Hello, and welcome to the FTAI Aviation Third Quarter 2023 Earnings Conference Call. I will now turn the conference over to Alan Andreini from Investor Relations. Please go ahead, Alan.

Thank you. I would like to welcome you all to the FTAI Aviation Third 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 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 34th dividend as a public company and our 49th consecutive dividend since inception. The dividend of $0.30 per share will be paid on November 28, based on a shareholder record date of November 14. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA. We had another strong quarter with adjusted EBITDA of $154.2 million in Q3 2023, which is up 1% compared to $153.1 million in Q2 of 2023 and up 42% compared to $108.9 million in Q3 2022. During the third quarter, the $154.2 million EBITDA number was comprised of $119.6 million from our Leasing segment, $40.6 million from our Aerospace Products segment and negative $6 million from Corporate and Other. Turning now to Leasing. Leasing had another good quarter posting approximately $120 million of EBITDA. The pure leasing component of the $120 million of EBITDA came in at $102 million for Q3 versus $94 million in Q2. Additionally, on the acquisition side, we closed on 10 aircraft and 23 engines at attractive prices, which will contribute to further growth in future Leasing EBITDA. Part of the $120 million in EBITDA for Leasing came from gains on asset sales. We sold $55.4 million book value of assets at a 24% margin for a gain of $17.6 million benefiting from strong demand for assets globally. And we've had more asset sales coming in the final quarter of this year. Aerospace Products had yet another excellent quarter with $40.6 million of EBITDA and an overall EBITDA margin of 38%. We sold 41 modules in Q3 to 11 unique customers comprised of 2 new customers and 9 repeat customers. We see tremendous potential in Aerospace Products and feel very good about generating consistent EBITDA growth. As to the balance of 2023, we see FTAI coming in above the high end of the $550 million to $600 million EBITDA range, which we communicated at the beginning of 2023. Looking ahead to 2024, our current expectation is for Leasing EBITDA to total $475 million for the year, including $50 million from gains on asset sales. Based on a strong backlog and an expanding customer base, we are looking for $200 million to $250 million of Aerospace Products EBITDA in 2024, up from $98 million year-to-date 2023 and $70 million in 2022. Overall, we therefore expect annual aviation EBITDA for 2024 to be between $675 million to $725 million, not including Corporate and Other. With that, I'll turn the call back to Alan.

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

Our first question comes from Josh Sullivan with The Benchmark Company.

Congratulations on the strong quarter here. Just with the earnings this week, we've had some updates from the large aerospace OEMs. Just wanted to check in on what Fortress has seen on the leasing and module market as these new generations of engines face these ongoing maintenance issues. And particularly as it relates to the geared turbofan engine versus the GE56 options Fortress is offering?

Yes. So as you can imagine, demand for the prior technology equipment is extremely high in light of what is going to be accelerated maintenance on the new technology and some estimates. The company or others are estimating that approximately 600 A320s with GTF engines on them will be grounded in the first half of 2024 and approximately 300 on average through 2026. So that's a significant amount of assets that are going to be out of service for an extended period. Therefore, anyone that has A320ceos is keeping them and is doing the maintenance to refresh the engine. So both of those factors are very good for us, and lease rates are trending up. Almost week to week, increases can be observed right now. And so that's positive and is likely going to continue for some time. In terms of maintenance events, companies that we estimated were going to take assets out of service or not do another shop visit or might part them out are delaying and deferring that. Therefore, there will be more maintenance, and assets will last longer. So all of those factors are very beneficial for the equipment that we maintain and own.

Got it. And then secondly, just on the 2024 guidance you provided, what are you baking in for PMA assumptions into that number? And then if we get an approval sooner rather than later, what does the PMA ramp look like from manufacturing to stocking to actually getting a customer check?

Yes, in that $200 million to $250 million number, we've included about $15 million to $20 million of EBITDA from PMA. And that would come from both the sale of PMA parts as well as modules. We're not sure on the ramp. It's hard to forecast that accurately. So I would assume that most of that is towards the back end of the year, based on our current assumption.

Our next question comes from Myles Walton with Wolfe Research.

It's Lou Raffetto on for Myles. Maybe just within Aerospace Products, I want to make sure I understand what drove the sequential step-up in sales and EBITDA in the quarter? I mean you did 4 more module swaps, but I'm not sure that equates to the $40 million step-up in sales and obviously, the strong growth in EBITDA as well?

Yes. So we also had growth in the sale of used service raw material. So USM was higher and is likely going to continue to grow. As we've mentioned previously, we started a number of teardowns in the second quarter, and it generally takes 3 to 6 months for that revenue to show up in EBITDA. So we're seeing strong demand for USM, obviously, with shop visits increasing. That's one key way of saving money on a shop visit. Therefore, we see the teardown in used service raw material activity growing. And then within the modules, the mix of modules matters in terms of revenue and the core has more revenue than the fan and the low-pressure turbine. We had more core sales activity in this third quarter compared to the second quarter, proving exactly what we've been expecting and selling. It's a harder sell and a longer sell to sell core modules. It's easier to do a fan in 2 days or a low-pressure turbine in a week. The core is a bit more complicated, but we've been pitching that for a couple of years now, and we have many customers recognizing the substantial savings there.

All right. Great. Just to clarify regarding the USM, does it relate to the $40 million increase we observed in the CFM engine parts inventory? Or is that increase more about building inventory for future sales rather than being directly linked?

Yes. This is Angela. As Joe mentioned, the number of teardowns equates to an increase in inventory, but you won't see the revenue generation for 3 to 6 months. So we had a lot of teardowns in Q2 and Q3, and you'll see that revenue come through in Q4 and Q1.

Right. So that's kind of like almost a leading indicator to some extent?

Yes.

Could you provide some insight into the substantial increase in maintenance revenue, both year-over-year and sequentially, while lease income has actually decreased sequentially and possibly year-over-year as well?

Yes, two things went on. One is we elected to terminate 4 A320 aircraft leases to a carrier in Southeast Asia. We did that to get higher rates and better terms. We did that intentionally. There's strong demand for these assets, and we've already got multiple parties negotiating to get them. When you terminate a lease, you have lease maintenance revenues that you recognize from the prior lease come through, which is why you see a step-up in the maintenance revenue. The lease side is a bit of an accounting issue. When we do engine swaps for aircraft that are on lease, we book the difference in value. When you put a new engine on an aircraft and take an old engine off, there's generally an increase in the value from the new engine going in. That gets amortized under the rules, the lease accounting rules as a lease incentive. Thus, it reduces your lease revenue, strangely. But that's why you see it going down. It's a noncash item, too. So it's even more confusing from that point of view.

Our next question comes from Giuliano Bologna with Compass Point.

Congratulations on a great quarter.

Thanks.

One thing I'm curious about is, you obviously mentioned that you're including $15 million to $20 million of PMA contribution in the products outlook. So there's obviously some great confidence about being able to receive approval for PMA in the near term. What I was curious about is, do you think the PMA approval timeline could be slowed down at all by the issues the FAA is dealing with at the moment, including turbofan issues, parts, and government shutdown concerns? I'm just curious how you think about that and how you're thinking about the impact of PMA approval timeline?

Sure. So yes, we've had very good progress on the parts that are in the works and a very good dialogue. We haven't seen anything significant on that front. But recognizing that the FAA does have a lot on its plate, probably more than ever in history, and they now have an administrator. So that's a good thing, and they've added people. So we see it moving ahead, but it is inherently difficult to be precise about when you expect things to be resolved.

Got it. That's very helpful. And then one more on a topic that kind of came up earlier, but there's obviously a lot of tightening in MRO capacity across the industry. And I'm curious how you think about that impacting your business and how long that trend could continue?

Yes, it's good for us because our pitch to airlines is we can save you time and money on maintenance events. The longer the time you'd have to spend by sending an engine into an MRO, the more savings we provide. I think the GTF issue means that basically, every GTF engine is going to have to go through a shop visit in the next couple of years on an accelerated basis. That's going to push out what was potentially available capacity that will be used up by the GTF. So the market is definitely getting tight and is going to get tighter, which is very good for us because we're essentially pre-building modules to supply people in a short period of time and help them avoid or skip the difficulties of a shop visit.

Our next question comes from the line of Hillary Cacanando with Deutsche Bank.

Congratulations on the great quarter. Just a quick question on the 2024 guidance. I was wondering if you can also provide how many modules you're expecting to sell? If you could maybe give us some guidance on that as well? And then on the USM side, could you tell us how much of the EBITDA was attributed to USM for the third quarter? And then for 2024, if you could talk about how many engines you expect to part out during the year from the USM?

Okay. I'll take two, and I'll give one to Angela. I think we expect to part out approximately 40 engines this year and next year, we're expecting it to go to 50. We essentially make approximately $1 million per engine from that activity. On the number of modules next year, our assumption is in the neighborhood of 200 modules. But there's a wide range on that, and there's different mixes. So I wouldn't say that's terribly precise. But that's sort of the order of magnitude where we are. What do we think this year will be?

100.

130.

130 this year. So that's sort of the order of magnitude of growth on that. And then USM, Angela?

USM for Q3.

Q3.

For Q3. Yes, 25% of our EBITDA from USM.

Okay, 25%. So roughly $10 million this quarter.

Okay. Got it. That's really helpful. And then I just have one more follow-up question. So it looks like you sold fewer engines in the third quarter, 8 engines versus 17 engines last quarter, and just given the strong environment, strong demand for engines, I was just wondering why you sold fewer than last quarter? Was that deliberate or just timing?

We have been selling mostly the non-CFM56 or non-V2500 engines. The engine sales we've been signing up in the last few quarters have included a lot of Pratt 4000s, CF6-80s, RB211s, which we now own fewer of. That's why I think engine sales have decreased. We're not interested in selling a lot of our CFM56 or V2500 assets today because we think they're still going up in value. We expect to hold those rather than monetize them. We could actually sell them today at a very nice gain, but that would probably be short-lived. I mean they're going to go up in value. That’s one of the reasons why we've reduced the gain on sale for next year as we've repositioned our fleet to more CFM56 and increasingly now V2500, and we have fewer assets that we're looking to sell. We also believe they will all go up in value.

Okay. So your strategy is more towards just leasing the engines rather than selling the CFM, right? You would rather lease them rather than sell?

Yes. On that basis, yes. We're also still effectively selling modules. So we're selling engines for engine shop visits and then rebuilding them. But just outright selling an engine, we don't see that as a significant activity.

Our next question comes from Brian Mckenna with JMP Securities.

So it will be great just to get an update on where you are in the process around insurance claims related to the Russia and Ukraine war? And then is there any updated timeline around selling the ships portfolio? And can you just remind us how much liquidity both of these situations could bring in?

Yes. I think a good estimate for the total proceeds from both situations would be around $300 million, roughly split evenly. On the insurance side, we are currently negotiating with the airlines that wrongfully took our assets, who are using Russian funds, similar to what Aeroflot has done. We have three separate negotiations progressing toward a settlement. This approach would help us avoid lengthy litigation. We hope to resolve one or two of these negotiations soon, and the third by mid-next year. Regarding the ships, we have two assets that are currently being marketed. The industry outlook is very positive, as there are no new ships being built and demand is high. I anticipate that we could sell the smaller ship fairly soon, and by mid-next year would be a reasonable timeline for the larger one as well.

Helpful. And then just switching gears a little bit. So it's been a few quarters since you acquired QuickTurn. So can you just give us an update on how this acquisition is going so far and then where you are in the integration process? And then just more broadly on M&A. In this environment, are you seeing any uptick in strategic opportunities that could accelerate the strategy or the growth of the company longer term?

Yes. QuickTurn is doing great. We have streamlined the activity focused mostly on engine tests and very light hospital shop visits and module swaps, which was the big driver of why we were really interested in that facility. We did over 20 engine tests in September. What's our estimate for October?

20.

About 20. So that's a pretty good run rate. The demand from industry partners, major airlines around the world is good. We think that is playing out very nicely, and we'll continue to use that for delivering and exchanging modules. We're very happy with that acquisition. On the broader topic of M&A, there are things happening in the industry. The aftermarket segment has got people's attention, and it's performing very well in a market where not a lot of things are performing well. So that's a bit of a rising sector. We are seeing offerings for sale. We're very focused on engines and engine maintenance. So we're not going to get off that track. But there are segments that have aspects that would be interesting to us that we're looking at. I mentioned before that engine piece part repair is still a focus for us, and we've made progress on that, but I still think that is an interesting segment for us to grow in.

Great. Congrats on another nice quarter.

Thanks.

Our next question comes from Sherif Elmaghrabi with BTIG.

So first, you talked about having more core sales in Q3. Could we see some lumpiness going forward as the mix shifts between core and fan? Or is this kind of more of a hockey stick trajectory?

I think it's moderate. The mix is not going to shift dramatically because, again, an engine has 3 different modules, so you're going to ultimately move all of them at some point. It's really just a quarter-to-quarter fluctuation and not something that I would say would be dramatic over a longer measurement period.

Okay. And then given PMA is sounding more of a 2025 story, and I know you said it's hard to be precise, but can you remind us of the timeline between PMA approval and when we start seeing them show up in the modules? And where do we sit on that timeline for the 4 PMAs going through approval right now?

There has been good progress on all of them. As soon as those part numbers are approved, we will incorporate them into our engines, making them available almost immediately. Chromalloy usually starts production before the final submission, so there will be inventory ready right away. The longer lead times will apply to third-party sales or other airlines that need to go through their own approval process and engineering review, which can vary by airline. This makes it challenging to estimate the duration and ramp-up period. However, you are looking at months, not years.

Our next question comes from Frank Galanti with Stifel.

I wanted to clarify something. Earlier, you mentioned that this year you expect to sell 130 modules, which would imply about 10 modules in the fourth quarter. Please correct me if I have that number wrong. Also, in your prepared remarks, you noted that EBITDA is expected to grow sequentially. To achieve this, especially next year, if only 200 modules are sold and your margins are above 50 percent, that would indicate significant core contributions. How do you view the irregularities and the sequential growth of cash flows from the modules sold?

On the first question, you're correct. The 130 is low; we should be in the 150 to 160 range for total modules sold for the year. As for the second question about margins, we've mentioned blended margins of around 35% for Aerospace Products. The USM margins tend to be lower than module margins, resulting in an overall mid-30s level. There can be some variations; we've experienced quarters where it was in the 40s. We haven't had any low quarters yet, but that could happen. Therefore, we're comfortable with the mid-30s range. How it plays out each quarter, however, will need to be addressed as it occurs.

Sure. That's helpful. And switching over to the lease income on the aviation side. You mentioned lease amortization sort of eats into that lease income number. But looking quarter-over-quarter, that's only a $5 million increase in lease intangible amortization. So if you back that in, you're only at $41 million, which is still a $7 million lease income for the quarter and that seems like too much relative to utilization increasing. Really, the question is maybe if there's any comment on that? But then secondly, in the guide for '24, can you sort of break down what your assumptions are from a utilization perspective relative to portfolio growth?

Yes. We indicated that leasing for 2024 would be approximately $425 million, if we exclude gain on sale. We are seeing higher lease rates, and we've added quite a few engines on lease in Q3 and Q4, along with some acquisitions we're making. So when you put that together, if you take the current run rate of $100 million, $425 million assumes modest growth going forward for 2024 for Leasing. We are seeing a very strong market, which if it continues, could potentially provide some upside.

Okay. That's helpful. And one more, if I could. On the PMA side, is there any possibility you can comment on if the engineering work is complete for the 4 modules getting approved?

No, I wouldn't comment on specific parts at this point.

Our next question comes from the line of Brandon Oglenski with Barclays.

This is David Zazula on for Brandon. Congrats on the real growth in Aerospace Products this quarter. Joe, if I could ask kind of a broad question to start. You guys have done very well, it appeared to us, on the cargo side during the last couple of years, and that market has been under at least a little bit more pressure from what we can tell. Can you talk a little bit about your exposure there and how you're thinking about the cargo mix and what you're hearing from those types of customers right now?

Yes. Our cargo exposure is minimal. We decided, I think starting 18 months ago, to basically get out. It was a very strong market driven by COVID and e-commerce, but we saw a lot more downside than upside. Therefore, we got out of the cargo market. I don't see an immediate rebound, so I wouldn't rush to go back in.

And then on the module side, it seems like you had an uptick in repeat customers. I guess can you talk anything about the composition of those customers and what feedback you're getting there?

Yes. We're getting great repeat business. Every customer we've sold a module to has come back for more. We have a 100% success rate on repeat customers and we actually have a number of those customers who've given us orders for 2024 or indications they've said they want 8 fans or 6 LPTs or 5 cores next year. This helps us because we can position that and plan for the year ahead of time. It's an incredibly simple concept that saves people time and money. Therefore, once they do it, they're often wondering why they didn't do this for years. We haven't received a single negative comment from anyone on the customer side indicating they wouldn't use it more.

Great. And then for Angela, it looks like you drew down the revolver a little bit this quarter, and then Joe was talking about some kind of exciting opportunities down the pike. Is there anything you can tell us about the incremental capital policy or what you're thinking about at least as you stand right now?

Yes. We do have some leads for investment opportunities that are very attractive right now, and we're looking at several debt financing alternatives of not a huge amount, but some. It may be temporary, given the $300 million of potential liquidity we get from the Russia assets and the ship sales. Therefore, we're in good shape. It's really just a matter of timing.

Our next question comes from Ken Herbert with RBC Capital Markets. Joseph Adams, the CEO, responded that they currently have some attractive investment opportunities and are exploring several debt financing options, although not in large amounts. This situation may be temporary due to the potential liquidity of $300 million from the Russia assets and ship sales. Overall, they are in a good position but are focused on the timing.

Joe, maybe I wanted to see if I could ask a question on an earlier comment you made specifically around just the tightness in the CFM56 or more broadly the narrowbody MRO network. Are you starting to see that reflected yet in quotes for sort of extended turn times as we think about turnaround times on the CFM56, sort of where they are now and where they could go into the first part of next year?

Do you want to take that?

Sure. Broadly speaking, we are starting to see a longer lead time on piece part repair. One of the key drivers for our turnaround time on shop visits is going to be piece part repairs. What we're seeing is a delay in that supply chain side of the business. Our position on piece parts is we have a program where we're able to carry inventory. As we've discussed, the engines that we're tearing down, the 40 engines this year, many of those we can teardown and use, which mitigates a lot of those delays on turnaround times. This should also drive a lot of demand for modules since they're basically a replacement for doing a full shop visit. These shop visits can be done outside of a traditional overhaul shop. So the delay is good for our module program and we are mitigated through having piece part repairs and our teardown program. We are starting to see that delay creep up and expect that to continue.

Great. Helpful. And just one follow-up. Are you expecting any incremental pushback from your airline customers on piece part pricing in 2024? As you think about your ability and the demand for USM and possibly new parts or PMA parts, how is the pricing dynamic playing out? And is that going to continue to be a nice tailwind for the alternative material marketplace?

It's a great tailwind. The OEMs have taken significant price hikes. As you probably know, it was low double digits in 2022, and it was sort of a 9% to 10% price hike on parts that was implemented in August of this year, so it wasn't even a full year. That's the pricing umbrella that USM operates under. To the extent that OEMs continue to raise those prices like that, which I believe they will, we will benefit from that. Moreover, it also makes the whole engine worth a lot more as the replacement value goes up in lockstep with piece part prices.

I'm showing no further questions in the queue. I would now like to turn the call back over to Alan for closing remarks.

Thank you, and thank you all for participating in today's conference call. We look forward to updating you after Q4.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.