Willis Lease Finance Corporation

Good day and welcome to the Willis Lease Finance Corporation third quarter 2024 earnings call. Today's conference is being recorded. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding our expectations related to financial guidance, outlook for the company, and our expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions which are subject to risk and uncertainties. These statements reflect WLFC's views only as of today. They should not be relied upon as representative of views as of any subsequent date and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risk and other important factors that could affect WLFC's financial results, please refer to its filings with the SEC, including, without limitation, FLC's most recent quarterly report on Form 10-Q, the annual report on Form 10-K, and other periodic reports, which are available on the Investor Relations section of WLFC's website at www.https://www.wlfc.global/.investor-relations. At this time, I would like to turn the conference over to Austin Willis, Chief Executive Officer. Please go ahead.

Thank you. Here with me today is Scott Flaherty, our CFO, and Brian Hull, our president. Firstly, I'd like to thank our employees for delivering another strong quarter. And in particular, I'd like to recognize our legal department, finance department, and those others who have been involved in our capital markets transactions over the past two years, from completing our eighth ABS last year to establishing what we understand to be the industry's first ever engine warehouse and closing the first engine JALCO. And more recently, expanding our revolver to $1 billion and extending and expanding the company's preferred stock with an increased investment from the Development Bank of Japan. I would also like to announce our second quarterly dividend of 25 cents per share to be paid on November 21, 2024 to holders as of November 12, 2024. Our core leasing business is performing extremely well and continues to show improvement relative to prior quarters. Our Q3 pre-tax earnings, or EBT, of approximately $35 million is our second highest on record and represents our highest when you adjust for long-term maintenance reserves which tend to run lower when lessees opt to extend leases rather than return engines. Demand for engines remains robust. Little has changed from the second quarter in that supply chain issues continue to affect the OEM's ability to produce new assets and parts, and the MROs continue to struggle to repair engines in a timely manner. This continues to bode well for our utilization and rates. The Boeing strike is exacerbating this problem and is resulting in more of our customers seeking to extend the lives of their current generation narrow-body aircraft. We have seen specific examples recently where airlines had RFPs in the market to sell their fleets of aircraft over the next 12 months, but have recently retracted those RFPs as they don't have a clear picture of when they can expect their new aircraft to deliver. Generally, airlines will plan to retire a fleet when they have used the green time or serviceable life of an engine and when the airframes require major checks. By extending the lives of their fleets, many airlines are faced with the prospect of making major investments in their aircraft that they may not fully realize the value of. Our programs, like Constant Thrust, where we insource the airline's engine maintenance enables the airlines to only pay for the incremental hours and cycles that they consume on their engines, rather than paying for full overhauls. We have seen an increase in airlines requesting this service in recent months. We are exceptionally well-placed to fulfill these program requirements due to our size, diversity of engine assets, and in-house materials and maintenance capabilities. While some airlines have looked to reduce capacity in recent months, we have not seen a reduction in demand. And in fact, our average lease rental factor has increased over the prior quarter. While we feel that some engine lease rates may be stabilizing at a higher level, there is still significant upside from our existing portfolio. Our ability to reprice a lease is a distinguishing factor relative to the aircraft lessors given the proportion of our portfolio on short-term leases. Growth has been a focal point for us as we are seeing opportunities to acquire assets that are resulting in attractive returns. During the third quarter, we purchased 27 engines and four airframes and sold 13 engines, resulting in net portfolio growth of $182 million. Our ability to grow in this environment is the direct result of our flywheel business model where our different businesses create value and opportunity. For example, we purchased a number of turboprops that will be added to our pool of engines used to support constant thrust programs we have with an ATR operator. We provided a debt-like product to a customer where the underlying collateral is V2500 and GTF engines because we are exceptionally comfortable with the asset types. And we speculatively purchased a number of new generation engines, both from the OEM as well as on the open market. The ability to pursue multiple asset strategies as well as offering a services-enhanced leasing product enables us to grow in a variety of market conditions. I mentioned our recent completion and upsizing of our preferred stock and revolving credit facility. When combined with our warehouse facility, these financings evidence our exceptional ability to access diverse capital at attractive rates. We intend to deploy this capital over time as we grow our equity in order to properly manage our leverage in accordance with our long-term goals. We see many opportunities to grow and believe our platform and financial structure will help support that growth, earning us a premium return. Thank you, and I'll hand it off to Scott Flaherty, our CFO.

Thank you, Austin, and good morning all. As you can see from this morning's earnings release, the company produced strong earnings as evidenced by both the $34.5 million of third-quarter earnings before tax, or EBT, and $122.3 million of year-to-date EBT achieved, which exceeds full-year performance in any prior year of our company's history. This performance was up 14.1 million, or 69%, in a comparable quarter of 2023, and up 76.1 million, or 165%, on a comparable year-to-date basis. Walking through the P&L, revenues for the quarter were $146.2 million. Significant revenue drivers were core leasing revenues, inclusive of lease rent revenues and interest revenues on notes receivables, and sale-type leases were $68.3 million, another all-time high, reflecting the increased total portfolio size of nearly $2.7 billion at quarter end, as the company purchased equipment, totaling $229.8 million in the quarter, only slightly offset by $47.9 million of equipment sales. Maintenance reserve revenues for the quarter were $49.8 million, up $12.1 million, or 32%, from the comparable quarter in 2023. 1.2 million of these revenues were long-term maintenance reserve revenues associated with engines coming off lease and the associated release of any maintenance reserve liabilities. And 48.5 million of these revenues were short-term maintenance revenues, which are highly correlated to the amount of time our portfolio is flying as we get paid an hourly and cyclic rate on our lease assets. These short-term maintenance revenues were up 14.2 million or 41% when compared to the comparable period in 2023. Spare parts and equipment sales of 10.9 million in the quarter were up 7.5 million or 223.4% from the comparable quarter in 2023 and produced 18.4% gross margins. The increase in spare parts sales reflects the demand for surplus materials that we are seeing as operators extend the lives of their current generation fleets. We have also benefited from some strategic surplus material purchases made in the first quarter of the year, as well as our vertically integrated platform, allowing us to provide this value to our customers, as well as our own portfolio. Gain on sale of our portfolio assets, a net revenue metric, was $9.5 million in the quarter. as mentioned above, associated with $47.9 million of gross sales and compares to $0.8 million of gain on sale in the comparable period in 2023, which was associated with $4.7 million of gross sales. During the quarter, the company sold 13 engines and other parts and equipment to various trading partners. Maintenance Services, which represents fleet management, engine and aircraft storage, repair services, and revenues related to management of fixed base operator services was 5.9 million, slightly down from the 6.2 million in the comparable period of 2023. Reported revenues reflect only our sales to third parties and not our intercompany sales, which support our fleet and our material to those businesses. Our maintenance capability allows us to be more efficient in our leasing operations, as well as more relevant to our customers by being able to offer a broader, bundled product solution, which provides other business opportunities for our core leasing business. On the expense side of the equation, cost of spare parts and equipment sales was $8.9 million, up $6.8 million, or 337.9%, which was influenced by the large increase in third-party sales from the comparable period in 2023. Depreciation slightly up 2.4% from the comparable quarter in 23 to 23.7 million, reflective of the growth in the portfolio. Technical expense of 5.2 million was down 3.5 million from the comparable period, as well as generally had less unplanned non-capitalized maintenance visits. G&A was 40 million. up $13.4 million from the comparable period in 2023. The cost increases include $7.8 million of costs related to share-based compensation, which was influenced by depreciation in the price of the company's public equity securities, $3.0 million related to a special bonus paid to our executive chairman at the direction of the compensation committee for the company's performance, and $2.5 million of incentive compensation, which is derivative the performance of the company. Net finance costs were $27.8 million for the quarter compared to $19.1 million in Q3 2023. The $8.8 million increase in costs were related to an increase in average indebtedness in the respective quarters by $161 million, an increase in financing costs as the weightings of borrowing shifted across finance vehicles and $3.3 million reduction in derivative-related receipts at certain hedge positions that the company had matured. The weighted average cost of debt, inclusive of our interest rate hedge positions, was 4.04% at 9-30-2023 compared to 5.13% at 9-30-2024. As mentioned earlier, EBT was $34.5 million for the quarter, and the company produced $23.1 million of net income attributable to common shareholders, factoring gap taxes and the cost of our preferred equity. Diluted weighted average income per share was $3.37, up 58.2% from the comparable period in 2023. Cash flow from operations through the third quarter of the year was up 28.1%, to $216.4 million and driven by growth in pre-tax earnings as the business enjoys significant tax depreciation shields, strong cash flows associated with our sales type leases, solid collections relative to the prior comparable period, slightly offset by growth in spare parts inventory as the company opportunistically purchased an attractive portfolio of engine parts early in the year. In September, the company refinanced and expanded its $50 million preferred stock position held by the Development Bank of Japan into a $65 million preferred stock position. The new preferred position will accrue quarterly dividends at a rate of 8.35% per annum. The incremental capital raise will be utilized to further support the growth of the business. Just last week, on October 31st, the company refinanced and expanded its $500 million revolving credit facility into a new $1 billion-sized facility with a five-year term and a $250 million accordion feature. This facility, alongside the $500 million warehouse facility we put in place in May of this year, will provide capital to support the continued growth of the company. Historically, we have looked to diversify capital sources to support the growth of our business. As we continue to see opportunities for growth, we do not foresee any changes to this strategy. With our Q3 earnings release this morning, we announced a 25-cent per share regular quarterly dividend, our second. This will be payable on November 21st to record holders at November 12th. The company has brought balance sheet leverage, defined as total debt obligations to equity, inclusive of preferred stock, to 3.43 times, at Q3 2024 compared to 3.71 times in the comparable period of 2023. When factoring debt, net of cash and restricted cash leverages at 3.25 times. We have been successful in continuing to reduce our leverage levels while also growing our lease portfolio by a net $460 million or 17.3% on the year-to-date basis. At times, We maintain higher levels of restricted cash as we recycle ABS asset sale proceeds, which are held as restricted cash, to purchase new assets. This allows the company to benefit from attractive fixed rate debt pricing and therefore a lower cost of capital. With that, I will now open up the call to questions. Operator?