn't come back in 23. Is that the right way to think about those numbers? If you sort of talk about from their perspective, why that would be if you sort of saw that customers going away in a year?

No, I don't think the numbers

are exactly right. But there are times where a customer to be a repeat customer has to have a need. So not every customer is a repeat customer every quarter. So in other words, if you don't have a shop visit, you don't need a module. So it's a timing issue. I think what we've said is we have a very, very high level of repeat customer business. But sometimes you might have a customer that goes out of business. So you can't have 100 percent

repeat

customer in every quarter. It just doesn't happen that way. You have to have the need. But it's been very, very high. The customers that have used our modules have always said that was a great experience and I would like to do that again. And they will do it again when they have a need.

Okay.

Okay. Great. Thank you for taking my questions. Appreciate it.

Yes. Thank you. Our next question comes from Brian McKenna with Citizens JMP. Your line is open.

Okay. Great. Thanks. Good morning, everyone. So it's great to see another very strong quarter within aerospace products. So within the $55 million of adjusted EBITDA in the fourth quarter, was there any year end seasonality or any one off benefits? Or is it really just continued strength across the business given just increasing levels of demand for the products and services? And I'm just trying to get a sense of a good jumping off point for the segment to start 2024.

Yes, I think we mentioned to people there was a one time $5 million right up in the value of quick turn. That's

right. So we made an initial investment in quick turn in January and then bought consolidated and bought the remaining interest in December. But accounting requires you to revalue your initial investment to fair value at the time of consolidation. So that resulted in a one time non-cash accounting gain of about $5 million.

I don't think we experienced any seasonality in the fourth quarter. And I don't think we have enough history and market penetration to actually to see what seasonality effects there will be on that business yet. It's still growing too fast.

Yeah, got it. Okay, great. And then just broadly, the business clearly is reaching new levels of scale every quarter here. And so if I look out over the next couple of years, cash flow is really going to take another stair step higher. So how should we think about the capex needs of the business over time, the absolute level of cash needed for investment back into the business? And again, I'm just trying to get a sense of how you're thinking about the timing of maybe generating some excess cash flow and then what some of the uses of that excess liquidity will be.

Sure. So from a cash flow availability, we think about it as if you start with EBITDA and you strip out gain on sale and then you deduct maintenance capex for the engines, which is what you would need to do to keep the engines flying in repaired condition. We think that number is about between $60 and $80 million per annum. So that leaves $300 plus million available capital to do whatever we want with. So therefore, our priorities have been to manage to a strong double B rating. And we think we should achieve that. And we're there with two agencies already, but we want to be upgraded. So we want to maintain the strong coverages. Second is to do new deals. And obviously we have a new engine now, the V2500. So we'll be investing capital in more V2500s. Today we own about 60. I would expect we will own probably 150 to 200 of those engines by the end of this year. So that's an opportunity for us to invest, but it's discretionary. And then thirdly, when we generate cash, we would look to either stock buybacks or dividends for excess capital. So those are the priorities. I think this year is still a pretty active investing opportunity. So I think we'll see some really good deals, which I think will be creative and generate very good results for shareholders. So we don't see a lack of investment opportunities at this point. Got it. Thanks, Joe.

Yeah.

Thank you. Our next question comes from David Zazzula with Barclays. Your line is open.

Hey, morning, Joe. Thanks for taking my question. First one is cash position a little bit stronger. Could you talk about the near-term kind of working capital needs and near-term working capital intensity given that you're expanding the product business out? Is that a change in what you're thinking for working capital and needs of cash and the revolver capacity you have in the near term?

No. I mean, we had at year end, we had 90 million

in cash, 300 million undrawn on the revolver. So almost 400 million available liquidity. I think we have 200 million of LOIs in the pipeline right now for deals. And so we're good. And we'll also, you know, we'll generate some more cash by selling assets throughout the year. So don't see any significant needs or issues at this point.

Great. And then with the FAA, you talked about PMA, you know, kind of broadly the process, but specifically the changes of leadership at the FAA and then with the FAA having kind of new focus around Boeing and having to shift some resources there. Do you see either of those events kind of impacting your PMA process, you know, over the near-medium term?

I think that the main issues

that the FAA had from our perspective were during COVID. There was just long turnaround times and they lost, they had high turnover of personnel, some experienced personnel. So those problems have been addressed and have been largely, you know, fixed from what we see. So the other issues that you mentioned, you know, a new administrator and the MACs

have not had,

we have no sign that there's any impact from either of those. But the main thing was the staffing and the people coming into the office thing, which has been addressed.

Great. Thanks very much.

Yeah. Thank you. We have time for one last question. And that question comes from Sharif Elmgrabi with BCIG. Your line is open.

Hey, good morning. Thanks for squeezing me in. So I want to start with the well intervention vessels. It looks like both didn't work during the quarter. How are you thinking about these assets, especially given the well interventions going through a bit of an upcycle and that's cash that could be recycled into the portfolio?

Yes, you're correct. It was a bit of a headwind for us in the fourth quarter that both vessels were off higher. The Pioneer, the smaller vessel is now on higher. It started its charter in December, I think, and that's generated about six million a year in EBITDA. So that's, and that's now on a five year, a five year charter. So it's in good shape and we're actively marketing that vessel for sale. The other vessel, the Pride, they had a breakdown, a maintenance event on the crane. It's still in repair until March. And we expect that there's a charter in place for that to go on higher in April, which is actually a pretty good charter. So you will see continuing headwinds in the first quarter. And then hopefully both vessels will be on higher in the second quarter and onward. And we hope to sell both vessels hopefully this year.

That's helpful. And then just on the 2025 notes coming due early next year, are you planning to pay that down and reduce leverage or could we see those refinanced sooner?

It was actually late next year, I think.

October of next

year. So that we have a lot of time. We have over 18 months and we evaluate the market from time to time and think about those. But there's not a real

important deadline yet. So we're monitoring it.

OK, thanks very much, everyone.

Thanks. Thank you. That concludes the question and answer session. I'd like to turn the call back over to Alan Androni for any closing remarks.

Thank you, Michelle. And thank you all for participating in today's conference call. We look forward to updating you after Q1.

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a

great day.

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day and welcome

to the Q4 2023 FTAI Aviation Earnings Conference call. At this time all participants are in listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. As a reminder this call is being recorded. I would like to hand the call over to Alan Androni, Investor Relations. You may begin.

Thank you, Michelle. I would like to welcome you all to the FTAI fourth quarter and full year 2023 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer, Angela Nam, our Chief Financial Officer, and David Moreno, our Chief Operating 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 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 annual report filed with the FCC. Now I would like to turn the call over to Joe.

Thank you, Alan. To start today, I'm pleased to announce our 35th dividend as a public company and our 50th consecutive dividend since inception. The dividend of 30 cents per share will be paid on March 20, based on a shareholder record date of March 8. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We ended the year strongly with adjusted EBITDA of 162.3 million in Q4 2023, which is up just over 5% compared to 154.2 million in Q3 2023, and up 31% compared to 123.5 million in Q4 2022. During the fourth quarter, the 162.3 million EBITDA number was comprised of 121.8 million from our leasing segment, 54.6 million from our aerospace product segment, and negative 14.1 million from corporate and other. Now let's look at all of 2023 versus all of 2022. Adjusted EBITDA was 597.3 million in 2023, up 40% versus 428.1 million in 2022. Turning now to leasing, leasing had another good quarter, posting approximately 122 million EBITDA. The pure leasing component of 122 million EBITDA came in at 99 million for Q4 versus 102 million in Q3. Additionally, on the acquisition side, we acquired at attractive prices 229 million in new equipment, comprised of 10 aircrafts and 33 engines, which will contribute to further growth in future leasing EBITDA. We're very comfortable in producing approximately 425 million of leasing EBITDA for 2024, excluding projected gains on asset sales of approximately 50 million. Part of the 122 million EBITDA for leasing came from gains on asset sales. We sold 33.5 million book value of assets at a 40% margin for a gain of 22.7 million in the quarter, benefiting from exceptionally strong demand globally for our portfolio of assets. And we remain comfortable assuming gains on asset sales continuing at approximately 12.5 million per quarter, or 50 million for all of 2024. Aerospace products had yet another excellent quarter with 54.6 million of EBITDA and an overall EBITDA margin of 34%. We sold 61 modules in Q4 to 17 unique customers, comprised of 6 new customers and 11 repeat customers. We see tremendous potential in aerospace products and feel good about generating EBITDA for 2024 towards the middle or higher end of the 200 million to 250 million dollar range. We continue to expect strong growth in aerospace products as customers experience the clear benefits of our MRE products and programs. We are both expanding the number of customers and usage per customer at an accelerating pace. Additionally, we are very pleased with the introduction, acceptance of, and demand for our second focus engine, the V2500. With this, we have the ability to become the leading full service aftermarket power provider for all 737NG and A320neo aircraft globally. Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be between 675 million to 725 million, not including corporate and other. With that, I will turn the call back to Alan.

Thank you, Joe. Michelle, you may now open the call to questions and answers.

Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again. Our first question comes from Christine Lee-Wag with Morgan Stanley. Your line is open.

Hey, good morning, everyone.

Good

morning.

Hey,

Joe, you know, on the leasing portion, we saw a sequential decline in revenue. Can you talk about what drove this slight step down?

Yes. The biggest driver was

we had four aircraft, A320s, on lease to Bamboo Airlines, which we terminated in the third quarter last year, so they were taken back. They were off-lease for Q4, and they'll be off-lease for Q1. That represents about 5 million per quarter of EBITDA. And the reason we did that is that the credit wasn't great, and we had other opportunities to put those out on lease at higher rates and better terms. So ultimately, it's very NPV-positive for us, but it had a negative impact on revenues in EBITDA on Q4 and will also affect Q1 of 2024.

Thanks. And, you know, Joe, you know, saying that you were able to release these assets at a higher monthly lease rate and better terms, can you talk about the overall environment that suggests that, you know, it seems like demand continues to outpace supply? So is there a general view when you've got assets up for release? Like, how much of a step up in the monthly lease rates are you seeing for those assets?

Well, it depends on,

you know, when the lease was originally done, but in general, lease rates for aircraft are up anywhere from 20 to 40 percent. So if the operator is either not a great operator or the operator isn't willing to pay market rates, then you move the assets. It's always more expensive to move than to keep it where it is, so you favor extensions over new leases. But in this case, we just didn't have confidence in the company, so we decided it was better, much better, to move them.

Great. Thanks. And if I could squeeze one last question. In the quarter, you were able to acquire 33 engines and 10 aircraft. Can you talk about the availability of assets in the market? I guess to some degree you guys are very unique because you're the asset owner and you also have an MRO capability. Does this give you an edge in being able to buy assets that maybe other just pure leasing assets or operators may not be interested in?

Yes, absolutely.

We, particularly on the engine side, if an engine is tagged unserviceable, it's very, there are very, very few buyers for that engine other than pure part-out companies which typically pay, you know, very low prices. And so we're uniquely positioned because we can take an engine that's tagged unserviceable and repair it. And it could be, the best situation is that it's unserviceable because of only one module, in which case, you know, we get the other two modules at a discount when it's really not, they shouldn't be trading at a discount, but they do because it's coupled with an unserviceable module. So we can buy anything. And so when people put up, you know, packages and some buyers like to nitpick and they'll say, I want that one, I want that one, I want that one, I want that one, the seller's like, I don't want to deal with that, I want one buyer. And so we're able to acquire, I think, much more effectively than other people for that reason. There's nothing we can't, you know, digest.

Great. Thank you for the call, Larry.

Thanks. Thank you. Our next question comes from Josh Sullivan with the Benchmark Company. Your line is open.

Hey, good morning. Morning. So I just wanted to get some color on the market response for lease rents, you know, after DFA put in the production cap on the max earlier this year. And I guess maybe it would be helpful to also understand just how lease rents have walked from pre-COVID levels to today. Sure.

David Moreno will take that. Hi, Josh. So lease rates typically are 60,000 plus maintenance reserves. During COVID, there were special arrangements made, let's say, power by the hour or rates that were 45 to 50,000 plus maintenance reserves. Those days are now long gone. That's for one CFM 56 engine. Yes, that's per engine. Yes. Today, those days are long gone. Lease rates are up 75 plus maintenance reserves. And those continue to rise as there's a shortage of CFM and V2500s today in the market.

And the cap, as you mentioned, the cap on the max production means that people are going to keep their NGs and COs longer because they can't meet their growth projections with the new aircraft. So that cap is likely to extend the imbalance between supply and demand for at least a couple of years.

And then secondly, I just, you know, I know you've talked about the parts business averaging around 35 percent EBITDA margins. Obviously, 50 plus is a good result this quarter in EBITDA. But what are the moving parts around maybe EBITDA per module?

So it's a function of

mix certain modules. You know, we have higher margins on particularly the core. It'll be a function on the size of the customer and it'll be a function on the timing and the urgency which they need the modules. So it sort of all goes into the mix on a quarterly basis. And we've been averaging about 500,000 per module in each of the quarters. We've had a couple of times where we've had some positive surprises because another reason is we often can buy things really cheaply. As I mentioned, we buy a package of engines. We might end up with a very low basis in a module that produces an outsized gain for that reason. So but I would say that, you know, the 500,000 is been pretty steady over the last couple of years. And, you know, it's a good assumption going forward until we have more PMA.

Thank

you for the

time. Thank you.

Thank you. Our next question comes from Miles Watson with Wolf Research. Your line is open.

Thanks, Joe. Could you talk about the V2500 MRE program, where it's being worked, how big could the contribution be? And then in respect to your comment that you, your vision for FTI is to be the leading full service aftermarket power provider globally for the NG and the CFM and the 56 and the V2500 engine. Can you just give us a picture of what does that mean in terms of quantum? Who is the leader today?

Sure. So maybe a bit of history. I mean, we have owned the V2500 for several years, so it's not that we just discovered. We've had about 50 to 60 engines in the portfolio for a while. Starting about six months ago, we got particularly interested in it with the GTF, you know, powder metal issue coming on the scene. It was obvious that many of those V2500 operators who had thought they would be phasing those engines out, you know, over the next three to four years were going to end up keeping them much, much longer. And that's the main driver that piqued our interest in that engine. So about six months ago, we started hiring people, building up our engineering talent, expertise, talking to MRO partners, lining up assets to buy. And it's been very, very successful. It's fallen in place probably a lot better than I would have ever expected. As the demand for shop visits is extremely high, then a lot of operators who don't have the capital or the ability to shop those engines today. So there's a tremendous opportunity for us to step in and do that. We have today about 15 engines in maintenance shops. We're using two different shops right now. There's multiple providers that we've discussed and we're sort of, it's a bit of a test drive right now where we've got some very attractive short-term deals. And ultimately, we will select probably a long-term partner on the MRO side or two to work with, you know, over the next few years. But we haven't done that fully. We also are very close on a large fleet deal where we would take over the management of engines on over 30 aircraft for an airline, the V2500s. And we would then be responsible for engine exchanges. So as we've used the term MRE, we maintain, repair, and then exchange. So when an engine has run out, needs a shop visit, the airline gives that back to us and we give them an engine that's been through a performance restoration as hours and cycles that they need to keep flying. So that we're fairly close on, I expect, in the next few weeks. And we have a couple of other deals like that. So the prospects are pretty exciting. And it is, you know, it does sort of give us a complete offering for anybody that operates a 737NG or an A320CO. We can provide CFM56 or V2500 power. And that really is our mission is to provide to airlines flexibility in the power they need so that we always have an engine available if they need it. And if they have too many, they give it back to us without a fight over return compensation. So that's very compelling for a lot of airlines. And then we provide them immediate and tangible cost savings because they don't have to manage a shop visit. They don't have to have an engineering department. They don't have to go provision spares. And they don't have to find out that the shop visit they thought was going to cost a million dollars cost $4 million. So there's a growing recognition that that is an easy thing for airlines to buy into is we can save them time and money and provide them great flexibility. As we say to them, what don't you like about that? You know, which part of it is unpalatable? And there isn't a part that's unpalatable. So it's a great sell. And that's what we're shooting for as our reason for being as a company is to provide that leading provider of aftermarket power to the global industry for those aircraft. In terms of contribution next year, I think the V2500 should add 25-minute EBITDA easily with some upside. So we're still early on. And as I mentioned, we've got a couple of large deals that could swing it one way or another. But it is a it's often running and I think very well received and great timing because of

the

need for that engine.

Thank you. Our next question comes from Juliano Bologna with Compass Point. Your line is open. All right.

Congratulations on another great quarter. For my first question, I'm curious why you think you're seeing accelerated acceptance in the aerospace area?

Well, I think people that have used it have experienced the fact that they've saved time and money and they have a great amount of flexibility. And they they often come back afterwards and say, I wish I had known about this before. I mean, why why wouldn't I want to do this? And so that once people experience the ease with which they can avoid a shop visit, which is usually very painful for people, no one I've talked to in the airline industry ever has told me after a shop visit. That was a great experience. So they all, you know, have scars. And I think what we provide is the easy button and it's it's caught on. And then word of mouth also helps because once one airline does it and they go to conferences and they have people in their engineering departments and other airlines, they tell them you should look at this and it worked really well. All of that just keeps building the momentum.

That's right. And then, you know, inevitable question. Can you give us an update on the on the PMA program?

Sure. So we're great progress continues. We're very happy with the development and what we've seen in the test results, which actually speaks to the the performance of those underlying parts when they're in operation, which is critical and very important. So so all good on that. Obviously, on the timing side, the FAA runs a very rigorous process. It's been an extremely successful program for them. They've never had any safety issues, but they are extremely, you know, careful and thorough. So it's inherently very difficult to predict when the actual completion of those approval processes are received. But but we're very excited. We definitely are 100 percent sure it's worth the wait. That's very helpful.

And then one last one. Are you still seeing discounts for off lease assets? It looks like you bought a lot of assets in the fourth quarter.

Yes, as I mentioned,

if if you have an asset that needs maintenance, you immediately if it's off lease and needs maintenance, you've you've narrowed the field of buyers down to like a handful of people. And so that's that dynamic has not yet changed. And I'm not sure it will. I think people are still most of the people we see in the marketplace with capital to invest are looking for assets that are on lease that don't need maintenance. So so that's really where we and as I said, we can fix anything and we we relish fixing things. That's how you add value.

That's great. That's very helpful. Thank you so much. And I will jump back in the queue.

Thank you. Our next question comes from Frank with default. Your line is open.

Great. Thank you for taking my question. I wanted to talk about sort of FTI aviation competitive positioning in the module swap business. So first on the V2,500, you see not having PMA first party PMA. You sort of talk about that dynamic relative to the CFM 56. And then from a broader perspective, it's my understanding that that you can get module swaps from other people, other MROs, other airlines with MROs to do module swaps. And that this is sort of not a new function. And so from my perspective, it feels like PMA is the sort of competitive advantage here. And I don't see that or the modularity on the V2,500 relative to the CFM 56. That's sort of my perception of it. Can you sort of talk about where I'm misunderstanding that or those dynamics?

Sure. Well, there's a couple of concepts in there that are mixed together. But there is PMA available for the V2,500. So that's an option for us to be able to utilize PMA. We don't have the same arrangement where we develop the PMA. So we would be more of a consumer on a commercial basis with the manufacturers if we decided to use that. So that's an opportunity for cost savings on the V2,500. There are other opportunities such as use serviceable material that we have a good line of sight to be able to utilize. There are some repairs that we are working on and our engineering team is working on. There are favorable agreements that we've struck with some of the maintenance shops. And so when you add it all up, and it's not the same playbook exactly as the CFM 56, but it's the same process of going through the cost of shop visit and figuring out where you can take out costs and where you can do things smarter and better. We think we can perform a full restoration of the V2,500, which today has a full list price of about $10 million. We think we can do that for $7.5 million. So it's roughly about a $2.5 million savings available for us or for our customers or for both of us. If you compare that on the CFM 56, the savings with full PMA availability on our favorable terms, as shop visit today is roughly about $6.8 million, and we think we can bring that in at about $3.25 million or so. So it's a dollar amount-wise CFM is better and it's percentage-wise better, but V2,500 is still good. The second question is about module availability. You can find modules on an ad hoc basis from an MRO. We actually buy some, we've bought modules from MROs, and they buy from us. And because you don't always have the module you're looking for in inventory. And so that is one of the content of the advantages of our module factories. We have in our fleet over 400 CFM engines, that's 1,200 modules. There's no one that has anywhere near that availability that I'm aware of. So inventories of modules in a repaired state is a competitive advantage. And I say repaired state because we do repair them and restore them, and if they're not repaired then they're pretty worthless from

an airline's point of view.

So it's a package. It's all of those things above. And when we say, people say, what are you? And we say, well, we're an MRE. We maintain, repair, and exchange, which is very different than anybody else in the industry. And then we combine that with the ability to provide power. And then we have the ability to deliver what I think is our ultimate competitive advantage, which is flexibility and cost savings. That's our pitch.

Okay.

That's helpful. Sort of thinking about the customer experience then a little further on the module side. In the last, I guess in 4Q22, the deck had said that you guys had sold over 100 modules to 26 customers. And based on this release, it said 178 modules to 30 customers. And if you sort of go through the press releases and look at each sort of quarter, you said there are new customers, there are five or two or six in this quarter. You sort of add those up to 26, you get to 40. So is that, so from my understanding then, there were 30 customers, 22 customers in 2022, 30 customers in 2023, but that sort of leaves 10 customers that didn't come back in 2023. Is that the right way to think about those numbers? If you sort of talk about from their perspective why that would be if you sort of saw that customers going away in a year.

No, I don't think the numbers

are exactly right. But there are times where a customer to be a repeat customer has to have a need. So not every customer is a repeat customer every quarter. So in other words, if you don't have a shop visit, you don't need a module. So it's a timing issue. I think what we've said is we have a very, very high level of repeat customer business. But sometimes you might have a customer that goes out of business. So you can't have 100%

repeat

customer in every quarter. It just doesn't happen that way. You have to have the need. But it's been very, very high. The customers that have used our modules have always said that was a great experience and I would like to do that again. And they will do it again when they have a need.

Okay, great. Thank you for taking my questions. Appreciate it.

Yep. Thank you. Our next question comes from Brian McKenna with Citizens JMP. Your line is open.

Okay, great. Thanks. Good morning, everyone. So it's great to see another very strong quarter within aerospace products. So within the $55 million of adjusted EBITDA in the fourth quarter, was there any year-end seasonality or any one-off benefits? Or is it really just continued strength across the business given just increasing levels of demand for the products and services? And I'm just trying to get a sense of a good jumping-off point for the segment to start 2024.

Yes, I think we mentioned to people there was a one-time $5 million right up in the value of QuickTurn. That's

right. So we made an initial investment in QuickTurn in January and then bought, consolidated and bought the remaining interest in December. But accounting requires you to revalue your initial investment to fair value at the time of consolidation. So that resulted in a one-time non-cash accounting gain of about $5 million.

I don't think we experienced any seasonality in the fourth quarter. And I don't think we have enough history and market penetration to actually to see what seasonality effects there will be on that business yet. It's still growing too fast.

Yeah, got it. Okay, great. And then just broadly, the business clearly is reaching new levels of scale every quarter here. And so if I look out over the next couple of years, cash flow is really going to take another stair step higher. So how should we think about the capex needs of the business over time, the absolute level of cash needed for investment back into the business? And again, I'm just trying to get a sense of how you're thinking about the timing of maybe generating some excess cash flow and then what some of the uses of that excess liquidity will be.

Sure. So from the cash flow availability, we think about it as if you start with EBITDA and you strip out gain on sale and then you deduct maintenance capex for the engines, which is what you would need to do to keep the engines flying in repaired condition. We think that number is about between $60 million and $80 million per annum. So that leaves $300 plus million available capital to do whatever we want with. So therefore, our priorities have been to manage to a strong double-B rating. And we think we should achieve that. And we're there with two agencies already, but we want to be upgraded. So we want to maintain the strong coverages. Second is to do new deals. And obviously we have a new engine now, the V2500, so we'll be investing capital in more V2500s. Today we own about 60. I would expect we will own probably 150 to 200 of those engines by the end of this year. So that's an opportunity for us to invest, but it's discretionary. And then thirdly, when we generate cash, we would look to either stock buybacks or dividends for excess capital. So those are the priorities. I think this year is still a pretty active investing opportunity. So I think we'll see some really good deals, which I think will be creative and generate very good results for shareholders. So we don't see a lack of investment opportunities at this point. Got it. Thanks, Joe.

Yeah. Thank you. Our next question comes from David Zazzula with Barclays. Your line is open.

Hey, morning, Joe. Thanks for taking my question. First one is cash position a little bit stronger. Could you talk about the near-term kind of working capital needs and near-term working capital intensity given that you're expanding the product business out? Is that a change in what you're thinking for working capital, the needs of cash, and the revolver capacity you have in the near term?

No. I mean, at year end we had $90

million of cash, $300 million undrawn on the revolver, so almost $400 million available liquidity. I think we have $200 million of LOIs in the pipeline right now for deals. And so we're good. And we'll also generate some more cash by selling assets throughout the year. So don't see any significant needs or issues at this point.

Great. And then with the FAA, you talked about PMA kind of broadly, the process, but specifically the changes of leadership of the FAA and then with the FAA having kind of a new focus around Boeing and having to shift some resources there. Do you see either of those events kind of impacting your PMA process over the near-medium term?

I think that the

main issues that the FAA had from our perspective were during COVID. There was just long turnaround times and they lost, they had high turnover of personnel, some experienced personnel. So those problems have been addressed and have been largely fixed from what we see. So the other issues that you mentioned, a new administrator and the MACs

have

no sign that there's any impact from either of those. But the main thing was the staffing and the people coming into the office thing, which has been addressed.

Great. Thanks very much.

Thank you. We have time for one last question. And that question comes from Sharif Elmgrabi with BCIG. Your line is open.

Hey, good morning. Thanks for squeezing me in. So I want to start with the well intervention vessels. It looks like both didn't work during the quarter. How are you thinking about these assets, especially given the well interventions going through a bit of an upcycle and that's cash that could be recycled into the portfolio?

Yes,

you're correct. It was a bit of a headwind for us in the fourth quarter that both vessels were off higher. The Pioneer, the smaller vessel, is now on higher. It started its charter in December, I think. And that should generate about $6 million a year in EBITDA. And that's now on a five-year charter, so it's in good shape and we're actively marketing that vessel for sale. The other vessel, the Pride, they had a breakdown, a maintenance event on the crane. It's still in repair until March, and we expect that there's a charter in place for that to go on higher in April, which is actually a pretty good charter. So you will see continuing headwinds in the first quarter, and then hopefully both vessels will be on higher in the second quarter and onward. And we hope to sell both vessels hopefully this year.

That's helpful. And then just on the 2025 notes coming due early next year, are you planning to pay that down and reduce leverage or could we see those refinance sooner?

It

was

actually late next year, I think.

October next

year. So that, we have a lot of time. We have over 18 months. And we evaluate the market from time to time and think about those, but there's not a real

important

deadline

yet. So we're monitoring it.

Okay. Thanks very much, everyone.

Thanks. Thank you. That concludes the question and answer session. I'd like to turn the call back over to Alan Androni for any closing remarks.

Thank you, Michelle, and thank you all for participating in today's conference call. We look forward to updating you after Q1.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.