Good day and thank you for standing by. Welcome to the Q4 2022 FTAI Aviation Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Andreini, Head of Investor Relations. Please go ahead.

Thank you, Michelle. I would like to welcome you all to the FTAI fourth quarter and full year 2022 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer, and Angela Nam, our Chief Financial Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and to review the risk factors contained in our quarterly report filed with the SEC. Now I would like to turn the call over to Joe.

Thank you, Alan. To start today, I'm pleased to announce our 31st dividend as a public company and our 46th consecutive dividend since inception. The dividend of $0.30 per share will be paid on March 22 based on a shareholder record date of March 10. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We ended the year strongly with adjusted EBITDA of $123.5 million in Q4 2022, which is up 13% compared to $108.9 million in Q3 2022 and up 22% compared to $101.4 million in Q4 of 2021. During the fourth quarter, the $123.5 million EBITDA number was comprised of $110 million from our leasing segment, $21.7 million from our aerospace products segment, and negative $8.5 million from corporate and other. Now let's look at all of 2022 versus all of 2021. Adjusted EBITDA was $428.1 million in 2022, up 33% versus $322.8 million in 2021. Now turning to leasing. Leasing had a good quarter posting approximately $110 million of EBITDA. The pure leasing component of $110 million of EBITDA came in at $85 million for Q4, up from $75 million in Q3. With strong demand for assets and the addition of new acquisitions in late 2022, we expect Q1 2023 will continue to grow. We're very confident in leasing EBITDA of $350 million to $400 million for the year excluding gains on asset sales. Part of the $110 million EBITDA for leasing came from gains on asset sales, which also performed well. We sold $102.6 million book value of assets for a gain of $25.7 million. And we remain comfortable assuming gains on asset sales continuing at approximately $25 million per quarter or $100 million for all of 2023. Aerospace products had another good quarter with $22 million of EBITDA. We started these activities a little over a year ago and in the last five quarters have booked approximately $91 million of EBITDA without any contribution from PMA. We see tremendous potential and continue to feel good about generating $20 million to $30 million in quarterly EBITDA and think $100 million plus in 2023 EBITDA remains very doable. We feel confident about this number because we're seeing a rapidly expanding backlog of aerospace products business with other leasing companies, MROs or maintenance and repair organizations, and airlines. With that, let me turn the call back over to Alan.

Thank you, Joe. Michelle, you may now open the call to Q&A.

Our first question comes from Josh Sullivan with Benchmark. Your line is now open.

Hey, good morning. Thanks for taking the question.

Good morning.

Just a question on engine availability particularly on the GE56, I think you sold 19 engines in the quarter, purchased 19. What was the mix there? And then what does the GE56 market look like and the constraints for new engine supply?

Yes. It looks very good. The mix we buy is - mostly what we're buying is CFM56 and a lot of what we're selling is Pratt 4000s, CF6-80s and RB211. So we've really been consciously shifting the mix towards CFM56 engines over the last couple of years. And we have a little chart in the supplement, which I think shows how much we've grown that to over - we now have about 330 CFM56 engines between stand-alone engines and aircraft engines. So - and we continue I think going forward to see very good activity on being able to buy engines even in a pretty strong and hot market for aircraft engines. So look, we now have a portfolio or we have negotiations ongoing for various acquisitions that total over 50 engines. Some of them are coming from aircraft that were parked or had been with an airline that went bankrupt. Some are coming out of an airline that just had surplus spare engines. So it's a wide mix. And as I've always said, you have the largest fleet of engines in the world, you have over 20,000 of these engines. We continue to believe we'll see numerous good opportunities to grow that number. Certainly I think we'll definitely grow that number this year pretty materially.

Our next question comes from Kristine Liwag with Morgan Stanley. Your line is now open.

Hey, good morning. Joe, I just want to follow up on PMA parts. Can you give us an update regarding certification progress and any feedback from the FAA you've received so far?

Sure. So nothing really new since the last time we spoke. But the first part that was approved, we've installed it in over 10 engines now and there's another airline that's put it in their fleet and operating. So it's performing extremely well. So we'll continue to do that and grow that. The next four parts made substantial progress in terms of finalization of manufacturing design, production and testing. And so we expect all four of those parts will be submitted for final approval this year around the middle of the year. So they've all sort of are progressing on individual timelines, but they're all targeting that same goal. And so if history is a guide, we should have a full portfolio of products available for 2024, which is very exciting.

Yes, that is. And then, Joe, can you just remind us once you get all these five PMA parts fully certified, how much in dollar savings do you think you could extract from doing that versus buying from the OEM catalogs in the aftermarket?

It's over $2 million per shop visit, our cost for those parts versus OEM list. And OEM list prices, as you're probably aware, went up significantly last year on November 1. And that's today without further increases. If you look forward over the next few years, you could very well - if OEM list prices continue to go up high single digits, our inflation - our escalator is capped at 3% so the gap will get bigger and bigger. If you look out four or five years, it's over $3 million per shop visit.

Great. Thanks for the update, Joe. And looking forward to see the announcements when you get them certified.

We are too.

Our next question comes from Giuliano Bologna with Compass Point. Your line is now open.

Good morning, guys. Thanks for taking my question. It's great to see some great performance on the operating side. One thing I was curious about moving to the Module Factory, I was curious if there's a rough sense of how many modules you're able to sell in 2022 and then to get a rough sense of how much that could grow in 2023?

Yes. That's a great question. So last year all of 2022 we sold 100 modules approximately and it was divided amongst 25 different customers, unique customers. It was a mix of asset owners and airlines and MROs. So it's a nice balance and sort of it touches the entire ecosystem of users of that engine, which is what we've always liked. So if you think about it, four modules per customer is not a big number and it really represents a lot of these users were basically testing the product and trying it out to see if they like it. And so everyone that's been a customer of the Module Factory is becoming a repeat customer. So we haven't lost any customers and we're picking up new ones all the time. So if you think we can grow 25 - just rough math if we could grow 25 customers to 50 and we can increase the number of modules per customer, the growth opportunity is right in line with what we've been talking about in that you could see upwards of 200 to 400 modules in a year coming in the next few years. For 2023 I would expect to see meaningful percentage growth. What that exactly is I would speculate somewhere in the probably 150-plus range of modules this year and it could go higher than that. We're seeing very strong volumes and activity right now.

That's great. Then I guess looking at some of the numbers, it's not broken out perfectly. But based on the aerospace products segment kind of implies you guys will generate somewhere in the range of say $500,000 per module in EBITDA and it seems like that could probably double to close to $1 million with PMA. I'd be curious obviously thinking about 150-plus, that can imply that you guys seriously get to $75 million on the current run rate and PMA could help you double that number definitely the following year without any volume improvements from the number of modules. Is that a good way of thinking about the economics and how that could contribute in '23 and beyond?

Yes. It's a good way of thinking about it. Even without meaningful growth in volume, we'll see big growth in income and EBITDA.

That's great. And then one last question around just kind of the core leasing EBITDA and the run rate. You guys obviously closed on a lot of acquisitions during the quarter and I'm assuming you didn't get a lot of contribution from those assets. And even in the past your target was trying to get to a run rate of $90 million to $100 million per quarter for the kind of core leasing EBITDA. I'm curious kind of where you were actually in the quarter with the new acquisitions or where the run rate was, including the new acquisitions?

Well, we're continuing and some of the assets we bought were off-lease so they don't necessarily contribute immediately and we'll continue to do that because we see the best value in terms of purchase prices in off-leased assets. So you have to build in a little bit of time to get those up and running. And I would say the market in general is really good for leasing. So airlines are announcing every day they're looking for additional old generation or not new generation assets, the 737NGs and the A320 CO fleets are in tremendous demand because of delays with new manufacturing. So we're seeing very strong demand that is really targeting second and third quarters of this year. I think that's when you'll see the biggest growth as people will be - are lining up assets now to be able to put in their fleet in the second quarter and run very significant schedules in the third quarter. So I think it's shaping up very nicely.

That's great. Thank you for answering my question. I appreciate it. And I'll jump back in the queue.

Thanks.

Our next question comes from Hillary Cacanando with Deutsche Bank. Your line is now open.

Hi. Thanks, Joe. Thank you for the call. Your acquisition of iAero Thrust seems really well timed just given the current environment of tight supply and MRO supply constraints. Could you just go over how the integration process is going and some of the longer-term strategic benefits of the acquisition that you're expecting? Thank you.

Yes. So it's going great. It was very timely. We were fortunate to find the facility in Miami that had maintenance capability for hospital and shop visits and a test cell. And the test cell, as I mentioned, there's only four of them that are independent test cells in the North American market and one of them is at Lockheed Martin, which we also have a little bit of knowledge out as well. So the test cell is a tremendous asset for us and the business is -there's probably one major customer in that facility that has over 30 engines there. So that's a big opportunity for the business to ramp that up and grow that and also for us to do additional module swaps, which we are fully engaged on as we speak. We've also made some management changes and hires that are terrific. We got some great people. And I think having a physical location for us that we can showcase our ability to store, do quick repairs and module swaps is a terrific marketing tool. So we couldn't be any more excited about it.

Great. Thank you. And then I guess just regarding the supply chain issues. When you listen to conference calls from Boeing, Airbus, they're all talking about it. Just wanted to get like a high level view, like your view as well of what is the problem and how long is this going to last? I mean do you see the supply chain issues lasting like well into next year or is this something that could be resolved this year? I know there's labor shortages, there's a whole bunch of issues that are contributing to it. But kind of your take on when do you think this could end and if that does - when it does end, what's FTAI's strategy kind of? I mean just obviously this is a fantastic environment, but once things start to be better for the other guys, will there be kind of a strategic change for FTAI?

Yes. It's a great question and it's something we think about and talk about all the time and it has some tremendous benefits for us. But it's a complex problem and I don't think it's going to be solved very quickly and every week we seem to hear about a new problem that no one thought about the prior week. So it's not slowing down, it's actually increasing. And the potential, many people are looking out to the summer when you have a lot of activity that there could be some significant challenges with people to get airplanes in the air because they're waiting on one or two parts and that's a real issue. So I think it's – and you hear about it from every participant in the space. And we've seen it also in our used serviceable material business where we sell used parts and there are particular parts that people just can't get or the lead time is eight weeks. And so that one single part could keep an engine in the shop for eight weeks or could keep it from flying. So in that event, part prices have doubled and in some cases are tripled just in a matter of weeks because it doesn't matter the price. If you have an engine tied up for two months, the price of a part is irrelevant; you have to pay whatever it takes. So I think it's getting potentially worse, and it could be a critical - it could be a meaningful challenge for people this summer. But with us, I mean that's our whole pitch really is we can get engines up quickly repaired. The QuickTurn concept is instead of sending a whole engine in and waiting for repairs and parts, we could actually swap out a module and have that engine back in service in two weeks. And so having repaired inventory on the shelf is part of our whole strategy and I think it's perfect timing for that. I think the longer-term consequence of this is that we hear a lot of airlines realizing that they cannot rely on a single supplier and be dependent upon a single supplier for anything. So again our business model is like you don't have to; we'll back you up. We're actually offering in some cases where we have perpetual power deals where we lease aircraft and engines, we'll put a spare on the ground in the airlines hangar so they could have access to a spare in case anything goes wrong and have it immediately. So all these challenges and all these things that are popping up, we have solutions and really we've gone from an environment where it felt like everything was working against us to where it feels now like everything is working for us.

Great. Thanks, Joe. That was pretty insightful.

Our next question comes from Frank Galanti with Stifel. Your line is now open.

Yeah, great. Hi, Joe. I wanted to start on the leasing side. So when I look just sort of on a macro level based on IATA data, domestic available seat kilometers are down still 16% from 2019 levels. And so to that point, there's still a large area under the curve of engines or cycles that just weren't used due to the pandemic. Doesn't that imply that there is a significant number of engines sitting on the sidelines that can sort of be used as incremental planes start flying again and shouldn't that ultimately push utilization down and yields down at least in the near term?

No. First of all, I think domestic narrowbody flying is currently at or above 2019 levels. With China's reopening, which had previously negatively impacted global numbers, they are now back to 2019 levels. In fact, February schedules in China increased by 10% compared to 2019. Consequently, the U.S. market is also doing well; United recently announced plans to exceed previous levels. Domestic business has risen by 30%, and leisure travel has also increased by 30%, while corporate travel has fully recovered to pre-COVID levels. However, there is still a surplus of aircraft that remain out of service. I monitor the number of parked airplanes by type, and for the 737 and A320, it's still slightly over 10%, which is a critical threshold. Historically, going below 10% indicates a tight market, with the lowest ever being around 3% or 4%. We are still addressing this, particularly with A320s, as Europe has been slower to recover due to its substantial A320 fleet. The engine market operates under a different dynamic. When COVID began, maintenance visits halted. Airlines utilized engines with remaining operational time and then parked them once service was needed. Currently, there is extremely limited availability of the CFM56-7B engine used in the 737 fleet. Although some engines and aircraft are parked, many engines have been removed and utilized long before recent parking. This market tends to self-correct quickly; the cessation of maintenance visits rapidly depletes available capacity, resulting in an annual supply reduction of about 15% to 20%.

Okay. That's really helpful. Shifting over to aerospace. You've been out there talking about a 2- to 4-year plan on the aerospace business reaching $500 million of EBITDA. I think first, can you sort of lay that out what that plan is? But sort to my question, let's say we get to the end of that 4-year plan we get to 2027, why wouldn't you hit that $500 million target? Why wouldn't you get there?

I think it's just execution. We have to execute otherwise the market is there and the market environment is very helpful for, as I mentioned, what our products are and what we can do for airlines to save them money. We basically provide airlines with cost savings and flexibility and so that to me, is a good product. It's a differentiated product, no one else can offer it. So really it's just can we execute. In terms of the composition of the $500 million of EBITDA, what we talked about recently with you is that if we had 25 Module Factory users last year each doing four modules per customer and we're able to double the number of customers to 50 and double the number of modules per customer to eight, that's 400 modules per year and we're currently at 100 and we expect substantial growth this year. So we're on a path that would sort of get there if we continue that. And then profitability, currently we're at about $0.5 million per module and we expect that to double with PMA availability next year so that gets you $400 million of EBITDA from the Module Factory. We expect 50 or so teardowns a year through the AR and we generate about $1 million of profit per aircraft so that's $50 million and then we expect the JV with Chromalloy to generate 50. So that would be the - that's an aspiration. It's not a forecast, but it's something we think about a lot and we keep refining and we feel good about the ability to get there.

Great. Thanks very much.

Thanks.

Our next question comes from Brian McKenna with JMP Securities. Your line is now open.

Thanks. Good morning, everyone. So it's great to see the strong quarter of asset purchases within leasing. But can you give us an update on where LOIs stand today? And then related, how should we think about the baseline level of gross asset purchases annually within the segment moving forward?

Yes. So on the second, I think we acquired over $600 million last year of new assets. Is that right, Angela? And we sold $250 million, $300 million?

About $250 million.

So that's in line with what we've been doing. The asset sales are a little bit higher and as we've talked, we intend to recycle capital more than we probably did years ago. But I think $500 million to $600 million of new acquisitions and $200 million to call it $300 million of asset sales is a reasonable expectation and we're starting off the year pretty strong. We don't - we have a number of deals right now that we have verbal awards and handshakes and that are not fully documented, but that number totals a couple of hundred million and it's very much CFM56 focused. As a matter of fact, I think in total that's over 50 CFM56 engines. So we could see a meaningful growth in the CFM56 engine count in the first half of this year, which is great.

Got it, helpful. And then congrats on the QuickTurn acquisition. I know it's small in the absolute, but there seems to be some pretty meaningful strategic benefits there. I'm curious though how are you thinking about incremental strategic M&A from here? Is there any white space across your business that you would look to fill via acquisitions or any M&A from here would really just be to expand into other adjacent businesses?

We look at the whole ecosystem of the engine and I think that the one area where we are currently focused is repairs. So when we teardown an engine, a lot of the parts before they can be put on a new airplane have to be repaired and our spend last year was roughly $50 million so it's a pretty good amount of money. And so we're looking at the repair space and what repairs we do, what repairs other people do and what opportunities there might be for either M&A or organic development or just using our buying power to get better deals. So I'd say that's the current focus. But we are trying to be vertically integrated in every way we can on this engine and there's I think the size of the engine, the fact that it's a modular engine, the fact that the OEMs keep raising prices so nicely gives us - it's just a huge opportunity.

Got it. Thank you.

Our next question comes from David Zazula with Barclays. Your line is now open.

Good morning and thanks for taking my question. To start off real quick, I was hoping you could provide an update on where you are with insurance recovery, what you've recovered so far and what planes are still outstanding?

Yes. So a couple of things. The assets we had in Ukraine are four aircraft and an engine, we're starting to move the engines out by truck. So we've begun the recovery on those assets and I expect that roughly we'll get about $30 million of assets out this year and we haven't decided fully whether we're going to lease those or sell those. So I think that's a partial solution. I think our book value on those was about $30 million. Our insured value is $70 million. And on that front the insurers have, as you probably are aware of, continued to be very uncooperative. So virtually every asset owner has filed lawsuits and we are not going to be different in that way, we're filing. We have filed one suit already and we're preparing the papers on the second. So we'll see what the judges say. Just it's been a bit frustrating that there is a lack of engagement by the insurers. But we believe that the assets were wrongfully taken and if that's what insurance is meant to cover, then we'll ultimately collect a meaningful amount of that. I think the total claim we filed is $270 million.

That's helpful. And then, Joe, I mean earlier you talked I think about increased velocity of capital through there. Hoping post the QuickTurn facility, you could unpack that a little bit and talk about how that acquisition might impact in a little more detail your capital velocity and intensity?

Well, there's two areas for that. One is in the leasing segment, we've talked about selling more assets and recycling the capital and in particular we've got two deals, one of which is fully closed, another which is in the process of closing; where we're selling the leased asset at a gain and retaining the engine management services contract where we'll make about $1 million per aircraft per year for the maintenance of those engines. And so that's something we want to do more of and we have some other deals in the pipeline. So in terms of the leasing portfolio, as I said, we've typically bought $500 million to $600 million of new assets a year and we expect to sell $200 million to $300 million of those each year. So that generates gains and it also allows us in some cases to keep the maintenance contract, which is a great outcome is to keep the best part of the deal and make a gain. So that's on the leasing side and that will continue. And I think we've got a good sense of how to create value, how to buy things off-lease, put them on lease and then sell them. On the Module Factory, I think we currently operate with about $150 million of inventory and as we grow that business that was doing 100 modules last year, we expect that that will turn significantly faster. So as we grow from 100 to 400, it's not going to go up four times. It should go up very modestly because we expect we can turn inventory. As we get larger and create more options, we'll turn that inventory a lot faster. So I expect that if we were to do 400 modules a year, our expectation is that we would need $200 million to $250 million of inventory to support that and it is facilitated by QuickTurn having the ability to deliver. Swap a low pressure turbine or swap a fan in under two weeks is a product that no one has in the market today. No one can do that.

Great. Thanks. Very helpful, color.

Our next question comes from Sharib Magrabi with BTIG. Your line is now open.

Hi, good morning. Thanks for taking my question. Could you talk a little bit about the different nature of shop visits at QuickTurn compared to the Montreal facility? And more broadly, could you talk about why are hospital visits becoming more popular?

Sure. That's a great question. In Montreal at Lockheed Martin, we focus on performance restoration. When it comes to an engine, if it only has about 1,000 cycles or 100 hours left, it needs to be rebuilt to exceed 10,000 cycles. This process involves disassembling the entire engine, inspecting each part thoroughly, replacing or repairing components, and then reassembling the engine. It can take months and cost millions of dollars. For instance, the current estimate for the CFM56 engine is $6 million, which is often more than the initial purchase price, and these costs rise every year due to price increases on parts. In Montreal, this extensive service is necessary to comply with regulations on engine lifespan. The second type of visit, often referred to as a hospital visit, typically involves quicker repairs, such as fixing a fan blade or replacing bearings. These jobs can sometimes be done by swapping out modules, allowing for repairs within 5 to 10 days. Airlines, especially those with a large fleet of CFM56 engines, aim to avoid the lengthy and costly full restorations by opting for these hospital visits, allowing for targeted repairs to keep engines operational longer. Currently, hospital visits account for about 40% of all shop visits and are expected to rise to around 60% over the next six years, largely due to an aging fleet. QuickTurn is concentrating on this hospital shop visit market. Having it in a separate facility is beneficial because, in a larger MRO shop, there's often an incentive to find more issues to address, leading to higher costs. It's more efficient to have a dedicated hospital shop where the primary goal is to fulfill the customer's requests and ensure a quick and safe return to service.

That's helpful. And great analysis. Thank you.

Our next question comes from Robert Dodd with Raymond James. Your line is now open.

Morning, everyone. On leverage if I can, obviously in the presentation I mean you point out that net debt to adjusted EBITDA is about 4.3. You want to get it to 3, 4. It might be into that range by maybe Q1 or could be at the lower end of that range towards the end of the year even. As you said, you don't need a lot of extra capacity for modules and you've got a lot of cash flow even after the dividend and after maintenance CapEx, et cetera. So what are the other options for you? I mean are you explicitly going to pay down debt, invest even more in assets? But you already gave us some guidance on what you plan to do on that front. So what's the thoughts on utilization of the cash flow that you're going to be generating this year given leverage is coming down on that?

Yes. So we've talked we do want to get the leverage to the point where we're a strong DD and I think if we achieve those numbers this year, we will achieve that goal. So that would accomplish that, which I think is great. We are always looking for good assets to buy and CFM56s are, as you can tell, our passion. So that could present opportunities for additional capital. Beyond that, I think we would look to dividends, share repurchases and they're all in the mix.

Thanks on that. I mean on the prospect for say dividend versus buyback, how would you allocate? What would your thoughts be on the relative value of each of those to normalize the allocation priority if it gets to having that much excess capital?

Well, obviously it will be a function of the share price and what we think the prospects are for the business going forward. I think that that will drive. The dividend, you know what you get. The share buyback is a function of the price.

Got it. Thank you.

Yeah.

At this time, I show no further questions. I would now like to turn the conference back over to Alan Andreini for closing remarks.

Thank you, Michelle, and thank you all for participating in today's conference call. We look forward to updating you after Q1.

This concludes today's conference call. Thank you for participating. You may now disconnect.