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Fortress Transportation and Infrastructure Investors LLC Common Shares
Q1 2022 Earnings Conference Call
4/29/2022
spk00: Good day and thank you for standing by. Welcome to the Q1 2022 Fortress Transportation and Infrastructure 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. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to our speaker today, Mr. Alan Andrini. Please go ahead.
spk07: Thank you, Tanya. I would like to welcome you to the Fortress Transportation and Infrastructure First Quarter 2022. our newly appointed CEO of FTI Infrastructure, Scott Christopher, the Chief Financial Officer of FTI, who will become the CFO of FTI Infrastructure, and Angela Nam, the Chief Accounting Officer of FTI, who will become the CFO of FTI Aviation, which will be the new name of FTI. 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 FAB. The reconciliations 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 and Ken, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. 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 FCC. Now I would like to turn the call over to Joe.
spk08: Thank you, Alan. To start the call, I'm pleased to announce our 28th dividend as a public company and our 43rd consecutive dividend since inception. The dividend of 33 cents per share will be paid on May 24th, based on a shareholder record date of May 13th. First, a couple of highlights. Yesterday, our board formally approved the spin of FTI infrastructure from FTI, and we expect the spin to be completed in the next four to eight weeks. Secondly, as to Russia-Ukraine war and our assets lost in that conflict, we are writing off $195 million in Q1 for impairments, bad debt, and lost revenue. But we expect to recapture all of that $195 million over the coming year. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA and FAD, or funds available for distribution. Absent the impact to our assets in the Russian-Ukraine war, which we estimate to be approximately 70 million in Q1, adjusted EBITDA would have been approximately 122 million, down 2% compared to 124.8 million in Q4 of 2021, and up 158% compared to 47.2 million in Q1 2021, including one-time charges, Actual adjusted EBITDA was 51.6 million in Q1 2022, which is down 60% compared to Q4 2021, and down 9% compared to Q1 2021. FAD was 71.4 million in Q1 2022, down 41% compared to 120.1 million in Q4 2021, and up 396% compared to 14.4 million in Q1 of 2021. During the first quarter, the 71.4 million FAD number was comprised of 117.1 million from our aviation leasing portfolio, 7.1 million from our infrastructure businesses, and negative 52.8 million from corporate and other. Turning now to aviation, let's start with the impact of Russia's war in Ukraine. We reported Q1 2022 aviation EBITDA of $48 million. Write-off of uncollectible debt or canceled leases with customers that ceased operations reduced EBITDA on the quarter by about $70 million. So we estimate EBITDA without the war effect would have been approximately $120 million or an improvement from Q4 2021 of $104 million. In addition, we are writing off 100% of the book value of $125 million of the 12 aircraft and 20 engines that remain today in Russia or Ukraine. For those aircraft and engines, we have filed insurance claims totaling $290 million, which we ultimately expect to recover most, if not all, of this amount. So when we do recover, all proceeds will be booked as income when received. We also took back nine aircraft from Russian and Ukrainian operators and are under LOI to sell four of these aircraft to cargo operators at a gain of approximately 30 million, while the remaining five aircraft are all 737 NGs for which there is very strong demand for both the aircraft and the engines. So we expect all nine of those aircraft to be on lease or sold by the end of Q2. We'll be taking further advantage of the strong cargo market and expect to sell other 747 and 767 aircraft and engines for significant additional gains in Q2. Turning to our aerospace products, we posted Q1 22 EBITDA of $16 million, comprised mostly of income from CFM 56 module sales again this quarter. And looking ahead, given the very visible and robust recovery in air travel demand worldwide, we're seeing a significant ramp in activity and backlog for our aerospace products. We currently have a backlog of approximately 180 modules contracted or on order and over $100 million of used serviceable material USM sales on order through multiple programs with MROs, maintenance and repair organizations, and airlines. We continue seeing growing market acceptance of our CFM56 product offerings with today over 20 active customers, including many of the world's largest airlines and independent maintenance shops, and are importantly seeing a very high level of repeat usage. We expect demand to accelerate as heavy volumes of CFM56 shop visits are being scheduled now for the second half of this year. Let me now turn the call over to Ken to discuss infrastructure.
spk07: Thank you very much, Joe. We're excited about the prospect for our infrastructure business. And through the next few slides, I'm going to talk about our recent results at each of our assets and highlight several of the projects and plans we have for growth in the coming months and the remainder of the year. It's an incredibly dynamic time in the transportation and energy markets with high commodity prices, extreme focus on energy security, and the mounting forces pushing energy transition. And we are in a great position with each of our businesses, ideally suited to act on these opportunities. Starting on page 9 with Transtar. Transtar generated $34.1 million in revenue and $14.6 million in EBITDA for the quarter. Revenue was up $1.1 million, or 3.5% quarter over quarter. Its slightly lower car loads were more than offset by higher average pricing. More specifically on car loads, cold rolled steel shipments out of U.S. Steel rebounded in March. showing promise for continued improvements next quarter, while hot-roll coil shipments have remained steady. Shipment cycle times that were delayed at customers for unloading in the fourth quarter and much of the first quarter are moving at a faster pace, permitting Transstar's rail car fleet to return more efficiently. Deep adopt of the quarter was impacted by 2 million of non-recurring items and a lag in fuel surcharge revenue. meaning we experience higher fuel costs in the first quarter for which we will be reimbursed in the second quarter due to the mechanics of our fuel surcharge program with U.S. Steel. Most importantly, cash flow from operations for the quarter was $16.6 million in excess of adjusted EBITDA as cash realized from the optimization of Transtar's rail car fleet was $3 million for the quarter, more than offsetting capital expenditures of $1.1 million. We're very excited about the future for Transtar. We're accelerating our commercial focus on third-party business, adding to our commercial staff, and pursuing a number of revenue enhancement programs. In total, we estimate an opportunity for approximately $30 million of incremental revenue over the next 12 to 24 months through these programs with minimal incremental capital need. Transfer is also an ideal platform for creative acquisitions, and we're experiencing a growing pipeline of acquisition opportunities that we believe, if successful in acquiring, would be highly creative to the business. Turning to Jefferson, first quarter EBITDA of 3.8 million was up 35% compared to 2.8 million in Q1 of 21 and up 66% compared to 2.3 million in Q4 of 21, driven largely by strong ship dock utilization for inbound crude oil movements as well as the commencement of yellow wax crude by rail from the Uinta Basin. With the recent disruptions in global trade flows, Jefferson's multimodal infrastructure provides customers valuable optionality They handle volumes via marine, pipeline, and rail. For the first quarter of 2022, crude oil and refinery intermediate revenues have grown 15% versus Q4 and 50% year-over-year. Volumes through the terminal have more than tripled versus the first quarter of 2021 and have increased 32% versus last quarter. From a project perspective, Jefferson remains on schedule for the end of the year and on budget for the previously announced 10-year deal with ExxonMobil. That project will bring substantial committed throughput volume and revenue to the terminal via our cross-channel pipeline system and provide a springboard for increased volumes. With the dislocation in the energy markets and demand by our refineries for more secure sources of supply, we're seeing growing activity at Jefferson. One of the emerging markets for crude supply is in the Uinta Basin of Utah, where volumes of yellow wax crude have been rapidly growing to replace imported barrels. At Jefferson, we moved an average of three trains per month through the terminal in Q1, In the second quarter, we expect to move eight trains per month, and we have capacity of handling up to 24 trains per month, and that is our goal as we enter the second half of the year. Jefferson is the only terminal in the Beaumont region capable of transloading large quantities of yellow wax crude, and the process involves a significant amount of handling, heating rail cars to unload the product, and blending with lighter crude, so it's a particularly high-margin business for us. Turning to Longridge. We're pleased to report that our new 485-megawatt power plant is up and running on a continuing basis, and we expect to generate strong cash flows under our power sales agreements for years to come. In addition, we're taking advantage of our own natural gas assets to produce gas in excess of our power plant's needs for sale into the merchant market, where gas pricing, needless to say, continues to be extremely strong. As the first quarter financials demonstrate, we took an unscheduled maintenance outage during the quarter to repair and complete commissioning of one of our steam turbines. The outage lasted approximately six weeks and represented an approximate $8 million adverse impact on EBITDA for the quarter due to lost revenues during the outage. All costs to make the repairs were covered under warranty. While far from ideal, the outage did result in two positives. First, We performed maintenance that was originally scheduled to take place in April, letting us avoid taking that outage and setting the stage for an uprate in power production to 505 megawatts at little to no cost. Second, we completed our hydrogen blending project. In March, we became the first utility-scale power plant in the United States to run on hydrogen, starting with a 5% blend. This is an important development of the National Infrastructure Bill, which was passed last year, includes $8 billion of funding for the development of hydrogen hubs, and we have applied as a recipient. As an early mover with multiple advantages, Longridge is well-positioned to secure funding from this program. So with the power plant in good shape, we are now focused on driving incremental growth by securing new business from power-intensive industries that want to locate new facilities at Longridge. We're seeing a robust pipeline of prospects and expect to announce our first major counterparty in the coming months. Finally, Rapano. Building on a successful first year of operation in 2021, we're kicking off the 2022 season in very good shape. Our business today is somewhat seasonal with activity picking up in the month of April and continuing into the fourth quarter, so expect Rapano to generate solid results in the second and third quarters in particular. The newly expanded LPG truck rack has seen high utilization, providing both propane and butane to local heating and blending markets during a period of significant market volatility. Our newly commissioned cavern chiller allows for fully refrigerated butane exports, and we have executed on a base agreement with an international off-taker for multiple cargoes beginning this month. We expect to move over 175 million gallons of LPG in 2022 versus 130 million gallons in 2021, with upside to over 250 million gallons with spot movements which are on the increase. We continue to advance our build-out plans for additional product storage, increased rail access with the construction of a double-unit train loop, 600,000 barrels of new storage and pipeline connectivity to major production areas. We're finalizing permitting and construction contracting for the new storage facility, which will more than double our throughput capacity and triple cash flow potential once complete. We expect to fund the capacity entirely with low-cost tax-exempt debt, making the expansion highly accretive. With that, let me turn it back over to Joe.
spk08: Thanks, Ken. It's hard to imagine a two-year period that's been more difficult and volatile than the last two. Between COVID and the war in Ukraine, our business models have been stress-tested in ways that we would never have expected. The good news is FTI has come through this period in good shape and, in fact, very good shape. The aviation industry is once again in growth mode, and our aerospace products are more in demand now than we had ever thought. And with the world's rediscovered desire for more energy independence, our infrastructure assets are more critical today and more valuable than they were just two months ago. Putting it all together, it's a perfect time to separate the companies. To that end, we filed this morning our public form 10, which means that we should have two separate trading companies in the next four to eight weeks. Heading FTI infrastructure will be Ken Nicholson, who you just heard from, Ken has been my partner for over 20 years, including the last 10 since we started FTI, and I'm very excited to be working with him in this new role. To sum it up, after years of preparation, the separation of FTI aviation and FTI infrastructure is now at hand, and we're very excited by the prospects for both companies. Turning back to Alan now.
spk07: Thank you, Joe. Tanya, you may now open the call to Q&A.
spk00: Certainly. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. And our first question comes from Justin Long of Stevens. Your line is open.
spk02: Thanks, and good morning. I wanted to start with aviation. Last quarter, you talked about the run rate for EBITDA from aviation being around $550 million, and that included $50 to $100 million from aerospace services. So at the midpoint, if you strip that out, aviation leasing was expected to do about $475 million of EBITDA. If you set Russia and Ukraine aside and take that out of numbers, what does that pro forma number look like going forward?
spk08: Yes. So I'll give you the answer first, and then I'll sort of walk back through how I get there. And the answer, I think, for the year would be $475 million of EBITDA. for both leasing and aerospace products. And I would use 375 million of EBITDA for leasing and 100 million now for aerospace products. We're more comfortable, I think, at the high end of that earlier range, given the widespread acceptance and the backlog that we see building. So if you take the 475 and then you look at the 375 for the leasing, As I mentioned, we had about $35 million of leasing EBITDA in Q1, and the war in Ukraine cost us about $70 million. So call that roughly $105 million if the war hadn't happened for the leasing business. And so if you use that as a base, the assets that came off lease that I mentioned, that are either off lease or stuck in Russia or Ukraine, Figured that's about a $20 million impact to Q2, negative impact. But we added business from the Avianca deal of about 10. So net-net, that's probably $95 million for Q2 from leasing. And then on top of that, we're going to have, as I mentioned, a $30 million gain from a sale of the four cargo planes that we were able to get back. So called Q2 roughly $125 million. And then if you look, the balance of that to get to 375 or 380 is about $220 million for Q3 and Q4. So that's kind of how I get to that number, and hopefully that's helpful. Because I apologize for all the variances and changes, but our world was sort of interrupted, unfortunately, as many people have been.
spk02: But that's the math. That's extremely helpful. I know there's a lot going on. So on that last point about the $220 million in the back half of the year, does that assume any gains? No. Okay. And I guess, secondly, on Jefferson, any update on what you're expecting from in terms of EBITDA over the remainder of the year and how things could ramp. And it was helpful to get some color on the trains per month that you're expecting in the back half. But curious if you could put a sensitivity around that in terms of what one train per month means to EBITDA.
spk07: Yeah, Justin, happy to do that. Maybe to answer your specific question, one train per month, one train of yellow wax crude can generate, it depends, but anywhere up to $100,000 of EBITDA. This is one of the reasons we're so bullish and so excited about it. Unloading one train can be a very high margin business between the heating involved, the blending, and what have you. very substantial projection. And we're excited about the trend we're seeing here in the second quarter. You know, big picture with Jefferson, obviously we have a lot going on. We've got the big Exxon contract kicking off at the early part of next year. Our ultimate goal is, you know, to get Jefferson to $80 to $100 million of EBITDA. The precise trajectory for which we get there is, you know, I can't provide that kind of precision quarter over quarter, but our goal is at the end of the year and as we kick off the new Exxon business in January of next year to be pretty close to that number on a run rate basis.
spk02: Okay, that's helpful. I appreciate the time. Thank you.
spk00: And our next question comes from Chris Weatherby of Citi. Your line's open.
spk07: Hey, thanks. Good morning, guys. Maybe just on the leasing side, I think, Joe, you mentioned that you'd recover – that you're writing down, I guess. Could you help us sort of bridge that gap? Are you talking specifically about the leasing business and is that just sort of new business opportunities that are out there? Is it a combination of that and insurance recoveries? I just want to make sure I understand how you're thinking about that.
spk08: So, yeah, the recovering of the 195 is really primarily would be from insurance and recovery of bad debt, not from any additional activity around that. So that's what we were referring to in that. And I think the As I mentioned, we filed $290 million of insurance claims. $75 million of that is for assets that are in Ukraine that look to us. We don't have a first-hand inspection. We have aerial photos of the area. They look destroyed. So that is pretty straightforward from an insurance point of view. So the other ones in Russia are... Ultimately, you have to prove that you can't get your assets back, but every day that goes by, that seems to be easier and easier to prove. I think that it's going to become fairly clear. A big chunk of what we're referring to, that 195, is the insurance recovery, ultimately, for those assets.
spk07: Okay, that's helpful. I appreciate that. And then just on Jefferson, I just want to make sure I understood the point there on the slide about the ramp-up. When you think about the eight trains, I know we have 24, I think, monthly trains of capacity. We're thinking about eight trains. I just want to make sure, is that the April run rate that we're on right now, or are you expecting sort of a run rate to accelerate as we go into May and June to be able to hit that for the second quarter? No, that is the run rate we are on currently. Okay, fantastic. Thanks for the time, guys. Appreciate it. Thanks.
spk00: And our next question comes from Giuliano Bellona of Compass Point. Your line's open.
spk09: Good morning, and thanks for taking my questions. I guess to start off, continuing along a similar topic on Jefferson Terminal, the details around the trains and the capacity are very helpful. The first thing I was interested in picking your brain about is that There's obviously been an increased focus on importing oil from Canada, and a large part of that would most likely be coming via rail. And you guys obviously have a rail terminal. I realize that a big part of what you're mapping out here is not necessarily from Canada on the train side initially, but I'm curious if there are opportunities on the Canadian side to get long-term agreements in place for multi-year supplies or if there might be the potential to get the DRU built on the Canadian side, for example. And then, you know, the kind of add-on to that is I'm curious if the capacity is any different if you're bringing in crew from Canada versus, you know, Yellow Wax and if EBITDA contribution would be any different between the two.
spk07: Yep. Thanks. Look, the general tone and atmospherics around Canadian crude by rail are very positive. You know, the White House made some statements weeks ago regarding increased imports from Canada by any mode other than pipe. So that's a very good thing for crude by rail. You know, I would tell you the activity today is still relatively light compared to where the activity was pre-COVID. About two to three trains a day get loaded in Canada, in the Alberta and Saskatchewan regions, and that number was between 10 and 12 trains pre-COVID. So we're still at relatively reduced levels, but it is growing. And with the White House sentiment, we are bullish that we're going to start seeing some crude trains coming in from Canada in the short term. Hard to specifically quantify that, but I do think we'll start to see a good uptick. Specifically on your point, You know, the economics I described on the Uinta Basin yellow wax crude, they're roughly the same for Canadian crude. It's also a very heavy barrel that requires heating when it comes in and tank cars and generally requires blending. And so the economics are typically the same. You know, we'd love to see more Canadian crude coming in. We have the capacity to handle it. We've got plenty of storage. We've got blending capabilities. So, you know, we're eager to see that market pick up.
spk09: That's right. Um, and then moving on to a slightly different topic, um, on the aviation side and, you know, works on the aerospace services, I guess, partially on the aerospace services side. Uh, I know that you guys already have approval for the first, uh, PMA part. I was curious if, um, there's any sense of timing for the second PMA part. Um, and then as a little bit of an add on to that question, uh, for the second PMA part, uh, I'm curious if you have a lot of orders for the first two parts combined. or how can we order book for parts they're shipping out there?
spk08: Yeah, the parts in development, there's a number of parts that are in development. They're all progressing, and there's very active dialogue in terms of with the regulators. So those are all making very good progress, and we expect to see them in various points of approval over the next year. So Those are moving ahead. And there is, you know, until they're approved, we have conditional orders, but it really doesn't translate until you actually get the approval. So I'm confident that there's demand. There's demand certainly from us and our engines, and we believe from the market.
spk09: That's great. Thank you very much, and I'll jump back in the queue.
spk00: Our next question comes from Greg Lewis of BTIG. One moment. Your line is open.
spk04: Thank you, and good morning, everybody. I just had a question in aviation. Clearly, a couple of factors have driven the ability for the team to start monetizing or selling off some aircraft into the cargo. You mentioned that. It doesn't sound like we're going to see much more of that as the year plays out. But just kind of curious, how should we think about the monetization of those assets and the recycling of that cash here as we look out over the next couple quarters?
spk08: Well, there is potential for more of that. I was just commenting that in the base numbers, it's not built in. So I think that we are thinking that the cargo market is at a really, really robust demand level, which maybe doesn't last forever. Historically, that's been true. And so we'll probably take more opportunity to monetize some of the cargo aircraft and engines in Q2 and Q3. And then the other potential monetization is I talked about last quarter. Some of the newer airplanes that we acquired in the Avianca deal and some of the other ones with long-term leases can be easily sold to other leasing companies today at very good prices. And we're close to doing a couple of deals where we would sell those at a gain and then retain the engine services contract for the next seven to eight years. So from our point of view, it's the ultimate best of all worlds. You acquire something, you sell it at a gain, take all your capital out, and you retain part of the business that we love, which is servicing the engines. That is a model that I think we think can be replicated. We believe we can do more of that and that will allow us to recycle capital and then also simultaneously build the backlog for our aerospace services products and lock that in. Very excited about that. I think the first couple of deals could happen in the next quarter or two. we think we'll be doing more of that. And overall, from a portfolio point of view, we're headed, as we mentioned, towards increasing the percentage of CFM56 product in our portfolio. It's today probably up from 50% to about 60%, and I would expect over time to see that grow even to 70% or 80% given the significant competitive advantage and the huge market opportunity that we have in that space.
spk04: Okay, that's great to hear, Joe. Thanks. And then I guess maybe this one's for Ken. Congratulations on, I guess, taking over the infrastructure side. I know it's been discussed that there's a lot of money on the sidelines in terms of looking at investment in infrastructure, and clearly the company over the years has shown an ability or willingness to kind of partner with with other investors to kind of build out the business and even do some asset monetization on your end. Just kind of curious what that's looking like. Is there any update or any color you can kind of give us around the potential to bring on additional partners into the infrastructure business, maybe post or prior to the spin?
spk07: Yeah, look, I mean, it's a pretty robust environment out there. There's, as you said, there's a lot of capital available, but there are a lot of assets, a lot of infrastructure needs. We're always looking for partners. You know, some of our customers, that's where, you know, it makes more sense for terminal build-outs where we put capital in and customers, you know, we help, you know, make their supply chains more efficient and what have you. I think there's a huge opportunity out there in the rail space. You know, we've got three or four different, you know, acquisitions we're currently looking at. I'm not sure those are any things we necessarily, you know, partner with folks on. Those are things that we would have the capacity to do you know, on our own, more on the ports and terminals space where we're building up capacity. That's where joint ventures and partnerships like that could start to make a fair amount of sense.
spk04: Okay, great. Thank you very much.
spk00: And our next question comes from David Zazioa of Barclays. Your line is open.
spk03: Hey, Joe. Hey, Joe. Thanks for taking the question. I guess first one is on Used serviceable material. Airlines in general have been really ramping up and placing a premium on capacity and trying to use more aircraft. I guess I'm wondering whether you think that will have a positive or negative effect on the used serviceable material market and your business going forward. It seems like you're counting on some significant ramp going on this year.
spk08: Yes, it's a good point. And, you know, we mentioned that there hadn't been a lot of – transacting in the used service and material market until the shop visits start to really pick up, which they are now. And so we're looking at a meaningful growth. I mentioned $100 million backlog of USM, and it's one of the reasons I think we're comfortable with the high end of the range for $100 million for aerospace products is that business will start to meaningfully contribute now in Q2, starting in Q2 and for the rest of the year. So the demand is very real. It's actually getting to be harder to find the parts now than it is to sell them. So that's a very good sign. And we have been building inventory. And one of the constraints on used serviceable material is getting the parts repaired because you take them out of an old engine, many of them have to be repaired. The repair shops are short staff. They don't have the supply chain constraints. So we have built a fair amount of inventory that we have repaired. So we're actually you know, a pretty attractive partner for many of these airlines and also particularly the maintenance shops. And so what we're trying to do with the USM now is use that as a lever to get more module transactions as well. So, in other words, we can decide who to give our valuable USM to if they, in turn, you know, do more business with us on the module side.
spk03: Thanks. That's helpful. And then just a follow-on for Ken or Scott maybe. you'd put out a potential number for increased spot market activity at Rapano. Should we think about that as being kind of proportional run rate as far as how much it flows down to the bottom line, or is that something that maybe you'd see a higher margin on that incremental activity? Thanks.
spk07: Yes, you got it right. today, and that's representative of the total margin out of Phase 1 operating at about 90% of capacity. Phase 2, we need to build more storage in a loop track. That's underway. We're just completing the permitting. You know, that's going to take 12 months plus to actually put into place, but it was meant to be illustrative to give you a sense for the incremental margin that comes out of that. It is a higher margin business. because it just has more scale, and so the actual contribution per gallon or per barrel is higher after Phase 2 gets implemented. You know, Phase 2 will start construction in another month or two here, and as I said, that will take, you know, 12-plus months to implement, but we wanted to make sure people understood how creative that could be. We've also, you know, applied for authorization-issued tax-exempt debt to build out the entirety of that project, and so I think it could be incredibly creative for Rupana.
spk00: Great, thanks very much. And our next question comes from Brian McKenna of JMP Securities. Your line's open.
spk01: Great, thanks. I know the big focus in the near term is getting the spin completed and deleveraging the business, but for the standalone aviation company, how should we think about the capital management strategy longer term, given what will be a healthy cash-flowing business? And then can you just remind us, what are the expected CapEx needs on a recurring go-forward basis for the business?
spk08: Yes. So there is, you know, and we put out a slide on the capital structure in the deck, which I think is very helpful because the SPIN itself will generate 800 million of capital for aviation or FTIE aviation, which will reduce that roughly to about 1.9 billion pro forma for the SPIN. And then in addition, As I mentioned, we have a potential asset sales of $300 million and another $200 million of insurance proceeds, which could possibly bring debt down to about $1.4 billion and equity to about $1.3 billion. So we'd be almost one-to-one debt to equity and under three times debt to EBITDA. So very, very strong pro forma financial profile coming out of the spin. Now that gives us the opportunity, and I think we're trying to get positioned so that we could be very opportunistic in what almost certainly there will be some more volatility and that creates opportunities for us to be able to use that firepower when situations present themselves. So we're working to get ourselves set up to be able to really capitalize on that while aviation is in a very strong growth and recovery mode.
spk01: Got it. And then just a bigger picture question, you know, given the geopolitical events that have taken place this year, does it make you rethink at all your global strategy and footprint within aviation? And then can you just remind us how much of the leasing portfolio is tied to the U.S., Europe, and then the rest of the world?
spk08: Europe is the biggest. For us, it's 60%. Yep, 60%. And U.S. is probably 20%. 25%. So I don't think you could, you know, I think Russia is unique in a way. I think there's not a country in the world that's sort of analogous that was able to do what they did. So I think that people have accepted that that's probably not as something that's going to happen in any other place, really. I don't see that as a significant risk. So obviously it's... It was a shock. I think the insurance market's going to pay, and they'll raise rates, but I think people are going to continue leasing airplanes all around the world, and I don't see it as a major change other than I think Russia will be off-limits and a pariah for maybe a long, long time.
spk00: Thanks, Joe. Our next question comes from Josh Sullivan of Benchmark Corporation. Your line's open.
spk06: Hey, good morning. Just as far as, you know, follow-up on that financing question, what are your thoughts on the timing approach to the $800 million?
spk08: Hey, it's Ken. We're very close.
spk07: I would say it's very well advanced, and, you know, it is next few weeks. I think things are pretty well organized, and we should be – having that financing all complete and committed literally in a few weeks. Feeling good about it.
spk06: Okay. And then just one on aerospace, you know, what's the appetite by airlines for additional sale leasebacks? You know, air traffic picking up, airlines still have an eye on capacity here, interest rates moving, you know, your aero parts offerings maturing, you know, a lot of moving parts here, but just curious on the signals you're getting from the sale leaseback market.
spk08: It's good. I mean, airlines are still, you know, they all lost money in Q1. They're all very positive, but they're still, you know, losing money. So they need capital. They need capital partners. So I think leasing as a percent of total fleet is 60% now. It's been increasing. So, you know, if anything, the airlines have proven that they're more volatile than people realize. So it's yet again. So I think leasing is a very critical part of their strategy. business model, and sale leasebacks are definitely on the table. I mean, we've been, you know, pitching the airlines on a sale leaseback where we manage the engines for them, which is another way of them, you know, getting out of the business of having to manage shop visits. So it's additional reduction in capital for them, which they like, and it's great for us. So that's been our And we're very flexible, very good to work with. And so we've converted, I think, quite a few airlines already over to that where they don't really want to manage shop visits again. So we want to be the largest aftermarket engine shop provider or power provider in the business. So I think we have a differentiated and better model to a product that is really important for them.
spk06: So would those be kind of like power-by-the-hour type relationships?
spk08: No. I mean, it's still a lease. We're not going to go power-by-the-hour, but you'd have a minimum rent. And then when the engine is due for its major overhaul, we do an exchange. And so instead of the engine, typically now if you have a 10-year lease or an 8-year lease and the shop visit is required in year four, The airline has to do the shop visit. It has to go out and get a spare engine, and it could take six months or nine months, and it could cost a million dollars just in getting a spare and transportation and all the downtime. So by giving an exchange, so we'll just, instead of the airline having to manage that shop visit, we just supply them with a new engine, and they give us the run-out engine. And so that then eliminates the downtime for them. They save money, and then we manage the shop visit. And all along the way, we're collecting maintenance reserves. So we're actually compensated for the maintenance and then some because we have a lower cost. So it's a win-win.
spk06: Thank you for the time. Thanks.
spk00: And our last question comes from Robert Dodd of Raymond James. Your line is open.
spk05: Hi, everyone. Good morning. Just back to the aviation and kind of related to the spin. I mean, on... What can you tell us about the expected dividend policy slash mix, you know, aviation versus infrastructure going forward, and particularly on the aviation side? I mean, how should we think about it beyond just what it's going to be post-spin, but what conceptually could be the driver of whether that increases, stays flat, etc.? ?
spk08: Yeah, so the aviation business should generate a lot of free cash flow going forward. We'll have, as I mentioned, we'll have a strong balance sheet. We'll have sort of an ability to recycle capital and grow the earnings. And so that's a perfect model to be able to increase dividends. And, you know, that's been our objective from the beginning. We've been able to maintain the dividend even in this period. tumultuous period, and we think that the future would allow us to grow that for the aviation business.
spk05: Perfect. Thank you. One follow-up, if I can, also on the aviation. Post-restructuring, spin and restructuring the balance sheet, do you have a target ROE? I mean, pre-Russia, pre-COVID, the aviation leasing business was regularly in the, call it the mid-teens, ROE. Do you think that's an achievable target going forward with the newly lower leverage balance sheet? Well, the previous one didn't have any leverage, but any kind of target you think is achievable for that business on the leasing side or on the combined leasing plus maintenance side?
spk08: I think it could be substantially higher than that into the target 20s, even 30s in terms of ROE. So I believe that that's very doable. Thank you.
spk09: Yeah.
spk00: I would now like to turn the conference back over to Mr. Andrini for closing remarks.
spk07: Thank you, operator. And thank you all for participating in today's conference call. We look forward to updating you after Q2.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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