FTAI Aviation Ltd.

Good day and thank you for standing by. Welcome to the Q3 2024 FTAI Aviation Earnings Conference Call. At this time, all participants are in 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 hand the conference over to your first speaker today, Alan Andrini, Investor Relations. Please go ahead.

Thank you, Liz. I would like to welcome you all to the FCA Aviation Third Quarter 2024 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer, Angela Nam, our Chief Financial Officer, and David Marino, 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 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 38th dividend as a public company and our 53rd consecutive dividend since inception. The dividend of 30 cents per share will be paid on November 25th based on a shareholder record date of November 14th. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We continued our strong performance with adjusted EBITDA of $232 million in Q3 2024, which is up 8% compared to $213.9 million in Q2 of this year, and up 50% compared to $154.2 million in Q3 of 2023. During the third quarter, the $232.9 million EBITDA number was comprised of 136.4 million from our leasing segment, 101.8 million from our aerospace product segment, and negative 6.2 million from corporate and other. Turning now to leasing, leasing had another great quarter, posting approximately 136 million of EBITDA. The pure leasing component of that number came in at 122 million for Q3, versus 112 million in Q2 of 2024 and 102 million in Q3 2023. Additionally, we sold 20.7 million book value of assets for a gain of 14.3 million and have more sales coming in the final quarter of this year. With continuing high demand for assets, we remain confident in generating 500 million in leasing EBITDA in 2024 including $50 million in gains on asset sales. Aerospace Products had yet another excellent quarter with $101.8 million EBITDA and an overall EBITDA margin of 34%, which is up 12% compared to $91.2 million in Q2 of this year and up 135% compared to $43.3 million in Q3 2023. We're seeing tremendous growth in adoption and usage of our aerospace products and are increasing our 2024 estimated EBITDA to 360 to 375 million, up from our previous estimate of 325 to 350 million. Overall, we now expect annual aviation EBITDA for 2024 to be between 860 to 875 million, not including corporate and other, up from $825 to $850 million that we got into last quarter. With that, let me turn the call back over to Alan.

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

Thank you. At this time, we will conduct the question and answer session. As a reminder, To ask a question, you will need to 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. Our first question comes from Sheila Kyogla with Jefferies.

Your line is now open. Hi, team. Thank you and congrats on a great quarter. Maybe if we could just level set the playing field here. We often hear from investors the idea that FTI is only capitalizing on the short-term bottlenecks in the aftermarket. Take the slower growth we've seen reported from some of the larger OEMs on their shop visits as an example this quarter or their aftermarket. When we get to a more normalized world in hopefully a few years' time, what does FTI's business model look like and what's your vision for And how do you think about the duration of the CFM56 platform, Joe?

Sure. Great. You know, we think about that all the time. Also, we are happy that we're in an environment, you know, that's so supportive of our business model. And we think it really enhances or it increases the rate at which we can convert customers to adopting a new way of doing things. And so if As we have worked with many airlines and we're increasing every quarter the number of new customers, we have seen no evidence that once people use our products or change the way they think about engine maintenance, which is letting us do it instead of them doing it, we've seen no evidence of anybody wanting to go back to the old way of doing it once the situation normalizes. And the reason is we're providing a tangible cost savings and time savings benefit to the customers. And it's not like they would three years from now wake up and say, let's go back to the old way of spending more money on engine maintenance. So we don't see any evidence that people will revert. And so this quarter we'll have the highest number of new customers that will convert to using our products, and David will talk more about that. And so we see the universe expanding as word of mouth spreads and more customers tell other people, you know, hey, this is great, you should try it. But more often now today, the question we get is not the original question we got was, is this a good product and can I save money? It's if I go with you. How can I be sure that you'll be able to supply me the engines I need? And that's where we hear more now from the customer, which is a great development. It's like, I get it. I buy that you have a great product now. Can you make sure that I will always have engines available? And so to that end, the acquisition we made of the Montreal facility, which we now call FTI Canada, really plays nicely into that because If you look back at 2023, for example, we were producing about 30 modules per quarter during that period. We increased that in the first half of 2024 to about 50 modules per quarter. Since we took ownership in the third quarter, we've now increased that production rate to about 75 modules per quarter. And we expect in 2025 that we will be up to about 100 modules per quarter at that facility. And we're well on our way to doing that. So we obviously invite customers to go visit, come see what we do. We've changed a lot of, you know, the things that a typical MR would do. And we've made it much more of a manufacturing production line. We've specialized employees. We've ordered a lot of parts so we're not at the risk of any supply chain disruptions. So we can take people through the facility and say, this is where your engines are going to come from. And we've got a lot of them and we have a lot of activity. And so that's a point of resistance we love to be able to try to sell through because you've got people almost on the finish line. And so We believe very strongly that the conversion makes sense for people. We believe that it's very sticky once you do get people converted. And then the only question left is, how long do you think people will fly CFM56 engines? And we've obviously made a bet that we think it's a long time, and anybody can have a view on that, but we think that that's the easiest of the points to get comfortable with.

I have a lot more questions, but I'll just stick to one more if it's okay, Joe. You mentioned you onboarded, I think, the most customers you've ever onboarded this quarter, and they're continuing to want more. So how do you think about how that discussion goes when they do convert, or how many customers did you have join? And when they do first start with you, what are the number of modules they start with, and how do you see them ramping?

Hey, Sheila, this is David. I'll take that question. So this quarter was our record quarter for new customers. We onboarded 19 new customers. Typically, a new customer places an order between one to two modules. And as you can imagine, the first sale is usually the toughest sale with a new customer because once you kind of go through the process, they understand the time-saving, cost-savings. And as Joe mentioned, it's a very sticky product. At the same time, we also are starting to see strong repeat customers. come in and request about five to ten modules at a time. That's typically what a repeat customer will do, and what actually happens in practice is they open up and they provide a full schedule of shop visits for the next five years. Our product, demand on that product is event-driven, meaning we want to know the shop visits, we want to match the modules with the shop visits, and once they convert to a repeat customer, we kind of have those discussions of understanding the fleet, the fleet plans, and how to maximize their cost savings and timing. An additional thing that we've done also is we're getting a lot of demand for field service. So what we've been doing in the past is we've been distributing modules on field with a lot of third-party field service team. We're getting customers who want us to do everything, the full white glove service. So at QuickTurn, which is now FTI USA, we built a field service team that now is being deployed worldwide to actually do the installation and to offer the complete service. So we're very excited about offering that service, and we think that's going to, you know, improve the overall experience even further and drive further repeat business.

Great. Thank you so much.

Thanks.

Thank you.

And then our next question comes from Jason Holcomb with Morgan Stanley. Jason, your line is now open.

Good morning, Carol. Joe, on the V2500, in the past you've mentioned you had inducted around 40 engines this year. Can you provide an update on how that is progressing? Are any engines beginning to come out of the shop yet? And then maybe if you could touch on the customer demand you've been seeing for the V2500. You've called out LATAM Airlines in the past, but are there any other large customer agreements we should be thinking about? Thank you.

Thanks. Thank you, Jason. I can take this. This is David. So on the MRE, we're very excited with the progress so far on the V2500. On the production side, you know, as we mentioned, the engines are in the shop. We're experiencing turnaround times that are on target, so 90 to 120 days. And those engines now have provided a strong pipeline that are 100% committed to customers. So those engines are coming out of shop. The LATAN program has now officially started, so we've started exchanging engines today. Additionally, we've secured two large North American airlines on MRE for about 20-plus engines in the next few years. So we're very excited about that and further growing that business Those should be strong contributors starting next quarter or Q4 2024 and more even in 2025. I think we're seeing tremendous opportunity worldwide in many different regions, so we're hoping to expand into Asia sometime very soon on a new deal as well.

Thank you very much for the call, David. If I can maybe just ask a quick follow-up. Are you guys able to share with us kind of the number of CFM56 models you've sold during the quarter and just sort of provide an update on that side? Thank you.

No, we've stopped, you know, providing that level of detail. We think it's, you know, commercially not, you know, a great idea, and so we think we give enough information without that. Okay, thank you.

Thank you. And that's a question that comes to Josh Sullivan at the Benjamin Company. Josh, now the line will open.

Hey, good morning. Good morning. With Chromaloy announcing it's now received FAA approval for a V2500 blade recently, what do you think the implications for the industry and then for FAA are going to be?

Well, I would take it as a positive. Um, it's, you know, when you think about the most complex part of the entire engine, it's the, uh, high pressure turbine blades and the fact that that, you know, got approved and, uh, is evidence that the FAA is confident. They have a extremely rigorous process as we all know, and it's been a great, has a great track record of, uh, success in the U S and the worldwide. And getting that approved is a great sign for future parts, including the CFM56 parts that we're working on. So I take it as a great step, and the process is working as it did before COVID, and it's working now post-COVID.

And do you think lessors will be willing to use the product?

Well, we're a less or I can't speak for everyone else, but I, you know, I think it's, you know, when I look, we, we use data when we make decisions and our data, you know, we have evidence that, you know, many of the parts are, you know, are, uh, perform extremely well and they cost less. So, you know, we kind of just think about that. And when we make it, when we make decisions about what we do.

Thanks for the time.

It's Hillary from Deutsche Bank. Ready to ask a question?

Oh, yes. Sorry. I couldn't hear you. Okay. Yes.

Thanks for the... We can't hear the operator, so sorry.

Oh, okay. Okay. Thanks for taking my questions and congrats on the great quarter. So Joe, in the aerospace segment, the EBITDA margin was 34% versus 37% last quarter. So I was wondering if you could just provide a little more details around that.

Yes. This is the first quarter that we incorporated FTI Canada in the numbers. And there are some legacy contracts for third parties that we inherited when we acquired the company. And that had a negative effect because they're low or no margin contracts that are running off. And so if you adjust for that, that would have normalized the margin at two to 300 basis points higher than the number we reported. And those contracts have a very short life. So we expect there'll be some impact in Q4 and then we'll be finished with that by the end of the year. So it was just a... an impact from the, from the acquisition that, uh, uh, we had to assume those, uh, those, uh, obligations, but they're running off.

Oh, that's great. So then, so then I guess as a followup, when those contracts will log at the end of the year, um, you know, will you be expanding your capacity? I guess, um, you know, when those roll off and then when you said earlier that you could do, you know, 100 modules per quarter in 2025, are you including, you know, potential additional capacity available when those contracts roll off, or would that be additional modules that you referred to earlier?

Yes, it is, you know, we're gaining on our productivity for the CFM 56 by taking employees who are doing other things at the facility that we need them to do and repurposing or, you know, giving them CFM 56 oriented jobs. So we're able to increase the productivity that I mentioned, the 30 to 50 to 75 to 100 with essentially the same workforce. So you're tripling, you know, more or less tripling, you know, our productivity with a very similar headcount. So it's, as I mentioned earlier, I mean, it was a massively underutilized facility from our point of view and And we're able to take, you know, the highest return, you know, anywhere in the company that we could get is focusing on increasing the productivity there, which we're doing and it's well underway, even though we're only, you know, a month into it.

Got it. So you are assuming, so within that 100 modules number, you are assuming that you'll be using the employees that were working on those contracts and be purchasing them to your modules? Okay, great. Thank you so much. Thanks.

Thank you. And everyone, I do apologize for the interruption earlier, and we will proceed with our Q&A. And we'll take our next question from Juliano Bologna from Compass Point. Your line is open.

Congratulations on another incredible quarter-out performance. Something I was curious about was you obviously done incredible job on the product segment, you know, continuing to scale and grow the platform. I'm curious where you see, you know, a lot of the growth coming from at this point and if there's been any kind of, you know, distribution between, you know, new customer growth or volume growth and how those trends have, you know, continued to evolve.

Yeah, the, I mean, it is, you know, more organic growth. As we've said, we've, we're focusing on the two largest engine markets in the world. It virtually every airline in the world, you know, operates a V 25 or CFM 56 engine, and we're still, you know, under 5% market share. So our focus is organic growth. And it's, as I mentioned, as an example with, you know, using the facility FTI Canada, we're able to triple the productivity with the same number of people. So the organic growth opportunity for us is right in front of us, and it's extraordinary. And so we're not really focusing on anything other than that.

That's very helpful. I appreciate it. And I'll jump back in with you. Thanks.

Thank you. Our next question will come from Ken Herbert from RBC Capital Markets. Your line is open.

Yeah, hi. Good morning, everybody. Maybe, Joe, just to start off, or David, obviously you called out you're not seeing any supply chain issues in terms of executing some of the business today on the parts side. It seems to be a major issue for the industry. Can you talk a little bit about how you've effectively managed to de-risk, it sounds like, your CFM56 and now V25 availability to parts and the extended lead times there that a lot of other MRO shops continue to talk about?

Yes, and you probably noticed our working capital number increased by roughly about $120 million from Q2 to Q3. And there's two reasons for that. One is we picked up about $50 million of inventory with the FDI Canada acquisition. But secondly, we are purchasing a lot of parts to be able to enable our ramp-up in productivity as I mentioned, you know, the 30 to 50 to 75 to 100, the best way to avoid supply chain disruptions is to pre-order and have a lot of inventory. And so there might be other ways, but that is the route we've chosen. We think it has a very high return on capital. You know, customers are very focused on the question, as I mentioned earlier, is we get the most often is can you actually get me the engines that I need? And how can I be sure of that? And so we're We're buying more parts as an insurance policy effectively, and we think it's low-cost insurance and high payoffs. So that's part of the thought process, and I think we're well-prepared going into 2025 to be able to really execute the best we can.

Okay. That's very helpful. And then on just the, you know, since the LATAM deal, which I think obviously was playing out very well for you, what's the pipeline look like of other potential opportunities of that size? Or should we be thinking maybe smaller opportunities or are there still some perhaps chunkier opportunities out there as we think about exiting this year in 25?

Hey, Ken, this is David. I'll take that question. So we're seeing many similar opportunities of that size, let's say 20 to 30 airplanes that, again, the real thesis around is not that the airline wants to raise capital through a sale leaseback. It's they don't want to do maintenance, right? So that's really the thesis. And so we're actively working those programs, and we expect to have some advancement probably this quarter, Q4 of this year.

Great. Thanks, David.

Thank you. Our next question will come from Brandon Oglenski from Barclays. Your line is open.

Hey, good morning, everyone, and thanks for taking the question, and congrats on a good quarter. Joe, I think you mentioned pipeline or backlog in the release last night, so can you maybe give us some idea of how much contractual business you are attracting in the products segment? And then maybe longer term as well, how sustainable

know is your margin profile in the business because if we just simply look at other mro providers obviously a totally different profit profile hey brandon this is david i can take that question so as far as backlog the way that we think about that is that's heavily correlated with the repeat customers uh today on average about 66 percent of our volume is on repeat customers And the more that you engage customers by nature, you're going to have a higher volume. So we expect that to continue to grow. And as I mentioned earlier, what we're working with is airline scheduling. So we're working on trying to understand when events are coming in, which gives us extreme visibility into future quarters and future years as far as engines and module matches. So if you're very good about as the business grows, we're going to get more and more visibility long term on backlog. The second question as far as margin, right, again, we expect margins to continue to increase inherently as the business grows. The reason for that is the same dynamic, is that the manufacturer is going to be increasing pricing year over year. So inherently, that is the pricing umbrella that we operate under. And then the second piece is we're focused on driving costs down every year or every quarter more and more. So we're rolling in new repairs, we're thinking about creative ways to use assets to drive further value. So our entire business is focused on driving costs down and that's why we feel very good about our margin expansion.

But when you think about the difference between our business and an MRO business, one of the big differences is that we own the engine and we own and work on our own engines. We don't do work on other people's engines. The typical traditional MRO model is to get a customer to put their engine in your shop, and then you mark up labor and parts and supply that engine back to them. In many cases, you might expand the work scope so you get a little bit more money, but that's a very different business. What we've done is said, we don't want to do any third-party business. We only want to work on our own engines. We want to streamline that. We want to have the single work scope. We want to be able to to run it like a manufacturing operation as efficiently as possible and, and high volume. So it's a, it's a, you know, it's a different construct. And as I said, many times, the key difference, you know, is that it's our engine, we own it, we build it, we put it on the shelf, airline comes in and in our pitches, like, do you want it or not? You know, it's sort of, don't tell me what work scope you want to do or how you want to rearrange it. It's there, it's available. They're very fungible, so it's your call.

I appreciate the response, both of you. And then I guess on the capital side, maybe this is one for Angela, but where do you see funding needs for the business now that you guys did some transactions here in the third quarter? And I think you have some offshore assets as well in the leasing business. Can you maybe give an outlook for them?

So on the offshore, we're I would say very close on the sale of both those vessels, which it's not 100% done, so I don't want to jinx it, but I would be very surprised if it didn't close in the fourth quarter. And it's on target with previous guidance we've given about the dollar amount. So we expect that to be concluded this year. And then on other capital needs, Angela can address that.

Yeah, on other capital needs, one of the Redemptions that are coming up is on our Series B preferred, which we set to our floating rate on December 15th. So that's something that we'll be looking to redeem similarly as we did for our Series A this quarter. So besides that and continuing to finish our plan on the V2500 engine purchases through the end of the year, we don't have any other big purchases that we need capital for yet.

And our next maturity is until 2028. That's right. Thank you. Thanks.

Thank you. Our next question will come from Miles Walton from Wolf Research. Your line is open.

Hey, good morning. We've got Lou on for Miles. Morning. Joe, can you give us an idea of the average green time on the engines you've been buying and if it's the same as the last couple of years? Is there also any difference between the CFM56 and the D2500? David will ask it. Sure.

So the way that we invest in engines is we're looking at value on cost per cycle basis. So I'd say the composition of engines that we acquire today are a little different than they were two years ago. Right now we're focused on acquiring assets that need shop visits, so assets that are completely run out that we can add value and then we can offer them for exchange or for lease. So we're really targeting value-add activity on the engine side. As you can imagine, green time is more expensive today than it was, let's say, two years ago. So that's really the focus. The V2500 is also a very tight engine as well. So it's the same strategy at the moment is we're buying run-out engines to refurbish those engines and offer them for programs. So that's really the focus at the moment.

All right, great. Thank you. And maybe just to follow up on that and earlier question, on the V2500, you mentioned sort of the MRE and everything going on there. I'm just curious, are you guys doing the work there sort of through the MRE, sort of the original MRE, or is it really all being done by Pratt at this point with the relationship there?

Yeah, so the way I divide the responsibilities up is three things. First is acquiring the run-out engine. Second is doing the performance restoration. And then third is taking it to market. for sale, lease, or exchange. We do number one and three, and under the Pratt program, Pratt manages number two, and they put all new parts, rebuild the engine to a full 20,000 cycles. There are certain other upgrades of thrust and potential from pre-select to select one that are available. So in that Pratt contract, there are things they could do that no one else could do that we saw a lot of value in. So at this point, it's really number two is managed by Pratt. We have had discussions with Pratt about potentially having Montreal, FTI Canada become a V2500 shop, but we don't have a conclusion on that. We would like to ultimately have that capability in Montreal, but that's something we haven't finalized the discussion on yet.

All right, great. Thank you. Just one quick follow up. I guess PMA was originally 15 to 20 million in this year. Not sure if that's still included or sort of been pushed. Just a way to think about that for 2025 at this point.

We're probably going to come up short on that this year, given that it's, you know, we don't have approvals yet. So I would say that we might have missed on that one.

And nothing on 25 yet, I guess, to think about.

We have not given real guidance on 2025 at this point, so that's something we'll consider early next year.

All right. Thank you very much.

Thanks.

Thank you. And our next question will come from Stephen Trent from Citi. Your line is open.

Good morning, and thanks very much for taking my questions. Just some quick ones for you. Could you sort of give us an update where you are with respect to insurance settlements as some of your competitors seem to be moving ahead in the court? So we'd just love to hear how that's going. Thank you.

Yes. So I divided into three different lawsuits, if you use the word. The first one, we have a... a agreed deal with the counterparty. That's the smallest one. It's probably about 10 to 11 million, which we think will close here shortly. The second one is our umbrella contingent policy, and we've had some, I would say, some overtures of discussing potential settlements on that one. And then the third one is the all-risk policies that are being run through on the London court cases. which will probably be the last to settle. But there are individual insurers are discussing early settlements and it typically starts to happen around the time when you get in front of the courthouse and you're facing potentially a bad outcome so that the insurers start to, they realize they've run out the clock as far as they can and now it's time to move on. We do see that coming, and how much of that we'll get in 2025 is hard to forecast at this point, but I do expect ultimately total recoveries in the neighborhood of about $150 million, which is all net income to us since we've written all of that off. I think we'll ultimately get there, and it's starting to move in that direction.

Okay, that's really helpful. Appreciate it. And one more kind of quick one for you. I mean, over the last year in chains, your stock has done so well. And have you given any thought to entertaining the idea of a stock split? And I know the retail shareholder might not be your number one priority, but just thinking about you know, high level, you know, how you may reach out to these other elements of the market that may balk at, you know, today's price per share. Thank you.

Yeah, I've had one or two people recently bring that up, and it's something I hadn't really looked at for a while. And so I've asked people for any data they might have to support, you know, whether that's something that increases and enhances value. And if we can sort of get something that convinces us that it's a good idea, we'll consider it. But so far I haven't seen – what I've seen is – didn't seem very conclusive, but I'm open. Anytime anyone wants to present something which says they can make our stock go up, I'm open to talking about it.

very helpful thank you very much thanks thank you and we'll take our last question from andre madrid from btig your line is open hey everyone good morning and thanks for the uh thanks for the time um earlier you spoke about the rising demand for field services could you maybe explain the margin differential there, if any, between field and non-field? And is there any read on how much of the broader mix this could become, the AP mix?

Sure. This is David. I can take that question. So the way to think about field service is it's an additional distribution channel to move velocity on modules. I would think about it less as a margin play, although the margin is quite good because it's just labor. in this scenario, but typically a field service event is about $50,000 to $70,000. So they're small dollars, but what it does do is it enhances the entire module experience, where you can line up the module, you can line up the team, and you can go execute that immediately, which really helps airlines that are in a pinch and able to bring back an aircraft really back into service very quickly. So I would think about it more as a instrument to increase velocity modules versus, let's say, an individual margin play.

Got it. Got it. And then I know you outlined previously about 60 to 80 million in maintenance CapEx moving forward, but where exactly is this being deployed and what are the priorities there?

That's a number that we would invest, that we invest to keep our engines in our leasing portfolio in service. So when an engine needs a performance restoration or a shop visit in our leasing portfolio, that's what we spend annually to keep those engines flying.

Got it. Got it. And one more if I could squeeze in. I mean, I know we were talking about the B25 PMA PAR from Chrome Alloy that got approved and the read-through from that, but I feel like we kind of danced around it and didn't really necessarily attack the conversation of

when you guys are expecting i know it said through end of 24 but could you give any color there if it's sooner as opposed to later i love the use of the word attack we no we don't give guidance on expectations of when uh parts will be approved we've only said that We're very pleased with the progress that's been made, and we are happy with the product itself, but we don't specifically forecast when approvals will be obtained.

Got it. Got it. Had to give a shot, but thank you. Appreciate it.

Thank you. And that does conclude our question and answer session for today's conference. I'd now like to turn the conference back over to Alan Andrini for any closing remarks.

Thank you, Crystal, and thank you all for participating in today's conference call. We look forward to updating you after Q4.

Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.