FTAI Aviation Ltd.

Good day and thank you for standing by. Welcome to the Quarter 2 2025 STAI Aviation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Andrini, Head of Investor Relations. Please go ahead.

Thank you, Brianna. I would like to welcome you all to the FTIA Aviation Second Quarter 2025 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. I'm pleased today to announce our 41st dividend as a public company and our 56th consecutive dividend since inception. The dividend of 30 cents per share will be paid on August 19th, based on a shareholder record date of August 12th. Angela will provide a detailed overview of the numbers, but first I'd like to highlight a few key updates. Aerospace products delivered another excellent quarter, reporting $165 million in adjusted EBITDA at a margin of 34%. We now estimate we are at 9% market share, approximately double where we were this time last year, with a strong focus on reaching our long-term goal of 25% market share. We feel confident in this goal due to our large expanding backlog of purchase orders for 2025, and beyond, supplemented by our Maintenance Repair and Exchange Agreement, or MRE, agreement with the Strategic Capital Initiative, or SCI, to support the portfolio's engine maintenance events over the life of the partnership. Our scale, asset ownership, and unique maintenance capabilities position FTI as the long-term sustainable leader in engine aftermarket maintenance. Overall market adoption of our unique MRE solution to engine maintenance continues to accelerate at pace in the CFM56 and B2500 engine markets. There is continued and growing global demand for pre-built engines and modules for owners and operators of all sizes as a flexible, cost-effective alternative to complicated, time-consuming, and expensive shop To that end, in Q2, we had the opportunity to execute a sizable engine exchange program with a major US airline, albeit at margins below our typical levels. We believe that offering attractive terms to showcase our capabilities with this customer will drive repeat business and higher volumes, ultimately leading to stronger margins. Furthermore, we're implementing several new procurement programs which we expect to contribute to margin expansion by the end of 2025. With these strategies, with the approval of PMA part number three, we continue to expect aerospace products margins to expand to the 40% plus range in 2026. Turning to production, we refurbished 184 CFM 56 modules this quarter, between our three facilities in Montreal, Miami, and Rome, an increase of 33% versus last quarter. In Montreal, our largest facility, we've been expanding operations by focusing on developing talent through our newly established training academy, as well as the use of specialization and technology to improve efficiency and throughput. We anticipate these measures will contribute to drive significant production growth over the next several quarters. We're also delighted to close on our 50% joint venture in Rome, now operating under the name Quick Turn Europe. We've been impressed by how quickly the team have scaled operations to meet EFTA's production pipeline, and we're excited for the plans we have to grow the facility over the coming months to support our regional base in Europe and the Middle East. In addition, we're excited by the opportunity it provides to sell directly to the Chinese market due to the CAC license, which QuickTurn Europe holds. Additionally, we're pleased to announce the acquisition of Pacific Aerodynamic, a piece part repair facility based in California, which focuses on highly specialized precision repairs of CFM56 compressor blades and vanes. Under FTI ownership, This strategic purchase delivers an increase in cost savings, which will lead to further margin expansion. In addition, it will increase operational efficiencies, further expand our repair capabilities for CFM56 engines, and further differentiate our offering. Over the past three years, we've now acquired four facilities across three countries in Europe and North America. We have a proven track record of integrating each into our MRE ecosystem. creating significant value. We're actively reviewing other M&A opportunities in the global market and expect additional acquisitions in the near term are a strong possibility to once again further differentiate FTI's offering. Next, let's talk about adjusted free cash flow. In the first half of the year, we generated $370 million in free cash flow above our targeted $350 million. It was driven by over $1.4 billion in gross cash inflows. Included in this number was the sale of 37 of the 45 seed portfolio aircraft, which are being sold to the Strategic Capital Initiative. The transition of these aircraft is almost complete, with the sale of the remaining eight expected to close during Q3. We also expect adjusted free cash flow to be in the range of $380 million in the second half of the year, which as a result, we are increasing our overall target from $650 million to now $750 million in adjusted free cash flow for all of 2025. With our pivot to an asset-like business model now nearly complete, we anticipate substantial growth in free cash flow in the coming years. For capital allocation, a first priority has been to manage debt in order to achieve a strong BB rating with the rating agency. goal we expect to reach by the end of this year, given our exceptional financial performance. Secondly, we'll continue to invest in targeted growth opportunities in areas where we can expand our differentiated product offering and further widen our competitive advantage. However, it's very likely there will be a surplus above these two priorities, which means returning capital to shareholders will be part of our financial plan in the near term. As to our current estimates for EBITDA for all of 2025, we're raising our outlook for aviation leasing from $500 million to $600 million, which includes $54 million in insurance settlements received in the first half of the year. And based on the strength of our current pipeline, we are also increasing our estimated 2025 aerospace products EBITDA from the prior range of $600 to $650 million to a new range of $650 to $700 million. Overall, we're updating total estimated 2025 business segment EBITDA from 1.1 to 1.15 billion to the new numbers of 1.25 to 1.3 billion. For 2026, we're also seeing meaningful upside to our previous estimate of 1.4 billion and plan to provide an update later this year. For the SCI, we've made great progress this quarter We closed on additional equity partners and expect to have final closings completed by October this year. Our target is to invest $4 billion through the 2025 partnership, which will be approximately 250 on-lease aircraft. Halfway through the year, we now have 145 aircraft either closed or in an LOI commitment and have good visibility from the SCI investments team on sourcing the remaining aircraft. through a combination of lessor, counterparties, and direct sale leaseback transactions with airlines. A key component to the SCI's investment strategy is the MRE agreement with FTI. During the second quarter, we generated 70 million aerospace products revenue by fulfilling orders to SCI, representing approximately 14% of our total sales in aerospace products, or 20%, for the entire first half of 2025. Fixed price engine exchanges are a great source of enhanced return to our equity partners, providing greater predictable cash flows and lower residual risks compared to peer lessors, while also delivering meaningful value to airline customers who avoid the costs and risks of managing shop visits themselves. We continue to believe SCI will be a major additional driver of growth in aerospace products, as well as providing a significant contribution to aviation leasing through management servicing fees, incentive fees, and our 20% minority ownership. Overall, in the industry, we see a very long horizon ahead for the lifecycle of current technology aircraft and engines. Many airlines today recognize that the economic useful life of 737 NGs and A320CO aircraft has been extended to 30 years versus the previous assumption of 25 years. While industry issues of multi-year delays in new aircraft deliveries and the durability of new technology of engines are well known, advancements in CFM56 and V2500 engine maintenance such as the availability of module swaps, development of new PMA parts, is allowing more airlines to economically reinvest in their existing fleets for longer than they originally planned. Programs like FTIE's MRE engine exchanges provide predictable costs and offer airlines a simple, easy way to keep their current aircraft flying profitably. Thus, an average useful life extension of five years means 20% more engine shop visits, which means greater maintenance spend and a larger opportunity for FTIE to expand our market share and help sustainably support airlines in their long-term maintenance needs.