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Fortress Transportation and Infrastructure Investors LLC Common Shares
Q2 2022 Earnings Conference Call
8/5/2022
spk03: good day and welcome to the second quarter 2022 fortress transportation and infrastructure investors earnings call today's call is being recorded and i would now like to turn today's conference over to alan andrini please go ahead sir thank you lisa i would like to welcome all of you to the fortress transportation infrastructure second quarter 2022 earnings call joining me here today are joe adams the ceo of ftai Ken Nicholson, the CEO of FTI Infrastructure, Scott Christopher, the CFO of FTI Infrastructure, and Angela Nam, the soon to be CFO of FTI Aviation. 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 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 and Ken, 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-cap 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.
spk05: Thanks, Alan. Welcome to the FTI second quarter earnings call. Today we have presented and will be discussing the financials as of June 30th on a consolidated basis. We're very excited that everything is in place for the spinoff of FTI infrastructure to be completed next Monday. So we will also provide some pro forma information about the two separate companies which we'll be trading next Tuesday under the symbols FTAI and FIP. To start, I'm pleased to announce our 29th dividend as a public company and our 44th consecutive dividend since inception. The dividend of $0.33 per share will be paid on August 29th based on a shareholder record date of August 15th. Let's now turn to the consolidated numbers. The key metrics for us are adjusted EBITDA and FAD, or funds available for distribution. Adjusted EBITDA was $165.3 million, up 220% compared to $51.6 million in Q1 2022, and up 143% compared to $68.3 zero million in Q2 2021. FAD was 109.4 million, up 53% compared to 71.4 million in Q1 2022, and up 60% compared to 68.3 million in Q2 2021. During the second quarter, the 109.4 million FAD number was comprised of 161.6 million from our aviation leasing portfolio, 9.9 million from our infrastructure business, and negative 62.1 million from corporate and other. Starting out with aviation, aviation had a really good quarter, posting approximately 160 million of EBITDA and 105 million of net income. We're benefiting from strong demand globally, driven by the recovery in travel demand, which in turn is fueling growth in engine aftermarket services. Lease rates have returned to at or above pre-COVID levels And improving asset utilization is pushing maintenance reserve collection up, while inflation is driving higher per hour and cycle rates. Asset prices are also up. We took advantage by selling about 100 million book value of assets for a gain of 55 million. And we have more asset sales coming in Q3 and Q4, both to recycle capital invested in some of our 2021 larger acquisitions and continue capitalizing on the robust freighter market. Aerospace products had an excellent quarter with $17 million in EBITDA and a significant increase in order backlog. We're in the process of completing two separate asset sales where FTI will retain engine maintenance service contracts for the next eight years covering 22 engines. We believe this marks a unique way to scale the number of engines we manage while recycling capital for new investments. In addition, we've been awarded a major engine exchange program covering between 10 and 20 engines for a large Southeast Asian airline. All told today, we now have five airlines, three leasing companies, and five maintenance repair organizations, or MROs, signed up to use the module factory for a significant portion of their CFM56 fleet, And every user we've had so far has been a repeat customer. Used serviceable material, USM, sales experience more activity in Q2 as shop visits increased. Demand for used CFM56 material is high and growing and sufficient to easily support 20 to 30 engine teardowns per year. which continue to generate approximately a million in profit per engine for us. Our PMA initiative made significant progress in Q2 on the next four parts development. Although the process is slower than expected, we're very happy with the parts being produced and are promptly supplying all data requested. At this point, we expect all four new products to be submitted for final approval by this time next year. We currently expect to complete an additional $200 million in asset sales in Q3 and have concurrently signed up $300 million in attractive new acquisitions to replace these. The new deals are expected to be accretive by adding more EBITDA than the assets removed. Although from a timing perspective, Q3 likely will experience a slight decrease in leasing EBITDA until those new investments have fully closed. Turning to the insurance claims, we're making good progress by supplying all information requested by the insurers regarding our $290 million in claims for assets lost in Russia-Ukraine. With three different buckets of claims, we think it is possible to realize a partial recovery by year-end 2022 this year with the balance collected in 2023 and 2024. As a reminder, any recoveries will be 100% income since all related assets were written off fully in Q1. To pull it all together, we expect aviation, without any insurance recoveries, will produce per quarter 90 to 100 million in EBITDA from leasing, 20 to 30 million in asset sale gains, which we think will be recurring each quarter, and 20 to 30 million in EBITDA from aerospace products, totaling 550 to 600 million in per-anum EBITDA from aviation. With this level of EBITDA, we expect FTIE Aviation to pay a dividend going forward of $1.20 per annum, while FIP, Fortress FTIE Infrastructure, expects to pay 12 cents per annum. for the total of $1.32 for the two stocks post-spin. Let me now turn the call over to Ken to discuss infrastructure.
spk04: Thank you, Joe, and good morning, everyone. As Joe mentioned, our infrastructure business will be a standalone company commencing next Tuesday. We're extremely excited about the prospects of our infrastructure platform and believe we're well positioned to drive substantial growth at each of our four existing businesses. It's a dynamic time in the industrial and energy markets with inflation and focus on energy security as prominent as ever, and our assets are extremely well positioned to capitalize on several opportunities. Quickly to the second quarter results. In total, our infrastructure business posted $26.7 million of EBITDA in the second quarter, up 34.8% sequentially from $19.8 million in the first quarter of 2022. Importantly, each of our four core companies reported sequential growth in revenue and EBITDA. As we head into the second half of the year, we're seeing good momentum across the portfolio and expect to continue to generate meaningful sequential growth as our businesses continue to ramp up operations following recently completed developments and as new contracts kick in. In the aggregate, we're targeting achieving annual adjusted EBITDA in excess of $200 million in the next 12 to 24 months with no additional investment required to meet that target. I'll briefly review each of our infrastructure companies, starting with Transtar. Transtar had an excellent quarter, posting growth across all aspects of the business, including volumes, pricing, revenue, and EBITDA. EBITDA increased from 14.8 million in Q1 to 18.8 million for Q2, a 29% quarter-over-quarter gain. More importantly, cash flow was 20 million for the quarter as sales from non-core assets continued to exceed capital expenditures. Volumes at Transtar increased from 54,000 to 57,000 car loads from Q1 to Q2 while pricing, or average rate per car, grew from $562 to $599 per car load. We're insulated from inflation and higher fuel costs at Transtar with the ability to pass through higher operating costs under our contract with U.S. Steel. And ancillary services also grew at Transtar, with car repair efforts bringing in new revenue for the quarter. While the third quarter is typically seasonally a little soft, softer than other quarters during the year, we expect results to remain steady as we look ahead, driven by continued progress on a number of initiatives to gain new customers and grow revenue from other sources, including car repair and real estate income. Next on to Jefferson. Q2 EBITDA at Jefferson was $4.2 million, up 11% compared to $3.8 million in Q1 of 2022. We saw increases in volumes of both refined products and crude oil as utilization of our terminal capacity continued to steadily ramp up during the quarter. We're very bullish about the second half of the year at Jefferson and expect revenue and EBITDA to grow materially in the third and fourth quarters. We're seeing a substantial pickup in volumes of refined products shipped to Mexico, and yellow wax crew trains are now running at 9 to 10 trains per month. More importantly, at ExxonMobil's request, we now expect to complete construction of new storage tanks and commence terminal operations under our 10-year contract during the fourth quarter of this year, ahead of our original schedule of January 2023. We expect this contract to generate approximately 20 million of incremental EBITDA annually, bringing substantial committed throughput volume to the terminal and provide a springboard for increased volumes and growth in volumes. There are also inactive discussions with Exxon about activating an additional connecting pipeline, which will bring incremental crude volume from Jefferson to the expanded Exxon Beaumont refinery. Additionally, we will look to complement this expansion by providing bidirectional service on the Southern Star crude oil pipeline between Jefferson and Motiva, allowing for increased blending capabilities and higher crude oil throughput at the terminal. In short, the much anticipated ramp at Jefferson is now upon us. Moving on to Longridge. Longridge generated $7.5 million in EBITDA in Q2 versus $6.1 in Q1. As we have communicated in the past, we target quarterly EBITDA for our 50% share of Longridge to be in the range of 12 to 15 million per quarter. Our results for 2Q included the impact of gas purchases during the quarter that were required from external suppliers as we transitioned our internal gas production to new wells later than planned. This combination of constrained labor availability and limited supply of drilling equipment meant it took approximately three weeks longer than expected to bring new gas production online, necessitating the purchase the purchase for our power plant from third parties at historically high prices. Fortunately, it was an isolated event and not something we expect to repeat. By the month of June, we were running on our own gas and generated EBITDA for the month within our targets. Going forward, we expect to continue steady EBITDA from the power plant in line with our targets. Development at Long Ridge continues to be robust. In July, we entered into agreements with New Light Technologies for the construction of a new $300 million facility to be built on Long Ridge property, which will produce carbon-negative and biodegradable plastic products from natural gas. Long Ridge will sell power and natural gas to New Light, as well as provide land under a long-term lease. In addition, we expect to be an investor in the project if certain conditions are met. We expect the facility to be operational in 2024. Finally, to close out with Rapano. At Rapano, our key focus is on commencing development of our Phase 2 LPG transloading system. This system is expected to triple our throughput capacity and quadruple our operating margins when it comes online in a couple of years. We have demand from multiple international off-takers, and our goal is to enter into a long-term agreement with one or more parties during the third quarter. We have completed engineering for the new storage tank, and associating piping and systems and negotiated construction contracts. We plan to finance all construction costs with tax exempt debt. In the meantime, in the second quarter, we expanded our existing capabilities by loading fully refrigerated LPG to large gas carrier marine vessels. With this important step, we move closer to our goal of loading VLGCs, or very large gas carriers, across our dock facility. In addition, the newly expanded LPG truck racks continues to see high utilization providing both propane and butane to local heating and blending markets, meeting additional customer needs in the area. Finally, we continue to see increased interest in the renewable energy space, with 250 acres primed for development. We have announced a coordinated effort to develop a unique marine cable manufacturing facility with Rise Light, which will provide a critical American-made infrastructure link to bring renewable electricity from offshore wind generation to local consumers. Also, our Clean Planet joint venture continues to progress through the permitting process for the first plastics recycling plant at Rapano. We're expecting to complete construction of the Clean Planet facility in 2024. With that, I'll turn it back to Joe.
spk05: Thanks, Ken. Next week is a big week for FTI shareholders with the consummation of the spin. FIP will eliminate K-1s for shareholders upon the spin, and FTI will begin a six- to eight-week redomiciling, which, when complete, will eliminate K-1s for all shareholders as well. Index funds, ETFs, and a broader investor universe will be able to own both stocks, and importantly, both companies will focus, refine, and articulate their uniqueness and value-add in the respective markets served. For aviation, FTI is capitalizing on global travel recovery and growth in aftermarket engine services to be the leading low-cost commercial engine power provider for narrowbody aircraft globally. The unique combination of engine leasing and maintenance management provides airlines cost savings and capital preservation through proprietary products and practices while focusing on the largest and most liquid engine market in the world.
spk04: And I would just say for infrastructure, we very much look forward to updating investors on a standalone basis starting next quarter. We do expect to post meaningful growth in the near term across each of our four key business units. It's a very attractive time to own long-term assets, well insulated from inflation and with high scarcity value in the country's largest industrial and energy markets. We view the growth at Transtar this quarter as a good indication of things to come. And following years of development, we're accelerating the pace of ramp-up at Jefferson and Rapano terminals while at Longridge with the power plant complete. We're now beginning to drive incremental cash flow and value. And I'll turn it back to Alan.
spk03: Thank you, Ken. Lisa, you may now open the call to Q&A.
spk01: Thank you. If you would like to ask a question on the phone lines today, please press star 1 on your telephone keypad. Once again, everyone, that is star 1 to ask a question. We'll take our first question from Giuliano Bologna from ContestPoint.
spk09: Thank you. Joe, starting off with you on the aviation side, I'd be curious about a couple of different things and how they kind of interact together. You obviously mapped out a handful of asset sales from some of the four of the nine assets you got back from Russian carriers last quarter that you expected to generate a $30 million gain on sale. And then you had a a handful of other 737 NGs that you got back that were potentially going to go on lease. I'm curious, when we look at the asset sale numbers, it obviously came in a bit higher than what I had expected. I'm curious what the composition of those asset sales looks like and if you sold more of the Russian assets. And you mentioned some cargo assets as well during the call. And then looking on the other side, I'm curious what kind of assets you're looking at on the LOI side because you obviously have a pretty strong LOI pipeline. And you mentioned $300 million of potential acquisitions. So I'm curious, what types of assets are you selling? What types of assets are you acquiring? And how should we think about the EBITDA contribution coming out on the sales and then back in on the acquisitions?
spk05: Yes. So the composition is a little – as I mentioned, there's two different groupings. One is cargo and the other is recycling capital from – mainly the Avianca deal, but also some others with long-term leases that we did last year. The cargo assets we also sold in addition to selling some of the assets, the 757s and 767s we took back from Russia and Ukraine, we've also sold some 747s in this quarter. So that's why the gain is higher than we had originally projected. That market, as I mentioned, we don't know when the cargo market will slow down, but we don't want to miss it. So we decided that it was sort of a good time to, you know, we'd rather be early than late. And that market, you know, we had bought those assets at a very, attractive time several years ago when no one was paying attention or thinking about cargo. So there were quite good returns for us. But we decided it was time to sort of lighten up on the cargo side. And then in the third quarter, I think I alluded to the deals that we're selling with long-term leases attached. So there's still a lot of capital that's been raised by new leasing companies that wants to buy deals. And And we structured those so that we can retain the engine maintenance service contract and do that for the lessor, which is great for us because we could use other lessors' capital and retain the best part of the deal. So those are the deals we're targeting to close mostly in Q3. And we'll add a lot of – we add backlog to our aerospace products business that way. and we think we can continue to grow and we're very pleased that you know the lessor acceptance of that is has been not not by one lessor but by two lessors so we see that as something that's very very significant for us to continue to grow the service business and highlight our ability to create value out of portfolio deals which is why I referenced that I think this gain on sale is something that we think is should be recurring for us each quarter I think we can do that we can buy packages of assets and then find the parts that are most attractive to other people and take advantage of that. In this case, we're able to even keep the engine maintenance service as part of that. On the buy side, we're focused on all CFM 56 engines or mostly. That's been the focus all along. We acquired 25 engines in Q2 that were all off-lease. That's where you get the best prices when you have an asset that you have to put revenue, you have to attach revenue to it. That's a market that very few people compete with us on that. So that was a great on the buy side. Additionally, we've got some deals with big airlines that we have existing relationships with, that we've established a good relationship with. They're also CFM56 engines. And they would add to very similar to the transactions we did last year with Avianca and ETA. So we think it's a great combination. We pick up EBITDA by doing that. So it's both recognizing a gain and increasing EBITDA seems like a very good win.
spk09: That's great. I appreciate it. And switching topics over to infrastructure, Well, I'd like to focus a little more on Jefferson. I'm curious, you know, obviously there's a lot of commentary on the call about Jefferson, and there's an outlook or a roadmap to getting to roughly around $80 million in EBITDA. I'm curious, you know, what gives you a lot more confidence that they'll be able to get there and then think about the different components. Obviously, there's the XMDL coming on. There's obviously the WAPs. Yeah, yellow lines, train car volumes, they're starting to increase going 2Q. I'm curious, you know, what the different components are and how to think about contributions from some of the different initiatives that are going on at Jefferson.
spk04: Yep, yep. Yeah, look, we're pretty bullish on the second half of the year at Jefferson. Look, all the assets are in place. We're finishing up the new assets for the ExxonMobil contract, and we're really happy that we're going to be able to start operations under that contract now in the fourth quarter. That's obviously a big piece of the bridge to $80 million, but a bigger piece is just continued increases in utilization. All of our assets in place today are being utilized at less than 50%, you know, and it's been a process for, frankly, a few years of building out those assets and cultivating the relationships with the ExxonMobiles, Metivas, and others in the Beaumont refinery complex. It's been a lengthy process, but, you know, we're now finally there. As I mentioned, you know, we're opening up another crude pipe between Jefferson and Exxon, we're kind of making a small change to the Southern Star pipeline between Exxon and Motiva to allow it to be bidirectional. All of those things play into more demand and more requests for throughput from our two largest customers. Yes, we're thrilled that yellow wax trains continue to accelerate. The second quarter was a good quarter. I think the third quarter will be an even better quarter. Refined products in the Mexico are strong and getting stronger. New terminals are being opened in Mexico. And so we're seeing indications and seeing business in this month of July that make us very comfortable with our outlook for 80 million of EBITDA, you know, in the next 12 to 24 months.
spk08: That's great. I appreciate it. Thanks for taking my questions. I'll jump back in the queue.
spk01: We'll take our next question from Josh Sullivan from the Benchmark Company.
spk08: Good morning. Good morning.
spk07: Just a question on the overall leasing market. We've had both Airbus and Boeing come out here lowering delivery assumptions due to supply chain issues, mainly within the engine availability market or vertical. So first off, is that lack of OEM engine supply supporting the module business in USM? And then secondly, you know, in the aircraft leasing market, how are airlines responding to that lack of OEM aircraft supply? Is that a conversation you guys are having with airlines about capacity at this point?
spk05: Yes, it's good for us. I like that fact that, you know, it's harder to make new airplanes because it makes owning the ones we own better, more demand. There's a lot of demand, you know, for the, you know, the, existing 7-7 NGs and A-20 CO assets. So we've got, as travel demand has been very, very robust and relatively price and elastic, airlines need lift and need capacity. So to the extent that new deliveries get stretched out, it just extends the longevity of the fleet that we own, which is good. And then the other thing I mentioned, which is also good for us is inflation because as inflation increases the price of a shop visit, our advantage gets bigger and also our revenue collected from maintenance reserves goes up. So we like both of those trends. And it seems like, as people have indicated, it's not going to be I think somebody said they're not going to be, uh, talking about stop talking about this probably until 2024 is the expectation. So we've got pretty good, um, period where it's going to be positive, I think for us.
spk07: And then, and then one for Ken, just, just on phase two for Bono, do you have customers in place or what are you seeing there to drive the next phase?
spk04: Um, Hey, gosh, um, We are very close. I can't tell you we have a contract signed with an off-taker. I will tell you the team at Rapano spent the better part of two weeks in Europe recently, and I think we're in a very good position to sign something up in the third quarter. Plenty of demand from very large investment grade companies, We want to make sure we sign the best deal. But we're close. Everything's ready to go. But we're not at the point yet where we have a contract executed, but we're close.
spk08: Got it. Thank you for this time. Thanks.
spk01: We'll take our next question from Chris Weatherby with Citi.
spk06: Hey, thanks. Good morning, guys. This is Eli Winsky on for Chris. So maybe thinking about some of the sensitivity around the infrastructure side and going over to Jefferson. Ken, you were talking about, you know, you'll obviously get the Exxon contract and then you're going to focus on better asset utilization. But what are some of the puts and takes to getting better asset utilization, specifically on maybe the rail congestion side? How does that impact growing some of that business?
spk04: Really no issues with congestion. I mean, we can handle double the train activity we're handling today. I mean, that's one of the things we can – working on as we developed the terminal, ensuring that whether it's inbound crew trains or outbound refined products trains, we've got plenty of capacity to handle the additional business. When we go through the calculation of exactly what our throughput capacity is, there's about 400,000 barrels per day. That's the capacity. We take all that stuff into consideration. I mean, we're not too concerned about congestion issues. We've got plenty of track at the terminal, and so we certainly haven't experienced any congestion to date, and I don't think congestion is going to be an issue for us.
spk06: Okay, that makes sense. And then on the Exxon side, you said you have a lot of the assets in place, but what is left? And then separately, on the $20 million of incremental EBITDA, What does that ramp up there look like? So you said that's 20 million annually, but when does that really start to pick up? When should we expect a lot of that to be coming in? What's left to go there?
spk04: That really, there should be a very short ramp up to that contract. I mean, the operations commence when everything is built. What is being built specifically is just under 2 million barrels of total storage. So we have storage tanks that are under construction. We've built 4 million barrels to date. This is an additional 2 million we're bringing online. And then just piping and manifolds, the way that system will work is we will receive refined products by pipe, accumulate and store the refined products, and then we will load large ships for export of those products. So it's really just down to storage tanks, piping, and manifolds, all stuff we've built before so far on track for completion during the fourth quarter. Feel pretty good with our ability to get it done, you know, I would say mid part of the fourth quarter, although the team down there is, you know, very focused on, you know, completing as quickly as possible. There's not, I wouldn't say, we're at a stage of construction now where, you Most of the risks that you would typically see, geotechnical and what have you, are behind us. And now we're welding and painting. We're not digging any holes or driving piles or anything like that that can typically be a cause for delay.
spk06: Yeah, sounds like the tougher stages are over. On to Mexico for refined products. How involved is the government right now still in restricting moves? So you said that you're going to see a substantial pickup there. But what does the government play? Yeah, I'll tell you.
spk04: I mean, it's always an ongoing dialogue. Right now we're not seeing any reduction in movements. You know, I mean, Exxon is as active as ever in loading trains for movements down to Mexico. We watch it closely. And, you know, there are, you know, on occasion percolation of, you know, a story here, a story there, but at the end of the day, the country needs gasoline and diesel, and Exxon's got a base of about 1,000 ExxonMobil gas stations that they need to serve, and so we have not seen any issues or any slowdowns coming across from some of what you might read in the papers about government interaction.
spk06: All right. That makes sense.
spk08: Thank you all.
spk01: We'll take our next question from Justin Long with Stevens.
spk02: Thanks and good morning. I know in the slides you called out a $200 million plus EBITDA run rate for the infrastructure businesses over the next one to two years. You referenced $80 million from Jefferson earlier. I think you gave the number of $100 million for Transtar in the slide. When I add up the pieces, it sounds like we could be a decent fit above $200 million. So I was wondering if you could just kind of refresh us on your latest thoughts on the EBITDA contribution from each of the different assets as you look out the next couple of years and maybe what level of corporate costs are getting factored into that forecast as well.
spk04: Yeah, absolutely. You were spot on on the companies that you mentioned. Transtar is $100 million. of the total of 200. Jefferson, 80. Longridge, we're targeting 50, could easily be more to the extent we produce excess gas, particularly at current market pricing, but hold 50 plus for Longridge. And Rapano, right now, we're including at 10, which is really only including phase one and a little bit of incremental activity that does not include phase two. So that's not in the $200 million estimate. You add all that up and yes, you get in excess of 200, closer to 240 million. And then we deduct 30 to 40 million of corporate expense and that gets you to just north of 200 million.
spk02: Perfect. And secondly, I wanted to ask about the pro forma debt for the two businesses post-spend next week. I know you gave the numbers in the slides, but How are you thinking about targeted leverage for each of these businesses a year from now? And based on that target, what's the capacity that you feel like you have for each entity to invest in growth?
spk05: So for aviation, we're targeting maintaining the double B ratio and somewhere probably in the neighborhood of four to five times debt to EBITDA. So there's capacity, I think, to go up as we grow EBITDA. But I think we're comfortable where it is at this point.
spk04: And I would say for infrastructure, it's generally the same in terms of the ratios. Obviously, the infrastructure business is a slightly smaller business right now. But in terms of a ratio, it's in that sort of four to five times EBITDA target. The beauty of the infrastructure business is in terms of investment capital for growth, a lot of what we do is eligible for tax exempt financing. And that's something we've used historically at Jefferson. And we can use Everpano and potentially even at Longridge. And so, you know, debt capacity, obviously we'll be smart and disciplined about, you know, incurring debt. But, you know, we've been successful in the past growing through investment by accessing the tax exempt markets. At Jefferson, our average rate of borrowing is in the high twos as an example. I'm not sure in this current market environment, Rapano for phase two will be at a similar rate, but it'll still be a significantly lower rate than where the more traditional taxable markets would be. I feel like we can maintain a four to five times leverage ratio, but at the same time, you know, continue to incur debt for specific projects at attractive levels.
spk02: Got it. Thanks for the time.
spk08: Thanks.
spk01: We'll take our next question from Frank Galante with Stiefel.
spk00: Yeah, hi. Thanks for taking my questions and congratulations on getting the financing done to be able to spend the infrastructure business. I wanted to follow up on the engine maintenance program. So you had mentioned when you sold a couple of the engines, you're able to keep the maintenance portion. Can you sort of talk about what that physically entails and then sort of the economics? So is that simply using the module factory or is that full overhaul services up in Montreal? And then how should we think about that from a unit economics perspective?
spk05: Sure, that's a good question. How it works is that we sell the aircraft to the new owner and agree to provide replacement engines for the life of those leases when needed. So when an engine is due for a shop visit, we would take the engine that needs the shop visit and exchange in return an engine that meets minimum requirements of cycles and hours available in a swap. And so that engine then becomes our engine. We can either put it in the module factory or do an overhaul or sell it. And in the economic meantime, what we're doing is we're collecting the full maintenance reserves from the airline for that engine along the way. So the way we price it out, given our advantage cost with on the maintenance side is that we could generate an additional million dollars per aircraft per year through that transaction. So it's a very attractive for us and it's also attractive for the new owner obviously. They're doing it voluntarily because managing those engine events is not something everybody's capable or experienced or has had good outcomes on. So we think it's an example of our ability to provide a competitive service at something that we can then generate a significant profit because of our proprietary products and advantage. So very exciting, I think, because it opens up a very, very large market. Sixty percent of the world's fleet is owned by leasing companies. So as we looked out, that's an important – area for us to, you know, to spend time and to try to grow and to profit from. And so this is a way to do that on a pretty significant scale.
spk00: Great. That's super helpful. And sort of continuing to get on the aviation path, I wanted to ask about the module factory. Can you sort of talk about customer interest since the inception of that? And I guess my My assumption is that it's picking up. But in that way, are there needs to put more engines into that business? If I remember correctly, there's about 10 that was originally put in. And then is there any interest or need to move past the three modules that you guys have developed and expand those services?
spk05: In terms of the scale, I mean, yes, we would probably, as volume grows, and obviously what we're doing is we're turning modules, so we would increase the number of modules in the module factory as the business grows. We are seeing very broad-based growth in users. As I mentioned, we've got You know, it takes a while to market this, but we've spent time with many, many airlines. And, you know, each week we, you know, are educating airlines or spending time with them and finding that they have needs and demands. And, you know, we're building backlog for 2023 right now. So we're seeing a very broad base acceptance on the airline level. The maintenance shops have been very, I would say, much easier to sell because they're in the business of doing this regularly and And there's never been, for many of these shops, they never had a place to go to buy a fan or to buy an LPT. So this is something now that they're recognizing they can use to generate additional income for their own maintenance shop. And then, as I mentioned, the leasing companies, we're seeing the leasing companies use this now for return compensation. So at the end of a lease, an engine, you often have return compensation issues with the airline. The airline has to provide a certain minimum number of hours and cycles back. And if they don't, they have to pay cash. And so we can oftentimes, if it's an LPT that doesn't meet the requirements, we could sell an LPT to the airline or the leasing company so that the return conditions are met and they save money and they don't have to do a shop visit. So it's becoming a useful tool for people to save money on the end of lease issues. So Really developing a very broad market for this, and it is an education process. It takes time, but given that we can sell to almost everybody in the ecosystem, it's a huge growth opportunity for us. And the backlog, as I mentioned, is continuing to build. And as we, with the sale of these assets and retaining the engine maintenance agreements, That gives us committed volume, which we like. As with the WestJet deal, we have an eight-year deal, a seven-year deal. We now have two eight-year deals that we'll add to that. So we see it with a nice ramp. In terms of if we did double the volume, if we had 10 engines, we might have 15 engines or as much as 20. But if each engine is sort of $2 million to $3 million, it's not a huge investment to get that kind of a turnover increase. ramp, which we would expect to turn a module within three to six months and do it multiple times a year. So I don't see that as a big capital user, and it should scale quite easily. In terms of going beyond these three modules, we don't see anything quite as attractive as this right now, so our focus is really on that. We could develop something later in the future, but right now everybody's all eyes on this opportunity.
spk00: Great. I'd squeeze in one more question, if I could, on the PMA business. Can you talk about the approval process and why it's taking longer than anticipated? Are there customers that are interested in just one part that's approved or are they sort of waiting until there's a number of parts before engaging? Yeah.
spk05: Well, I think it's, I mean, people know that additional parts are in development. So having a critical mass is very helpful. So I think that's, that's part of what we're attempting to achieve from the very beginning. And so once we have that critical mass, then I think people will know that that's coming. So they tend to key off that. The process is just, I think there's been an element of cautiousness. There's a lot of data requests and a slower turnaround time than normal. So it's all those factors, but We've got a great partner. They know how to do this. They've done it hundreds of times. And the parts are very, very happy with what we've got in the pipeline.
spk08: Great. Thank you very much. Thanks.
spk01: And that concludes today's question and answer session. I would like to turn the call back over to Alan Andrini for any additional or closing remarks.
spk03: Thank you. Thank you all for participating in today's conference call. We look forward to updating you for both companies after Q3.
spk01: And that concludes today's presentation. Thank you for your participation. You may now disconnect.
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