Good day, and welcome to the Q4 2023 FTAI Aviation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would like to hand the call over to Alan Andreini, Investor Relations. You may begin.

Thank you, Michelle. I would like to welcome you all to the FTAI fourth quarter and full year 2023 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; Angela Nam, our Chief Financial Officer; and David Moreno, our Chief Operating 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 annual 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 35th dividend as a public company and our 50th consecutive dividend since inception. The dividend of $0.30 per share will be paid on March 20 based on a shareholder record date of March 8. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We ended the year strongly with adjusted EBITDA of $162.3 million in Q4 2023, which is up just over 5% compared to $154.2 million in Q3 2023 and up 31% compared to $123.5 million in Q4 2022. During the fourth quarter, the $162.3 million EBITDA number was comprised of $121.8 million from our Leasing segment, $54.6 million from our Aerospace Products segment, and a negative $14.1 million from Corporate and Other. Now let's look at all of 2023 versus all of 2022. Adjusted EBITDA was $597.3 million in 2023, up 40% versus $428.1 million in 2022. Turning now to Leasing. Leasing had another good quarter, posting approximately $122 million of EBITDA. The pure leasing component of $122 million of EBITDA came in at $99 million for Q4, versus $102 million in Q3. Additionally, on the acquisition side, we acquired at attractive prices, $229 million in new equipment, comprised of 10 aircraft and 33 engines, which will contribute to further growth in future Leasing EBITDA. We're very comfortable in producing approximately $425 million of Leasing EBITDA for 2024, excluding projected gains on asset sales of approximately $50 million. Part of the $122 million in EBITDA for Leasing came from gains on asset sales. We sold $33.5 million book value of assets at a 40% margin for a gain of $22.7 million in the quarter, benefiting from exceptionally strong demand globally for our portfolio of assets. And we remain comfortable assuming gains on asset sales continuing at approximately $12.5 million per quarter or $50 million for all of 2024. Aerospace Products had yet another excellent quarter with $54.6 million of EBITDA and an overall EBITDA margin of 34%. We sold 61 modules in Q4 to 17 unique customers, comprised of six new customers and 11 repeat customers. We see tremendous potential in Aerospace Products and feel good about generating EBITDA for 2024 towards the middle or higher end of the $200 million to $250 million range. We continue to expect strong growth in Aerospace Products as customers experience the clear benefits of our MRE products and programs. We are both expanding the number of customers and the usage per customer at an accelerating pace. Additionally, we are very pleased with the introduction, acceptance of and demand for our second focus engine, the V2500. With this, we have the ability to become the leading full-service aftermarket power provider for all 737NG and A320neo aircraft globally. Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be between $675 million to $725 million, not including corporate and other. With that, I will turn the call back to Alan.

Thank you, Joe. Michelle, you may now open the call to questions and answers.

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

Hey, good morning, everyone.

Good morning.

Hey, Joe. On the leasing portion, we saw a sequential decline in revenue. Can you talk about what drove this slight step down?

Yes. The biggest driver was we had four aircraft A320s on lease to Bamboo Airlines, which we terminated in the third quarter last year. So they were taken back, they were off leased for Q4. And they'll be off leased for Q1. That revenue is about $5 million per quarter of EBITDA. And the reason we did that is the credit wasn't great. And we had other opportunities to put those out on lease at higher rates and better terms. And so ultimately, it's a very net present value positive for us, but it had a negative impact on revenues and EBITDA in Q4 and will also affect Q1 of 2024.

Thanks. And you know, Joe, saying that you were able to release these assets at higher monthly lease rates and better terms, can you talk about the overall environment that suggests that it seems like demand continues to outpace supply? So is there a general view when you've got assets up for re-lease, like how much of a step-up in the monthly lease rate are you seeing for those assets?

Well, it depends on when the lease was originally done. But in general, lease rates for aircraft are up anywhere from 20% to 40%. So if the operator is either not a great operator or the operator isn't willing to pay market rates, then you move the assets. It's always more expensive to move than to keep it where it is, so you favor extensions over new leases. But in this case, we just didn't have confidence in the Company, so we decided it was much better to move them.

Great. Thanks. And if I could squeeze one last question. In the quarter, you were able to acquire 33 engines and 10 aircraft. Can you talk about the availability of assets in the market? I guess to some degree you guys are very unique because you're the asset owner and you also have an MRO capability. Does this give you an edge in being able to buy assets that maybe other just pure leasing assets or operators may not be interested in?

Yes, absolutely. Particularly on the engine side, if an engine is deemed unserviceable, there are very few buyers for that engine besides companies focused on parting it out, which typically offer low prices. We are uniquely positioned because we can take an unserviceable engine and repair it. Ideally, the engine is unserviceable due to just one module, allowing us to acquire the other two modules at a discount, even though they shouldn’t actually be discounted. We can purchase anything. When sellers offer packages, some buyers tend to be selective, wanting certain items but not others, which can be frustrating for sellers who prefer to work with a single buyer. Therefore, we are able to acquire assets more effectively than others for this reason. There's nothing we can't manage.

Great. Thank you for the color.

Thanks.

Thank you. Our next question comes from Josh Sullivan with The Benchmark Company. Your line is open.

Hey, good morning.

Good morning.

So I just wanted to get some color on the market response for lease rents after the FAA put in the production cap on the MAX earlier this year. And I guess maybe it would be helpful to also understand just how lease rents have walked from pre-COVID levels to today?

Sure. David Moreno will take that.

Hi, Josh. So lease rates typically are $60,000 plus maintenance reserves. During COVID, there were special arrangements made, let's say power by the hour or rates that were $45,000 to $50,000 plus maintenance reserves. Those days are now long gone. Today...

That's for one CFM56 engine.

Yes, that's per engine. Yes. Today those days are long gone. Lease rates are up $75,000 plus maintenance reserves and those continue to rise as there's a shortage of CFM and V2500s today in the market.

And the cap, as you mentioned, the cap on the MAX production means that people are going to keep their NGs and CLs longer because they can't meet their growth projections with the new aircraft. So that cap is likely to extend the imbalance between supply and demand for at least a couple of years.

I know you've mentioned that the parts business averages around 35% EBITDA margins. Achieving over 50% this quarter in EBITDA is commendable. What factors are influencing the EBITDA per module?

It's influenced by various factors, including the mix of certain modules that we have higher margins on, especially the core. The size of the customer and the timing and urgency of their needs for the module also play a role. This all comes together on a quarterly basis. We've been averaging about $500,000 per module each quarter, and we've occasionally experienced positive surprises because we can often purchase items at low costs. For example, when we buy a package of engines, we may end up with a very low cost basis in a module that generates significant gains for that reason. However, the $500,000 figure has remained quite consistent over the past couple of years and is a reasonable assumption moving forward until we receive more permanent modifications approved.

Great. Thank you for the time.

Thank you.

Thank you. Our next question comes from Myles Walton with Wolfe Research. Your line is open.

Thanks. Joe, could you discuss the V2500 MRE program and where it's currently being developed? What potential contribution could it have? Additionally, regarding your vision for FTAI as the leading full-service aftermarket power provider worldwide for the NG, the CFM, the 56, and the V2500 engines, could you provide insight into what that entails in terms of scale and who the current leader is in this space?

Sure. Just to provide some background, we have owned the V2500 engine for several years, with around 50 to 60 engines in our portfolio. About six months ago, we became particularly interested in this engine due to the GTF powder metal issue, which led many V2500 operators, who initially planned to phase out these engines in the next three to four years, to reconsider and keep them longer. This shift was the main reason for our renewed focus on the V2500. Consequently, we began hiring, enhancing our engineering expertise, engaging MRO partners, and acquiring necessary assets, all of which has progressed better than anticipated. The demand for maintenance is extremely high, and many operators currently lack the funds or capability to service their engines, presenting us with a significant opportunity. Currently, we have about 15 engines in maintenance at two different shops, exploring multiple providers in what can be seen as a test phase, with some promising short-term contracts. In the coming years, we plan to select one or two long-term partners for MRO services. We are also close to finalizing a large fleet deal to manage engines for over 30 aircraft equipped with V2500s, which will involve engine exchanges. Under our MRE approach, when an engine requires maintenance, the airline returns it to us, and we provide them with a fully restored engine that meets their operational needs. We expect to finalize this arrangement within weeks, alongside a couple of other similar deals. The prospects are very promising, as this offering caters to operators of the 737NG or A320ceo, allowing us to provide either CFM56 or V2500 engines. Our mission is to offer airlines flexibility in power options, ensuring availability and simplifying the process of engine returns without complicated negotiations over compensation. This approach appeals to many airlines, as it delivers immediate cost savings by alleviating the need for them to manage maintenance, maintain an engineering team, procure spare parts, or face unexpected maintenance costs. There's a growing recognition that this proposition is straightforward for airlines to accept; our message is well-received, emphasizing ease and efficiency. As for the V2500's impact on our financials next year, I anticipate it will contribute about $25 million in EBITDA, with potential for additional upside. We are still early in this phase, and while a couple of large deals could influence the outcome, the initiative is off to a great start and is receiving positive feedback, coinciding perfectly with the current demand for this engine.

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

All right, congratulations on another great quarter. For my first question, I'm curious why you think you're seeing accelerated acceptance in the aerospace area?

Well, I think people that have used it have experienced the fact that they've saved time and money and they have a great amount of flexibility and they often come back afterwards and say, I wish I had known about this before. I mean, why wouldn't I want to do this? And so that once people experience, the ease with which they can avoid a shop visit, which is usually very painful for people. No one I've talked to in the airline industry ever has told me after a shop visit, that was a great experience. So they all have scars, and I think what we provide is the easy button, and it's caught on. And then word of mouth also helps because once one airline does it and they go to conferences and they have people in their engineering departments of other airlines, they tell them, you should look at this and it worked really well. All of that just keeps building the momentum.

That's great. And then, an inevitable question. Can you give us an update on the PMA initiative and program?

Sure. So great progress continues. We're very happy with the development and what we've seen in the test results, which actually speaks to the performance of those underlying parts when they're in operation, which is critical and very important. So all good on that. Obviously, on the timing side, the FAA runs a very rigorous process. It's been an extremely successful program for them, PMA. They've never had any safety issues, but they are extremely careful and thorough. So it's inherently very difficult to predict when the actual completion of those approval processes are received. But we're very excited and we definitely are 100% sure it's worth the wait.

That's very helpful. And then one last one. Are you still seeing discounts for off-lease assets? It looks like you bought a lot of off-lease assets in the fourth quarter.

Yes. As I mentioned, if you have an asset that needs maintenance, you're limiting your potential buyers to just a few. That situation hasn't changed, and I'm uncertain it will in the future. Most buyers we encounter in the market with available capital prefer assets that are on lease and don’t require maintenance. That's our focus, and as I said, we are capable of fixing anything. We enjoy the process of fixing things because it enhances value.

Okay. That's very helpful. Thank you so much and I will jump back into the queue.

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

Thank you for taking my questions. I wanted to discuss FTAI Aviation's competitive positioning in the module swap business. Regarding the V2500, do you think not having first-party PMA affects you compared to the CFM56? Additionally, I understand that module swaps can be sourced from other companies, MROs, or airlines, and that this is not a new service. From my viewpoint, it seems like PMA provides a competitive edge, which I don't see with the modularity of the V2500 compared to the CFM56. Can you clarify where my understanding might be incorrect regarding these dynamics?

There are different concepts at play, but we do have PMA available for the V2500, which presents a cost-saving opportunity. However, we won't be developing the PMA ourselves and would operate as a consumer on a commercial basis with the manufacturers if we choose to utilize it. Additionally, we have opportunities to use serviceable materials and are working on certain repairs with our engineering team. We’ve formed advantageous agreements with some maintenance shops, and while the strategy isn't exactly the same as with the CFM56, the underlying process is similar in assessing shop visit costs and determining areas for improvement. We believe we can fully restore the V2500, which typically has a list price of around $10 million, for approximately $7.5 million, leading to about $2.5 million in potential savings for us, our customers, or both. In comparison, for the CFM56, the savings with full PMA availability under favorable terms during shop visits is about $6.8 million, with potential to bring it down by around $3.25 million. Thus, while the dollar figures favor the CFM, the V2500 still offers good value. Regarding module availability, we can occasionally find modules on an ad hoc basis from MROs, and we have purchased modules from them and vice versa, as specific modules may not always be in inventory. Our fleet includes over 400 CFM engines, translating to 1,200 modules, providing us with a unique competitive advantage in module inventory. These repaired modules are particularly valuable from the perspective of airlines, as unrefurbished modules are less useful. Overall, our strength lies in being an MRO that focuses on maintaining, repairing, and exchanging, which sets us apart in the industry. Coupled with our capacity to provide power, we offer significant flexibility and cost savings, forming the core of our competitive edge.

Okay, that's helpful. Thinking about the customer experience and the module side, in the fourth quarter of 2022, it was reported that you sold over 100 modules to 26 customers. According to the latest release, you sold 178 modules to 30 customers. If you review the press releases for each quarter, you mentioned new customers, numbering five, two, or six each quarter. If we add those up to 26, it totals 40. So, from my understanding, there were 30 customers in 2023 compared to 26 in 2022, which suggests that 10 customers did not return in 2023. Is that the correct way to interpret these numbers? Can you explain why some customers may have left within a year?

No, I don't think the numbers are exactly right. But there are times where a customer to be a repeat customer has to have a need. So not every customer is a repeat customer every quarter. So in other words, if you don't have a shop visit, you don't need a module. So it's a timing issue. I think what we've said is we have a very, very high level of repeat customer business, but sometimes you might have a customer that goes out of business. So you can't have a 100% repeat customer in every quarter. It just doesn't happen that way. You have to have the need. But it's been very, very high. The customers that have used our modules have always said that was a great experience and I would like to do that again. And they will do it again when they have a need.

Okay, great. Thank you for taking my questions. Appreciate it.

Yep.

Thank you. Our next question comes from Brian McKenna with Citizens JMP. Your line is open.

Okay, great. Thanks. Good morning everyone. So it's great to see another very strong quarter within aerospace products. So within the $55 million of adjusted EBITDA in the fourth quarter, was there any year-end seasonality or any one-off benefits? Or is it really just continued strength across the business given just increasing levels of demand for the products and services? And I'm just trying to get a sense of a good jumping off point for the segment to start 2024.

Yeah. So I think we mentioned to people there was a one-time $5 million write-up in the value of QuickTurn.

That's right. We made an initial investment in QuickTurn in January and then acquired the remaining interest in December. However, accounting rules necessitate that we revalue our initial investment to fair value at the time of consolidation, resulting in a one-time non-cash accounting gain of approximately $5 million.

I don't think we experienced any seasonality in the fourth quarter, and I don't think we have enough history and market penetration to actually to see what seasonality effects there will be on that business yet. It's still growing too fast.

Yeah, got it. Okay, great. And then, just broadly, the business clearly is reaching new levels of scale every quarter here. And so if I look out over the next couple of years, cash flow is really going to take another stair step higher. So how should we think about the CapEx needs of the business over time, the absolute level of cash needed for investment back into the business. And again, I'm just trying to get a sense of how you're thinking about the timing of maybe generating some excess cash flow, and then what some of the uses of that excess liquidity will be.

From the perspective of cash flow availability, we consider it starting with EBITDA, removing any gains from sales, and deducting maintenance capital expenditures necessary to keep the engines operational. We estimate that this results in approximately $60 million to $80 million annually. This leaves us with over $300 million in available capital for various purposes. Our priorities include maintaining a strong BB credit rating, which we are currently working towards with two agencies, as well as pursuing new deals. We are now investing in the V2500 engine, with ownership expected to grow from about 60 to roughly 150 to 200 engines by year-end. This represents a discretionary investment opportunity. Additionally, as we generate cash, we will consider stock buybacks or dividends for any excess capital. We believe this year still presents a wealth of investment opportunities, and we anticipate strong deals that will provide excellent returns for shareholders.

Got it. Thanks, Joe.

Yep.

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

Hey, good morning, Joe. Thanks for taking my question. First one is cash position, a little bit stronger. Could you talk about the near-term kind of working capital needs and near-term working capital intensity, given that you're expanding the product's business out? Has that changed what you're thinking for working capital, the needs of cash, and the revolver capacity you have in the near term?

At the end of the year, we had $90 million in cash and $300 million available on the revolvers, giving us nearly $400 million in liquidity. We currently have $200 million in letters of intent for deals in the pipeline, so we're in a good position. Additionally, we expect to generate more cash by selling assets throughout the year. Therefore, we don't anticipate any significant needs or issues at this time.

Great. And then with the FAA, you talked about PMA kind of broadly the process, but specifically the changes of leadership of the FAA and then with the FAA having kind of new focus around Boeing and having to shift some resources there, do you see either of those events kind of impacting your PMA process over the near medium term?

I believe the main challenges the FAA faced from our perspective occurred during COVID, leading to long turnaround times and high personnel turnover, including experienced staff. These issues have been largely resolved as far as we can see. Regarding the other concerns you raised, such as the new administrator and the MAX, we have not observed any impact from either. The key issue was staffing and the transition of personnel to the office, which has now been addressed.

Great. Thanks very much.

Thank you. We have time for one last question, and that question comes from Sherif Elmaghrabi with BTIG. Your line is open.

Hey, good morning. Thanks for squeezing me in. So I want to start with the well intervention vessels. It looks like those didn't work during the quarter. How are you thinking about these assets, especially given the well interventions going through a bit of an upcycle and that's cash that could be recycled into the portfolio?

Yes, you're correct. It was a challenge for us in the fourth quarter with both vessels not in operation. The smaller vessel, the Pioneer, is now operating again. It began its charter in December and is expected to generate around $6 million per year in EBITDA. It’s currently on a five-year charter, so it's in good condition. We are also actively marketing that vessel for sale. The other vessel, the Pride, experienced a breakdown due to maintenance issues with the crane. It is still under repair until March, but we anticipate a charter is set for it to begin operating in April, which is a favorable charter. Therefore, we will face ongoing challenges in the first quarter, but we are hopeful that both vessels will be operational in the second quarter and beyond. Additionally, we aim to sell both vessels this year.

That's helpful. And then just on the 2025 notes coming due early next year, are you planning to pay that down and reduce leverage or could we see those refinanced sooner?

It was actually late next year, I think.

October of next year.

Yes, we have plenty of time, over 18 months. We regularly assess the market and consider our options, but there isn't a critical deadline looming, so we're keeping an eye on it.

Okay, thanks very much everyone.

Thanks.

Thank you. That concludes the question-and-answer session. I'd like to turn the call back over to Alan Andreini for any closing remarks.

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

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.