Good day, and thank you for standing by. Welcome to the FTAI Aviation First Quarter 2024 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, Investor Relations. Please go ahead.

Thank you, Shannon. I would like to welcome you all to the FTAI Aviation First Quarter 2024 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 a 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 36th dividend as a public company and our 51st consecutive dividend since inception. The dividend of $0.30 per share will be paid on May 21 based on a shareholder record date of May 10. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We began the year strongly with adjusted EBITDA of $164.1 million in Q1 2024, which is up 1% compared to $162.3 million in Q4 2023 and up 29% compared to $127.7 million in Q1 of 2023. During the first quarter, the $164.1 million EBITDA number was comprised of $104.8 million from our Leasing segment, $70.3 million from our Aerospace Products segment, and negative 11% from Corporate & Other. Turning now to Leasing. Leasing had another good quarter, posting approximately $105 million of EBITDA. The pure leasing component of the $105 million came in at $98 million for Q1 versus $99 million of Q4 of last year. With exceptionally strong demand for assets and the commencement of the Northern Hemisphere summer season, we expect meaningful growth in Q2. We remain very confident in Leasing EBITDA of $425 million for the year, excluding gains on asset sales. Part of the $105 million in EBITDA for Leasing came from gains on asset sales. We sold $31.9 million book value of assets for a gain of $6.7 million, slightly below our expectations, but we have more asset sales coming in Q2 and the rest of the year and are comfortable assuming gains on asset sales of approximately $12.5 million per quarter or $50 million for all of 2024. Aerospace Products had yet another excellent quarter with $70.3 million of EBITDA at an overall EBITDA margin of 37%. We sold 72 CFM56 modules in Q1 to 16 unique customers. Additionally, we sold 6 V2500 engines in Q1 to 3 customers through our recently launched V2500 engine program. We continue to see the tremendous potential in Aerospace products and are comfortable that we will generate approximately $250 million of EBITDA in 2024, the high end of our previous range. Our maintain, repair, and exchange, or MRE, model for the two most widely used engines in commercial aviation produces cost savings and operational flexibility for airlines and aircraft lessors, by allowing them to avoid shop visits through engine or module exchanges. Our recently executed perpetual power agreement with LATAM covering over 60 V2500 and CFM56 engines illustrates the growing acceptance of airlines and lessors to outsource this activity to FTAI Aviation. Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be approximately $725 million, not including Corporate & Other. With that, I'll turn the call back to Alan.

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

Our first question comes from Kristine Liwag with Morgan Stanley.

Yesterday, you announced the successful execution of a perpetual power agreement with LATAM Airlines. Can you provide more color on what this agreement entails? How meaningful is this contract?

Kristine, this is David. So to provide additional color on LATAM, the deal itself is predominantly a V2500 maintenance, repair, and exchange contract. It does have a smaller component related to the sale leaseback, but what we're doing is we're building engines ahead of a shop visit, and we're providing engine exchanges that are avoiding shop visits for LATAM and offering flexibility. As far as EBITDA and how that's going to show up, we're going to be recognizing V2500 MRE contribution as soon as engines are exchanged. There's going to be a ramp-up period. So as we exchange more engines, there's going to be a ramp-up on Aerospace EBITDA. We're expecting ramp-up to take about 2 to 3 years as well as there's a smaller contribution on the leasing side that's going to commence as soon as we close those airplanes.

I see. And then when you said the ramp-up over 2 to 3 years, you said over 30 aircraft would be part of this agreement. Can you parse out the timing of when that could occur? And also regarding the EBITDA contribution of this deal, what are the economics?

Well, we're not giving a specific number on that yet. I think it's a bit of a function of how many engine exchanges occur and how quickly they occur, and we don't have certainty on that yet. But we do expect that it will ramp up such that we have it will be a needle mover in years 2, 3, 4, 5 for our Aerospace Products business. So that's really all we're saying at the moment at this point. It's going to take a little bit of time for that to kick in. But then once it does, it's a needle mover and it's very stable.

If I could do one more follow-up on this. With the V25 MRE that you announced earlier this year, how should we think about the LATAM contract as a proxy for economics for additional V25 MRE? Should this be what we look at for additional V2500 contracts? Is this a good starting point? Is this better? Any sort of context would be helpful.

It's a great starting point. And we would love to do more of these. And we hope we will. We have several projects that are of a similar nature. Each airline, obviously, has their own requirements and their own specs. So they'll all be a little bit different, but we hope this model is used by other airlines. And we're in discussions with the big operators of V2500s, and we've gotten very positive feedback on this. So we expect to do more, and we hope to do more.

Our next question comes from the line of Louis Raffetto with Wolfe Research.

Joe, during the last earnings call in October, you mentioned a rough estimate of around 200 module swaps for 2024, but specifically indicated you would be handling 72 in the first quarter. Do you have any updates on that? Additionally, in relation to module swaps, you've mentioned the MRE and the V2500, stating that you're addressing these shop visits proactively. What should we consider regarding capacity limitations at this time?

Regarding the first point, I remember indicating that we anticipated between 250 and 300 module swaps or exchange sales for this year, 2024, and based on the first quarter results, we are definitely on a positive trajectory. Our backlog is strong, and we are confident in that number. We have structured our plans to ensure we can meet this delivery. Our two maintenance facilities in Montreal and Miami provide us with sufficient capacity to achieve this. We are also actively working to increase our capacity in order to stay ahead, as we foresee significant growth in the coming years. While we are expanding our capacity, we currently have what is necessary to fulfill this year's requirements.

Okay, great. Please continue, Joe. Angela, just any commentary around how to think about cash flow in the quarter and rest of the year?

Sure. So our cash flows for this quarter, as you can see, our operating cash flows were about neutral, but that's because part of our proceeds from sales is sitting and investing. We believe for the rest of the year, our cash flow from operations will improve significantly.

Our next question comes from the line of Josh Sullivan with The Benchmark Company.

With the addition of the V2500, can you help us understand some of the relative savings compared to the GE56 for an airline? In the past, you've mentioned a $3.5 million difference on the GE56. Is there a way to consider that for the V2500?

Yes, we are approaching the V2500 engine in the same way as the CFM56 engine. We've considered sourcing used serviceable material, performing hospital repairs, and potentially using PMA to secure better deals with MROs based on volume commitments. Everything is under consideration. The shop visit cost for the V2500 is higher than that of the CFM56, typically ranging from $9 million to $10 million compared to about $7 million for the CFM56. We believe we can achieve similar savings by utilizing all these options, even though the total cost is higher, resulting in a lower percentage of savings but still the same overall amount. We feel positive about this. We haven't finalized all the partners for this program yet, but as volumes increase, we will be able to provide more details about our collaborations and the components involved.

Got it. And then just given the move in the stock, all the changes, do you have a sense of the investor base at this point versus last year? Any major changes you're seeing.

This is Alan. There have been. And I think that there are people that are initiating on the stock right here. And I think when you see the 13F filed for this quarter on May 15, you're going to see some names that you've never seen before.

Our next question comes from the line of Giuliano Bologna with Compass Point.

Congratulations on the ongoing outflows in the Products segment. I am interested in getting an update on PMA. Additionally, we have noticed a lot of conversation about the industry moving towards PMA and a growing demand for PMA from airlines. Do you agree with that perspective, and what do you believe is driving this trend?

Sure. Regarding the first part, we are making significant progress in obtaining approval for the next set of parts. While we are not providing a specific timeline, the progress has been very promising. The quality and performance of these parts will be excellent, which we are very enthusiastic about. As I have consistently stated, the wait is worthwhile. On the topic of acceptance, I believe that in the past year, many have focused on the reliability of the supply chain. Having a sole source for critical parts is not ideal, and people are beginning to recognize that PMA provides not only cost savings with a high-quality product but also a secondary source of supply. This is critical when you have an engine in a shop with turnaround times extending beyond six months. If you are dependent on a single part from a single supplier who tells you it will take a year, you find yourself in a difficult situation. That is why there is more discussion around this topic, as it is not merely about cost savings.

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

So this one is for Angela. Angela, you have 2 preferreds that go from fixed to floating this year, one in September and one in December. Obviously, you've had some great returns on those securities. Could you talk about what your plans are for them? And how your discussions are going with the rating agencies?

Sure, Hillary. So yes, you're correct in our Series As and Bs are converting to floating later this year. And we're currently planning on refinancing those preferreds before those reset dates. So we continue to reassess that. In regards to the rating agencies, our current analysts are those that typically cover airquest lessors. But each rating agency is recognizing the great contribution that we're getting from the Aerospace Products business and the different metrics that will be involved in those sectors. So we are bringing in Aerospace Products business coverage analysts to each of our discussions with the rating agencies this year, which we think will be beneficial to our ratings.

Great. And then my second question is just on the Leasing side. You mentioned that the demand for these assets remains strong. I know the gains could be lumpy. So how should we think about the segment for the rest of the year? And could you just talk about the pipeline for that segment? You sounded pretty excited about it in terms of what the pipeline looks like for the second quarter?

In the first quarter, two factors impacted Leasing EBITDA. First, we took back four airplanes after terminating a lease with a Vietnamese airline in the fourth quarter of last year, which are currently off lease. These will go back on lease in the second quarter, resulting in about a $5 million negative impact on EBITDA. Second, the first quarter is usually the slowest for flying hours, as many airlines do not operate on the same schedules. Some of our EBITDA depends on hours flown, so we expect improvement in Q2 and Q3. We anticipate a significant increase starting next quarter and we are reaffirming our $425 million leasing EBITDA target for the year, excluding gains from asset sales.

Our next question comes from the line of Brian Mckenna with Citizens JMP.

Okay. Great. Joe, I appreciate the comments on the $250 million of EBITDA expected from Aerospace products this year. But if I annualize first quarter results, you're already run rating at $280 million. It sounds like and it seems like there's quite a bit of room as we are heading into 2Q and beyond. So I would think it's reasonable to assume continued growth from the first quarter level. So why not move the upper end of the range for 2024 for the segment?

Well, it's just one quarter. I mean it was a good quarter, and we see good things ahead, but it's 25% of the year. And so we're just not ready to do that. We'll reassess on the second quarter. But at this point, we're sticking with the $250 million.

Got it. Okay. Makes sense. And then just a follow-up. It's great to see the V2500 program ramping. But how should we think about the incremental margin from this business? It would seem like there are some synergies with your existing platform and ways to leverage the infrastructure already in place. So could this business actually be margin accretive to the segment over time?

The LATAM deal illustrates our capabilities well, incorporating both V2500 and CFM56 engines. We provide engine solutions to virtually all airlines operating 737NG or A320 CO family aircraft, which means our reach is extensive. This allows us to bundle these services in a single transaction, enhancing our offering. Currently, demand is exceptionally strong, especially with over 600 GTF-powered aircraft grounded, equating to around 1,200 engines that are out of service. This high demand for the V2500 is expected to continue for the next three years, which creates a sense of urgency among airlines regarding availability. As a result, airlines are more inclined to discuss longer-term leases for the V2500, which can lead to increased value creation. If we can utilize the MRE and secure long-term leases, it not only provides a cash-flowing asset but also creates value in multiple ways. I believe this potential is currently evident and should evolve positively, offering some additional upside.

Our next question comes from the line of David Zazula with Barclays.

For David, I guess my understanding is with the V2500, you have a little bit less flexibility in how you execute the maintenance and operations of that type of engine. And just with high demand overall, can you just talk about some of the challenges you have in balancing the V2500 versus CFM56 and how you're managing that?

Sure. So on the V2500, you have a lot of the same components that you do on any engine, right, which is you have access to used serviceable material, you have access to independent MROs, and you have access to new parts via either OEM or PMA. The V2500, as we discussed, is a more expensive shop visit. It is a little more complicated from engineering, which therefore creates more demand for ways to avoid that shop visit. So we're seeing a lot of folks come to us not wanting to shop those engines and wanting us to come with solutions. We're able to integrate those solutions and provide a better product. So we are working through all that. There's a lot of innovations around the hospital side of that engine that are coming out just because there's not enough V2500s today in the market. So we're going to continue to develop our capabilities and continue to find innovative ways to maintain those engines.

And it's continuous improvement. When we started the CFM56 program, we only had about 10% of the knowledge we have now. Therefore, I expect that in a year or two, we will have significantly more resources for the V2500 than we do today. However, even without those resources, the market still looks promising.

Very helpful. Impressive work on the tender for the October 2025 notes. I'm curious about the plan for that funding. If you're not looking to significantly expand the leasing balance sheet, would you consider potentially funding a refinancing of those notes from the Aerospace Products side, or what would the plan be?

I believe the refinancing is complete. The next opportunity will be the callable 9.75, as the call price decreases in August. This will be our next chance to refinance and reduce our interest expenses. Regarding cash flow generation, we plan to utilize cash flow for debt repayment. Our cash flow priorities are: first, to make investments; second, to achieve a strong BB rating from all three agencies, which we are on track to accomplish; and third, to consider increasing dividends or initiating a stock buyback. On the investment front, we anticipate slightly enhancing our balance sheet due to our V2500 investments this year. We expect to conclude the year with 150 to 200 V2500 engines, up from 70 currently. While we are making slight increases in this area, I believe we will have an opportunity later this year to repay some of our more expensive debt.

And if I could just squeeze one more in? Any update on insurance or where you stand there?

Yes. We have 4 separate work streams going, 3 of them are negotiations with counterparties that are not insurance companies and they're very advanced, and we expect, hopefully, to get those done around the middle of this year, which represents about $75 million out of the expected $150 million that we expect in total to recover. The balance of that will be with insurance companies, which we think will take somewhat longer, which we're expecting to be in the middle of next year. But we think we'll get $150 million. We think half of that in the middle of this year and the other half in the middle of next year.

Our next question comes from the line of Sherif Elmaghrabi with BTIG.

So a couple on the LATAM deal. What's the lead time on the V2500 exchanges? You touched on your capacity, but I'm curious on the timing side, you said you'd be sort of prepping the engines for exchange ahead of time. And I'm wondering how long it takes before FTAI can recognize revenue?

Yes. We currently have engines at the shop, and we will begin delivering them once the transaction is completed. The engine exchanges will commence fairly soon. The ramp-up will require some time. We have scheduled shop visits for this year and are still planning for the following years. We expect to receive those engines soon and will work on producing them in advance. Some engines are already being finalized at the shop.

We have 15 V2500 engines in the shop right now. We began that earlier this year, and some of them are already being completed. We have a schedule in place to meet LATAM's requirements when they need them, and those engines will be ready. They have asked us about this a lot, and we have thoroughly addressed their concerns since it was one of their key criteria due to the industry shortages.

Yes, that makes sense. And then on the sale/leaseback side of the deal. Obviously, that generates some liquidity for LATAM, right? So does a deal like that, potentially for a future customer, not just this airline, does that open up opportunities for asset sales under the Leasing business? Is that sort of a multiphase deal something you're thinking about?

Yes, LATAM wasn't as focused on generating liquidity from this deal as some other airlines are. The amount involved isn't substantial for them, as their main priority was the engine exchange program. Every deal is unique, with different priorities. However, there is strong demand for unleased aircraft, which has led to increased investment in the Leasing segment. A six-year lease with a reputable airline can be easily monetized, and we plan to engage in more of this activity in the second quarter to generate additional cash and gains. We are optimistic about this approach.

Our next question comes from the line of Stephen Trent with Citi.

A couple of my questions have already been answered. But I'm curious as well, when we think about the engine module side, you've got very good exposure. In U.S., you acquired that 50% stake in a quick turn, I believe, a facility in Montreal. When you think about this high level, are there sort of any other geographic spots where you maybe think you can add your footprint?

Yes, we are focusing on Southeast Asia, having done a good job covering North and South America and Europe early on. We intensified our efforts in Southeast Asia about six to nine months ago and have experienced success there. However, this market represents a substantial opportunity where we are currently underrepresented, and we anticipate significant growth this year. We have begun considering whether we need maintenance capacity in that region. While I don't have any definitive answers yet, we will explore the possibility of establishing maintenance facilities, either independently or with partners, in the coming months.

Our next question comes from the line of Frank Galanti with Stifel.

Congrats on the great quarter. I wanted to ask about the Aerospace segment. Can you help us understand what the breakdown in the segment was between module swaps, USM sales, and full engine sales or exchanges given the varying levels of differentiation and margins between those businesses?

Sure. Starting with the module factory, we generated about $600,000 EBITDA per module sale or exchange this quarter, which is a slight increase from last quarter and aligns with what we've seen since we began operations at the Montreal factory. Module transactions can occur in groups of one, two, or three, allowing customers to choose their preferred option. Three modules constitute a complete engine. Some airlines have discovered that they can save more money by opting for a full engine exchange instead of trying to maintain their fan or low-pressure turbine, as this can often result in zero downtime. On average, transactions typically involve two modules. Regarding the module factory, the MRE V2500 business is quite similar. The profitability for the V2500, on a comparable basis, may be slightly higher than that of the CFM56 today, but they are generally similar. We anticipate this trend will continue, assuming that an engine consists of three modules for the V2500.

That does. And so sort of digging into the 3 whole engine CFM sales. So based on last quarter's reclassification of the V2500 gain on sale from that Leasing segment into the Aviation segment, it's sort of my understanding, right, so when you sell full CFM56 engine, that shows up with 3 modules and the result of a gain on sale it shows the Aerospace segment. So just confirm for me that that's correct. And then so how many of those setting 2 modules were full engines? And of those engines sold, how many of those engines did you sell with sort of the same 3 modules that you had purchased them with?

I have no idea. When we sell a whole engine, as I said, it's the customer's choice. If they wanted to take their fan off and only buy 2 modules, they can do that. So we don't really think of it any differently, and we don't break it out that way. It's not relevant to us as a business operation. So I don't have any numbers on that.

Okay. If you bought an engine during COVID and didn't do any additional work on it, when you sell that, does it contribute to Aerospace EBITDA?

Well, there's no such thing as an engine that sits around for 2 to 3 years, so that doesn't happen. When we buy an engine, we put it into the facility and it's split into 3 modules. It's either repaired, torn down, or combined reassembled into an engine. So that doesn't happen.

Okay. So then just to be clear, every CFM56 engine goes through the module factory in some capacity?

No. I mean we've bought airplanes, sold the airframe, and leased engines directly. If the engine doesn't require work, it doesn't go into the module factory.

Our next question comes from the line of Robert Dodd with Raymond James.

Congratulations on the quarter. I appreciate the detailed information about cash flow and potential fund usage, including debt repayment. You mentioned the dividend, and I would like to ask about that. The yield is only slightly above the S&P 500 considering the stock performance. You mentioned the possibility of increasing the dividend later this year due to the cash flow you expect to generate. Is there a guideline you have in mind? In the past, a 2x FAD coverage was a common consideration for dividends. The metrics are certainly different now, but is there a guideline we should consider for what would provide the necessary confidence to raise the dividend from its current level?

Yes, you're right. We haven't really considered the coverage calculation in recent years, but you have the history. I don't think we are approaching it that way today. Our focus is on making investments and maintaining a strong balance sheet. Once we have excess cash, we plan to return it to shareholders in some manner. That's basically our strategy.

Got it. And one more question. Regarding capacity, you were quite strategic when you added the Lockheed capacity during COVID when the facility was underutilized, and we managed to secure that long-term. Now that facilities are not underutilized and there are backlogs everywhere, do you think similar opportunities will arise? Will expanding capacity require an acquisition or be capital intensive, or do you believe you can find capacity as needed?

There is capacity available in the market. Some of the successful large shops are quite busy and are focused on geared turbofan work, which is affecting their ability to take on other tasks. However, there are many other facilities around the world that we are monitoring, and we also have partners in various locations. The maintenance sector still has opportunities; currently, we have ample capacity, but we are planning for the future. While the circumstances are not the same as they were during COVID, the industry remains significant and global, with numerous smaller and medium-sized players involved.

And I'm currently showing no further questions at this time. I'd like to hand the call back over to Alan Andreini for closing remarks.

Thank you, Shannon, and thank you all for participating in today's conference call. We look forward to updating you after Q2.

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