Good day, and thank you for standing by. Welcome to the Q2 2023 FTAI Aviation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like the hand to introduce your host for today's call, Alan Andreini, Head of Investor Relations. Please go ahead.

Thank you, Justin. I would like to welcome you all to the FTAI Aviation Second Quarter 2023 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 in 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 they 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 33rd dividend as a public company and our 48th consecutive dividend since inception. The dividend of 30 cents per share will be paid on August 29th, based on a shareholder record date of August 14th. Now let’s turn to the numbers. The key metrics for us are adjusted EBITDA. We had another strong quarter with adjusted EBITDA of $153.1 million in Q2 of 2023, which is up 20% compared to $127.7 million in Q1 of 2023 and up 2% compared to $150.7 million in Q2 of 2022, where we had over $64 million of gains on sale in that quarter. During the first quarter, the $153.1 million EBITDA number was comprised of $125.9 million from our leasing segment, $30.1 million from our aerospace product segment, and negative $2.8 million from corporate and other. Turning now to leasing, leasing had a great quarter posting approximately $126 million of EBITDA. The pure leasing component of the $126 million came in at $94 million for Q2, versus $91 million in Q1 of 2023. With strong demand for assets and the peak of the Northern Hemisphere summer season, we expect Q3 will grow incrementally. Additionally, on the acquisition side, we closed on 15 aircraft and 23 engines at very attractive prices, which will contribute to further growth in future leasing EBITDA. We remain confident in leasing EBITDA to have $350 million to $400 million for the year, excluding gains on asset sales. Part of the $26 million in EBITDA for leasing came from gains on asset sales. We sold $69.6 million worth of assets at a 31% margin gain of $31.9 million, benefiting from strong demand for assets globally. We have more asset sales coming in the remainder of the year and continue to be comfortable assuming gains on asset sales of approximately $25 million per quarter, or $100 million for all of 2023. Aerospace products had yet another excellent quarter with $30 million of EBITDA and an overall EBITDA margin of 44%. We sold 37 modules in Q2 to nine unique customers, comprised of three new customers and six repeat customers. We see tremendous potential and continue to feel good about generating $20 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 an expanding backlog of aerospace products business with leasing companies, MROs, or maintenance, repair, and overhaul organizations, and airlines. With that, I’ll turn the call back to Alan.

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

And the first question comes from John Sullivan from the Benchmark Company. Your line is now open.

Good morning, nice quarter here. Given the strength in the aviation leasing side and the issues the newest generation of engines are facing, particularly with the RTX geared turbofan engine, looking at some accelerated shop visit cycles into an already tight MRO market, I know you don’t have any GTFs, but have you seen any of that GTF pressure starting to play out for demand in your products and services?

Yes, we, you know, the airlines we talked to are all holding onto their old last generation equipment. So, we’ve seen airlines decide to extend leases, they’re looking for more assets, you know, the H220 Co family, or the 77800, those markets are very tight. It’s very hard to get additional capacity. This is going to put more pressure on those fleets because, with the GTF, it’s estimated you’ll have 1200 engine shop visits over the next 12 months, 200 in the next two to three months. So that’s in the busy summer season, trying to schedule that between now and September is going to be extremely challenging. So, anybody that has existing flying assets is going to keep them and they’re looking for more, and there’ll be more demand for spare engines. So I think, as you point out, it’s already a very tight market, and this is going to turn the stress up another couple of levels in terms of putting more demand for the assets that we own.

And then maybe what do you see as far as the sale leaseback market, you know, the large deals in the bidding process? Maybe what is your pipeline look like? Or what really gets the market going again?

Yeah, it’s interesting, it’s picking up. I mean, previously, I think the last few calls, we’ve been saying that the best buys for us have been assets that are off lease that we can buy cheap and put cash flow attached to it and then create value that way. We’re now starting to see that we’re very competitive again on assets that are either on lease or with sale leaseback transactions with airlines. We think it’s primarily because a lot of the mid-tier leasing companies were relying on debt financing provided by the ABS market, which is really not available. And it’s very challenging for people to price out deals with no debt or with much higher cost debt. So, it’s not that we’ve increased our pricing; it’s that the market seems to have come to us. So, we’re seeing several portfolio deals that are very attractive with cash flow attached and sale leasebacks, which never seem to go away totally because airlines always need money. So those markets, I think for the next at least for the next six to nine months, we see very good investment opportunities. That’s a fairly recent development.

Thank you for the time.

And thank you. One moment. And one moment for our next question. Our next question comes from Gianna Bologna from Compass Point. Your line is now open.

Good morning. Congratulations on a great quarter here. One question I’d be curious about. Obviously, we’re seeing some very strong performance at the module factory and you service materials driving the product segment, you’re also seeing strong leasing EBITDA, if I look at the first half of the year, at the segment level before corporate, you’re analyzing 585-586 million EBITDA already. And you’ve been talking about 550 to 600 at the segment level. Just curious how you’re thinking about the confidence level around that range, because you’re growing rapidly and you’re already running up closer to the high end of that range in the first half of the year.

Our confidence level is pretty high. With every quarter you have behind you, it’s easier to look back and hit the year. We have pretty good backlog at this point, as you can tell from my comments. So, I think if the environment doesn’t swerve in some fashion, which doesn’t look at all likely, we’re pretty confident in those numbers for the year. So that’s good. And in general, you’ve got pretty decent visibility out three to six months on what activity is in the pipeline.

That’s great. Maybe just for a little more context, obviously leasing, we have a good sense of where that is. And you probably have a good sense of the pipeline, but also on the M&A side. And then thinking just on the product side, in terms of the drivers, that give you a little bit of confidence there, I’m curious of where the how the backlog works on the module factory aside, if you’re continuing to see that module volume demand continuing to step up—we’ve been saying it for the last few quarters.

Yes, as you know, we’ve mentioned we’ve had a high level of repeat customers, I don’t think anybody that we’ve done business with hasn’t indicated they’re going to do more, and many of those customers have already put in orders for the balance of this year and indicated what they’d like to do next year, as they have visibility on their shop visits. So, it’s very good. We add new customers as well. As you can see, we continue to develop the repeat business, but we’re also adding, you know, each quarter we’ll add a handful of new customers, which will also grow. So, I think the backlog on modules is excellent, and visibility is increasing. And once customers have used it, they can say, well, now I’m going to use it in all my shop visits, and that gives us a longer-term view into what the pipeline will look like. It allows us also to helpfully pre-build inventory. So, the more visibility we have into what the customer is going to do, the easier it is for us to increase our throughput and turnaround time because we’ve been pre-positioning assets. And in that way, the other businesses, the USM users’ material business, and we see that increasing. We’ve been running, as we indicated, we probably did approximately 30 tear downs last year, and we’ve been running at that a little bit higher than that in the first half of this year. But we’re going to increase the rate of tear downs. We’ve taken a number of engines into inventory and started the process. As you’re probably aware, it takes about three to six months before you get revenue because you’d have to tear down the engine, label all the parts, inspect them, and many of those parts have to be repaired. So, they have to be sent out and then brought back, so we see that level of tear down activity increasing over 40 engines this year and strong demand as the original equipment manufacturers, as you’re probably aware, are putting a price increase in August—one of the share—which was quite a bit earlier than they’ve previously done it. So, I guess if you annualize that rate increase, that’s also well into the double digits. So new part prices are going up rapidly. So, you service material is very valuable. And we have probably the biggest supply of US serviceable material in the world, maybe other than the OEM, who doesn’t like to sell USM anyway. But that gives us quite a good tool to get additional business and cross-sell modules and other maintenance services. So, we’re going to take the USM activity level up in the next two quarters.

That’s great. I really appreciate the answering all the calls, I’ll jump back in the queue.

And thank you. One moment, our next question. And our next question comes from Hilary Cacanando from Deutsche Bank, your line is now open.

Hi. Hi, Joe. Thanks for taking my questions. So in the aerospace segment, you know, the total revenues declined sequentially. But the EBITDA margin was a lot stronger than last quarter at 44% versus 32% last quarter. Could you give us some color on what’s causing that difference? And I guess just related to that, should we continue to expect someone to get going forward?

If it’s primarily mix, it’s hard to control that quarter, but it was favorable this quarter because we had slightly less use serviceable material sales and we also had more core modules that we sold, which tend to be higher margin. So we had less of the lowest margin and more of the highest margin. We would continue to suggest that 35% is still a good place to hold in the middle. As you know, for modeling purposes, we think that’s a sustainable number and we will not always exceed it to the degree it was this quarter, which was really just driven by mix. Occasionally, there’s just an opportunistic sale, and you happen to have the right asset at the right time for somebody who desperately needs it. We can also see sometimes we intentionally make sure we have that asset, so that’s part of the business.

Got it. Thank you. And then I guess on the stock, since we got rid of the K-one, SEC has gotten us included in a number of indices and was recently included in the Russell 2000 last month. If any other indices are looking to add you to their index, particularly just kind of provide more color on that? Thank you.

We think that the next one that we’re going to be considered for is the S&P 600, and that could be at the end of as early as the end of Q3. Estimates from the index folks say that number could be another 12 to 15 million shares.

Okay. Great. That’s very helpful. Thank you so much.

Thanks.

Thank you. One moment for our next question. Our next question comes from Brandon Oglenski from Barclays, your line is now open.

Hey, good morning, and thanks for taking the question. Joe, I was wondering if you could provide us an update on the products approval process with the FTAI and where that stands?

Yes, everything is progressing and on the timeline that we’ve talked about previously, which is we expect the additional four products to be available around the end of this year. And other than that, we’re not providing any more detail about the process around that.

Okay, but still on track for end of year. And strategically, Joe, I guess, how do you look to leverage that portfolio? Do you think it’s going to be more powerful for you in your own assets? Or is this going to be something that you think flourishes more third-party sales?

So, I think we’ve always felt like, you know, we’re going to use it, and we’ll be a quick adopter. We believe this will facilitate other people adopting it. As we saw with the CF 680 engine previously, we put PMA in those engines and lease them, and no airline in the world had any issue with leasing an engine PMA. Some airlines will say, well, we wouldn’t necessarily put PMA in our own engines, but no one would not lease an engine. So similarly, we expect to be similar in this market. And that’s why I think the integration of our products and the ability to cross-sell is very powerful, in that we have a solution for everyone. There’s nobody out there, and we can offer something of value to help save on maintenance expense, which increasingly stands out on PMA airlines. As you’re well aware, the chasm numbers are going up, and maintenance, particularly engine maintenance, is one of the big drivers. So, we think that our ability to offer a wide range of products to anybody that owns or flies engines is really powerful.

Okay, appreciate that. And then on the capital side, I guess, are you comfortable with where you’re running debt levels right now? And do you think you need a little bit more cash? Is there a capital required going forward?

We’ve had access; we have a revolver that we’ve always had access to that acts as our liquidity, and we’ve had good access to the debt markets and the preferred markets. We think that the credit metrics are improving. As we’ve told people, we expect to be in the mid-threes debt to total EBITDA, which we achieved this quarter, which we were hoping to achieve by the end of the year. So that’s good, and we think that that will position us to be strong. As long as you’re a strong double B, you pretty much always have access to capital. So, we’re very close to that and think we’re going to get in good position, you know. The need for capital is really driven off of investment opportunities, which is a good thing. As I mentioned, we are seeing an increase in opportunities, which we didn’t really expect, but the world is funny, and you know, things are always changing. So, we’re well positioned if opportunities present themselves to increase our position in the CFM 56 market.

All right, appreciate the response. Thank you.

Thanks.

And thank you. One moment for our next question, and our next question comes from Frank Galanti with Stifel. Your line is now open.

Great, Thank you. Appreciate you taking my question. I wanted to ask about PMA approval for airlines in both leasing and the module factory. So, has there been a change in the past couple of months on further PMA acceptance? And if possible, it’d be helpful to sort of know of the LPT module sold what percentage of those have PMA in it?

I don’t think we’ve sold any modules with PMA. And is that correct? We are flying in our lease fleet about 15 engines for the CFM 56 fleet. We’ve had 100% of our CF680 fleet, and we’re proud our Nelson’s lease as PMA, which always has been the case. So, in the CFM 56 fleet, we have about 15 engines that are flying and leasing to other airlines that are flying with PMA.

Is there any particular reason why there wouldn’t be PMA in the LPT module? From a customer or from a strategic market entry perspective?

No, as I said, if you look at the development and CSAT, you know, engine marketing, we expect it to be similar. So that ultimately, it’s purely a matter of timing as to when an engine needs a restoration of the LP T’s and when it does, that’s when there’s an opportunity to use the PMA. You can’t just take an engine off wing that’s not due for a shop visit and swap out good OEM parts for PMA; you just do it when it’s ready in the shop.

Okay, and then sort of switching it up just from a generally higher interest rate environment. How does that, from your perspective, affect the lease business, particularly lease rates?

Well, it’s had a—we’ve had, our cost of debt was at the lowest rate when we did an issue at five and a half percent. Estimates right now we’re trading in the probably seven and a half percent range on cost of debt capital. To bring it to our personal situation, our cost of debt is up about 200 basis points, but I would say our return on assets that we’re looking at deal wise, is probably up four to 500 basis points. So, from an investment point of view, it’s fine. We are more than covering the increased cost of debt. The other side of it is how does it affect the industry, and I alluded to that earlier. I think a lot of mid-tier leasing companies that used to raise an equity fund and assumed they would be able to leverage that with relatively cheap debt are struggling. It’s hard to get the debt; it’s way more expensive than it was before, by orders of magnitude, not just 200 basis points, but multiples of that. So, the numbers don’t work, which means that they’re not competitive, or prices come down. And all of that is what sort of leads us to be in a pretty good position because our cost of debt is up a little bit—not a lot—and we don’t leverage each individual deal, so we’re in an environment more like 2010 and 11, where he who has money is in a good spot.

That’s really helpful. Thanks very much.

Yep.

And thank you. One moment for our next question. And our next question comes from Bryan McKenna from JMP Securities. Your line is now open.

Great. Thanks. So Joe, could you talk about the opportunity in the repair market? I know you’ve spoken about this a little bit in the past, but I’m curious how you’re thinking about this opportunity today, both in the US and then in Europe as well. Would you look to potentially do an acquisition here to create some more scale initially versus trying to build it organically from scratch?

Yeah, great question. Since we last spoke up in Montreal, we have made progress on the repair joint venture. We took a trip through Europe and met with quite a few different options, and we’ve narrowed it down. I think we are progressing, and we had expected or hoped that we would have something by the end of this year. That seems doable, and we’re still very interested. As I mentioned, we’re increasing our teardown activity fairly meaningfully, which means our repair volume is going to be up materially, which makes us an even better partner for people who have repair products. So, I think it’s only gotten better. The repair market is a lot of people are paying attention to it now because OEM parts prices keep going up. Recycling, fixing, or repairing is a pretty attractive business for everyone. I’m very excited about that. Would we buy versus build? I think we’d rather avoid building something from scratch, as it probably has the best overall economics, but it takes a long, long time. So, we’d rather get in, if we can get into something sooner, that would be better. It could involve investing some modest amount of capital, but it’s, I doubt that it would be one company out there that has the portfolio that we could sort of acquire. So, it’s probably more of a partnership structure.

Got it. Very helpful. And then maybe just a question on your externally managed structure. So you clearly have had a longstanding relationship with Fortress since inception, but just given the growth trajectory of FTAI and the size and scale of the business today versus just a couple of years ago. Would you ever look to internalize the business and move out from under the Fortress umbrella?

Well, we got a lot of benefits from being part of Fortress. Also, we are in the process of being a sole Fortress is under contract to be sold to Mubadala, which would likely not close until around the end of the year. So, it’s really a decision the new owner would need to make on that front.

Got it. Thanks, Joe. And congrats on another great quarter.

Thanks.

And thank you. And one moment for our next question. And our next question comes from Robert Dodd from Raymond James. Your line is now open.

Hi. Excuse me. Hi, guys. And congratulations on the quarter. So question: you partly answered it about capital allocation, right. I mean, obviously, you know, I usually ask about the dividend; the dividend is extremely well covered from free cash flow. Your leverage is now in the middle of your target range for that strong double B. I mean, what’s the appetite for, and is there any appetite for allocating capital to increasing the dividend, or is it just the opportunities for investment in acquisition of assets are just much more attractive? And if you can give us—you’ve given us the delever acquisition dividend kind of priority order before. But you’ve already hit your leverage target. So can you rank where you view the priorities on capital allocation now, given that the leverage has improved significantly?

Yes, it’s similar. I mean, the number one priority has always been investment opportunities. As I mentioned previously, there’s an uptick in activity there. So, I think that has caught our attention at the moment. So that’s number one. We’ve never not been able to buy assets that we wanted to buy, which was important to keep that string unbroken. So, that’s number one. Secondly is making sure that we have good credit metrics to maintain a double B and to be a strong double B, which as you said, we’re probably a little ahead of schedule, so that’s good. After that, we would then look at dividends and stock buybacks. But I think the priority is still acquisitions number one, debt level number two, and then equity activity.

Got it. And what would it take confidence by? You’ve been very clear; you’re very confident in the guidance. What would it have taken for you to increase the indication for the aerospace products? Obviously, $100 million plus is still your indication. You have it effectively 60 already for this year with the building pipelines. So are you just being conservative, or where unless the market swerves against you? Are you worried about a market’s worth? Or is it just pure conservative as it?

Well, I’m always worried about a market’s worth. You never know, but I mean, it feels very good. You know, I mentioned everything. We went from having everything working against us to having everything working in favor. I’m happy about that, and you know, every day I wake up, I would say, I hope this continues. We’re not worried about it, but you always have to be worried about it because it’s the airline industry. But I think it really is just the passage of time. This is still a relatively new business. We’ve got new customers and feedback that is very positive and building orders. But I think time is really what we really just need to continue to build a track record.

God, I appreciate that. Thank you. And again, congrats on the quarter.

Thanks.

And thank you. I am showing no further questions. I would now like to turn the call back over to Alan Andreini for closing remarks.

Thank you, Justin. Thank you all for participating in today’s conference call. We look forward to updating you after Q3.

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