Willis Lease Finance Corporation

Your conference is about to begin. Good day and welcome to the Willis-Lease Financial Corporation first quarter 2025 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 that these forward-looking statements are based on current expectations and assumptions which are subject to risks 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 risks and other important factors that could affect WLFC's financial results, please refer to its filings with the SEC, including, without limitation, WLSC's most recent quarterly report on Form 10-Q, annual report on Form 10-K, and other periodic reports, which are available on the Investor Relations section of WLSC's website at https:// www.wlfc.global slash investor dash relations. At this time, I'd like to turn the conference over to Austin Willis, Chief Financial Officer. Please go ahead.

Thank you, Operator, and thank you all for joining us. On our call today, I am joined by Scott Flaherty, our Chief Financial Officer, and Brian Hull, our President. In our first quarter, WLFC continued to deliver strong financial performance underpinned by the growth of our core leasing business. While average utilization for the quarter was 79.9%, we ended the quarter at over 86%, evidencing our ability to produce revenue from off-lease engine purchases in a timely manner. For the first quarter, our total revenue was 157.7 million, and pre-tax income was 25.2 million. Our performance has enabled us to return capital to our shareholders while meaningfully expanding our business. And in April, we paid our fourth consecutive quarterly dividend of 25 cents per share. In a moment, Scott will provide more detail on our results. Following a transformative 2024, we were off to a strong start to the year. particularly as our differentiated flywheel business model enables us to generate premium returns. The macroeconomic concerns over tariffs have created market volatility, but the drivers of our business over the long term remain unchanged. The cost of new engines continues to drive operators towards leasing, and our maintenance capabilities and programs aid cost-conscious airlines would prefer to focus on flying passengers rather than engine maintenance planning. We remain confident in our business model and ability to continue to lead the sector in value creation. To that end, I want to highlight three notable transactions announced during the quarter that advance our strategy to provide efficient solutions to airlines. For those of you on the webcast, we have some accompanying slides. First, In February, we announced that we would exercise purchase rights to buy 30 additional LEAP engines from CFM International, a joint venture between GE Aerospace and Safran Aircraft Engines. The purchase includes LEAP 1A engines for the Airbus A320 NEO family of aircraft and LEAP 1B engines for the Boeing 737 MAX. These engines represent an important investment that will enable us to provide additional support to operators of these popular engines and aircraft. This purchase aligns with our vision to pioneer services and solutions that drive more sustainable operations and is consistent with our historical strategy of always having the most in-demand assets for our customers. Second, In March, we announced a new constant thrust deal with Air India Express for CFM56-7B engines, expected to close in the second quarter, which further builds on our existing partnership with Air India that began with our first transaction back in 2022. To reiterate, constant thrust is a product we created over a decade ago. in which we do a sale and lease back on an airline's fleet of aircraft or engines. And when an engine becomes unserviceable, we replace it with another from our fleet, managing the unserviceable engine through our maintenance and services businesses. The downtime for an airline is as little as one day, which delivers a level of efficiency and cost savings unobtainable through traditional maintenance or leasing arrangements. We value our partnership with Air India and believe that their decision to engage in another constant thrust deal with us is indicative of the value that it provides operators compared with alternatives. As discussed on our fourth quarter 2024 earnings call, we believe constant thrust will attract heightened demand as airlines look to transition from legacy fleets into NEO and MAX aircraft. We look forward to continuing to support the growth of the Indian aviation industry and providing innovative solutions to our global customers. And third, in March, we announced a joint venture to build an engine test facility in West Palm Beach, Florida, to address the shortage of similar facilities in North America. The shortage of adequate testing capacity is causing a log jam in the industry, constraining throughput and slowing engine repair turn times. This collaboration with Global Engine Maintenance and Engine MRO will allow us to test our engines, our customers' engines, GEMS customers' engines, as well as third parties who want us to test engines for them. By combining our engine testing needs with that of another MRO, we can offset much of the cost with the base load provided by the shareholders and seek additional income by offering the service to third parties. The test cell will initially focus on CFM56-5V and 7V engines, but will have the capability to test more modern variants in the future with flight modification. Finally, I want to reiterate the strength and expertise of our team as the aviation industry grapples with ongoing macroeconomic uncertainty. Demand for our products and services remains robust, both domestically and abroad. However, as always, we are prepared for the changes that could come as a result of the volatility experienced over the previous few months. The tariffs present challenges as well as opportunities. We have operated through multiple economic cycles and industry disrupting events in our 45 plus years of operation, and we stand prepared to respond as necessary. Our deep understanding of our customers' needs and the assets we manage will put us in the best position to prosper in any environment we face going forward. And with that, I'll hand it over to Scott Flaherty, our CFO, to discuss our financial performance in greater depth.

Thank you, Austin, and good morning, all. As you can see from our P&L, we are off to a good start in 2025. Q1 produced record quarterly revenues of $157.7 million. driving 25.3 million of earnings before taxes, or EBT. Our consolidated revenues of 157.7 million were up 33% from the comparable quarter in 2024, and were driven by our core lease rent revenue and maintenance reserve revenues, which were further enhanced by our vertically integrated services business. Walking through the P&L as it relates to revenue, Core lease rent revenue for the quarter was $67.7 million, and interest revenue was $3.9 million, which reflects interest income on long-term loan-like financings. Growth in these line items primarily reflects our increased total portfolio size of $2.82 billion as of March 31st. Our total loan portfolio is reflected on our balance sheet as equipment held for operating lease, maintenance rights, notes receivable, and investment and sales type leases. We have seen portfolio utilization grow from 76.7% at year-end 2024 to 86.4% by the end of Q1 in almost 10-point pickup as we were able to quickly deploy onto lease our December 2024 purchase of nine GTF engines from Pratt & Whitney. Additionally, we continue to see a solid average lease rate factor across the portfolio of 1.0%. Maintenance reserve revenues for the quarter were $54.9 million, up 11 million or 25% from the comparable quarter in 2024. As you peel back the numbers, you can see that $9.6 million of these maintenance reserve revenues were long-term maintenance reserve revenue associated with engines coming off lease, and the associated elimination of any maintenance reserve liabilities. $7.7 million of the $9.6 million related to an end of lease payment for which the company has subsequently been paid by a Chinese-based lessee customer. $45.3 million of our maintenance reserve revenues were short-term maintenance reserves compared to $37.6 million in the prior comparable period. This increase in short-term maintenance reserve revenue was influenced by an increase in the number of engines on short-term lease conditions and the systematic contractual increase in the hourly and cyclical usage rates on our engine, and to a lesser extent in this quarter, the timing of revenue recognition of in-substance fixed payments. Fair parts and equipment sales to third parties increased by 15.0 million, or 455%, to 18.2 million in Q1 2025, compared to 3.3 million in the comparable quarter. This increase was driven by the demand for surplus material that we are seeing as operators extend the lives of their current generation engine portfolios. In addition, there was a discrete 7.0 million sale in the quarter, as well as 2.2 million of equipment sales, for which there were none in the comparable periods. WASI, our spare parts business, provides a valuable outlet for the company to recognize residual values on our engine portfolio, while also providing feedstock for our and our customers' fleets in a tight parts market. The recycling of these spare parts often occurs at one of our two engine MRO facilities, which are located in Coconut Creek, Florida, and Ridge End, Wales. Gain on sale of leased equipment, together with our Gain on sale of financial assets, a net revenue metric, aggregated to 4.8 million in the first quarter, down slightly from 9.2 in the comparable period. This gain was associated with gross equipment sales of 49.8 million, representing an effective 10% margin on such sales. Our trading activity tends to be lumpy and varies from quarter to quarter due to the nature of the business. Trading is an important part of the business and keeps our portfolio relevant. Maintenance service revenue, which represents fleet management, engine and aircraft storage and repair services, and revenues related to management of fixed-base operator services was $5.6 million in the first quarter, up slightly from the comparable period in 2024. Gross margins came in at 5% as we are still in the build-out stages of our fixed-base operator services business, which influences our aggregate margins. We believe that our maintenance service offerings both enhance and create lease opportunities for the business and provide further vertical integration supporting the full life cycle of the company's assets. On the expense side of the equation, depreciation in the first quarter was up 11.3% to $25 million for the quarter as we increased the portfolio size as well as put new engines on lease, which starts their depreciation through our P&L. Write-down of equipment was $2.1 million for the quarter, which represented an impairment on five engines, which were all moved to help for sale. G&A was $47.7 million in the first quarter, compared to $29.6 million in the comparable period in 2024. Increases in the overall G&A spend were mainly related to $11.4 million in consultant-related fees, which are predominantly related to the company's sustainable aviation fuel project. Given the stage of this project's development, GAAP dictates that these costs are expensed rather than capitalized. The company has been awarded a UK governmental grant, which will ultimately offset a portion of these charges, but such grant will not be recognized until cash is received. We anticipate that first quarter spend, which represents licensing and engineering fees, represents the bulk of our net anticipated spend, inclusive of grant, in 2025. In addition, there was $6.9 million of share-based compensation, which was influenced by the rise in the company's share price relative to Q1 2024, and represented a $3.1 million increase from the comparable period. And approximately $1.2 million of wage increases due to additional headcount and general salary escalation as we grow the footprint of the overall business. Technical expense was $6.2 million in the first quarter, slightly down from $8.3 million in the comparable period in 2024. Technical expense generally relates to unplanned maintenance, whereas engine performance restorations tend to be planned, capitalized events. Net finance costs were $32.1 million in the first quarter compared to $23.0 million in the comparable period in 2024. The increase in costs was related to an increase in indebtedness as total debt obligations increased from $1.7 billion at March 2024 to $2.2 billion at March 2025, as well as an increase in the quarterly weighted average cost of debt, inclusive of our interest rate hedge positions, which rose from 4.56 in Q1 2024 to 6.16 in Q1 2025. The company also picked up $1.4 million in ratable earnings from our 50% ownership interest in our Willis-Mitsui and Cassix-Willis joint ventures. The company produced $15.5 million of net income attributable to common shareholders, which factors in gap taxes and the cost of our preferred equity. Diluted weighted average income per share was $2.21 in Q1 2025. Net cash provided by operating activities was $41.0 million in the first quarter of 2025 as compared to $59.8 million in the first quarter of 2024. The decrease was predominantly related to working capital, where relative changes in accounts payable had a significant influence on the net cash provided by operating activities. Adjusting for working capital were changes in assets and liabilities. Net cash provided by operating activities was $13 million higher in the first quarter of 2025 than in the comparable period in 2024. On the financing and capital structure side of the business, the company completed its fourth and fifth JOCO financings in the first quarter, bringing total JOCO financings at quarter end to approximately $105 million. Subsequent to quarter end, the company completed its sixth GELCO, bringing our total GELCO financings to $125 million. We regularly access the capital markets as we endeavor to source competitively priced capital to continue to grow our balance sheet and P&L. In February of the first quarter, we paid our third regular quarterly dividend of $0.25 per share. Subsequent to quarter end, we declared our fourth consecutive regular quarterly dividend, which is expected to be paid on May 22, 2025, to stockholders of record at the close of business on May 12, 2025. We believe that our ability to pay a recurring dividend speaks to the health of the business and provides our shareholders with a moderate current cash yield on their investment, while not degrading the strong cash flow characteristics and equity growth of the business, which supports our overall growth. With respect to leverage as defined as total debt obligations, net of cash and restricted cash to equity, inclusive of preferred stock, our leverage ticked lower to 3.31 times as compared to 3.48 times at year-end 2024. We mentioned with our annual results that our leverage had climbed in the fourth quarter as we took advantage of some year-end asset purchase opportunities. and we have now been able to start to work that leverage back down in the first quarter. With that, I will now open the call to questions. Operator?