Good day and thank you for standing by. Welcome to the Q3 2024 FTAI Aviation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today. Alan Andreini, Investor Relations, please go ahead.

Thank you, Liz. I would like to welcome you all to the FTAI Aviation Third 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 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 38th dividend as a public company and our 53rd consecutive dividend since inception. The dividend of $0.30 per share will be paid on November 25th based on a shareholder record date of November 14th. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We continued our strong performance with adjusted EBITDA of $232 million in Q3 2024, which is up 8% compared to $213.9 million in Q2 of this year and up 50% compared to $154.2 million in Q3 of 2023. During the third quarter, the $232.0 million EBITDA number was comprised of $136.4 million from our leasing segment, $101.8 million from our aerospace product segment, and negative $6.2 million from corporate and other. Turning now to leasing, leasing had another great quarter posting approximately $136 million of EBITDA. The pure leasing component of that number came in at $122 million for Q3 versus $112 million in Q2 of 2024 and $102 million in Q3 2023. Additionally, we sold $20.7 million book value of assets for a gain of $14.3 million and have more sales coming in the final quarter of this year. With continuing high demand for assets, we remain confident in generating $500 million in leasing EBITDA in 2024, including $50 million in gains on asset sales. Aerospace Products had yet another excellent quarter with $101.8 million EBITDA and an overall EBITDA margin of 34%, which is up 12% compared to $91.2 million in Q2 of this year and up 135% compared to $43.3 million in Q3 2023. We're seeing tremendous growth in adoption and usage of our aerospace products and are increasing our 2024 estimated EBITDA to $360 million to $375 million up from our previous estimate of $325 million to $350 million. Overall, we now expect annual aviation EBITDA for 2024 to be between $860 million to $875 million, not including corporate and other, up from $825 million to $850 million that we guided to last quarter. With that, let me turn the call back over to Alan.

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

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from Sheila Kahyaoglu with Jefferies. Your line is now open.

Hi, team. Thank you, and congrats on a great quarter. Maybe if we could just level set the playing field here. We often hear from investors the idea that FTAI is only capitalizing on the short-term bottlenecks in the aftermarket. Take the slower growth we've seen reported from some of the larger OEMs on their shop visits as an example this quarter or their aftermarket. When we get to a more normalized world and hopefully a few years' time, what does FTAI's business model look like and what's your vision, and how do you think about the duration of the CFM56 platform, Joe?

We constantly consider these factors, and we're pleased to be operating in an environment that is very supportive of our business model. This support significantly boosts our ability to convert customers to a new approach in engine maintenance. As we continue to collaborate with more airlines and increase our customer base each quarter, we've found no indication that customers want to revert to their previous methods after they start using our products. The benefits we provide, in terms of cost and time savings, are compelling. We believe it's unlikely that anyone will choose to return to older, more expensive maintenance methods in the future. This quarter, we anticipate bringing in the highest number of new customers to our products, and David will provide further insights on that. As word of mouth spreads, we are seeing our reach grow as more customers recommend our services to others. Interestingly, the inquiries we receive have shifted; rather than just asking if our product is effective and cost-saving, customers are now asking how we can ensure they have a consistent supply of engines. This change reflects their understanding of our product's value and their need for reliability. Our acquisition of the Montreal facility, now known as FTAI Canada, supports this demand. In 2023, our production rate was about 30 modules per quarter, which we have increased to around 50 in the first half of 2024. Following our acquisition, we have further ramped that up to about 75 modules per quarter and expect to reach 100 in 2025. We encourage customers to visit our facility, where we've streamlined operations to enhance our output while minimizing risks of supply chain disruptions. This allows us to reassure customers about where their engines will come from and that we have ample inventory and activity. Overcoming this hesitation is key for us, as customers are close to making decisions. We believe strongly in the benefits of our conversion process and that once customers switch, they will remain loyal. The main question that remains is the longevity of the CFM56 engines, and we are confident in our belief that they will remain in use for a significant time.

I have a lot more questions, but I'll just stick to one more if it's okay, Joe. You mentioned you onboarded, I think, the most customers you've ever onboarded this quarter, and they are continuing to want more. So how do you think about how that discussion goes when they do convert, or how many customers did you have join, and when they do first start with you, what are the number of modules they start with and how do you see them ramping?

Hey Sheila, this is David. I'll take that question. So this quarter was our record quarter for new customers. We onboarded 19 new customers. Typically, a new customer places an order between one to two modules. And as you can imagine, the first sale is usually the toughest sale with a new customer because once you kind of go through the process, they understand that the time savings, cost savings, and as Joe mentioned, it is a very sticky product. At the same time, we also are starting to see strong repeat customers come in and request about five to ten modules at a time. That's typically what a repeat customer will do. And what actually happens in practice is they open up and they provide a full schedule of shop visits for the next five years. Our product, demand on that product is event-driven, meaning we want to know the shop visits, we want to match the modules with the shop visits. And once they convert to a repeat customer, we kind of have those discussions of understanding the fleet, the fleet plans, and how to maximize their cost savings and timing. An additional thing that we've done also is we're getting a lot of demand for field service. So what we've been doing in the past is we've been distributing modules on field with a lot of third-party field service teams. We're getting customers who want us to do everything the full white glove service. So at quick turn, which is now FTAI USA we built a field service team that now is being deployed worldwide to actually do the installation and to offer the complete service. So we're very excited about offering that service and we think that's going to improve the overall experience even further and try further repeat business.

Great. Thank you so much.

Thank you. And then our next question comes from Jason Holcomb with Morgan Stanley. Jason, your line is now open.

Good morning, Joe. Joe, on the V2500, in the past, you've mentioned you had inducted around 40 engines this year. Can you provide an update on how that is progressing? Are any engines beginning to come out of the shop yet? And then maybe if you could touch on the customer demand you've been seeing for the V2500. You've called out LATAM Airlines in the past, but are there any other large customer agreements we should be thinking about? Thank you.

Thanks. Thank you, Jason. I can take this. This is David. So on the MRE, we're very excited with the progress so far on the V2500. On the production side, as we mentioned, the engines are in the shop. We're experiencing turnaround times that are on target, so 90 days to 120 days. And those engines now have provided a strong pipeline that are 100% committed to customers. So those engines are coming out of shop. The LATAM program has now officially started. So we've started exchanging engines today. Additionally, we've secured two large North American airlines on MRE for about 20 plus engines in the next few years. So we're very excited about that and further growing that business. Those should be strong contributors starting next quarter or Q4 2024 and more even in 2025. I think we're seeing tremendous opportunity worldwide in many different regions. So we're hoping to expand into Asia sometime very soon on a new deal as well.

Thank you very much for the color, David. I'm going to ask a quick follow-up. Are you guys able to share with us the number of CFM56 models you've sold during the quarter and just provide an update on that side? Thank you.

No. We've stopped providing that level of detail. We think it's, you know, commercially not, you know, a great idea. And so we think we give enough information without that.

Okay, thank you.

Thank you. Our next question comes from Josh Sullivan with Benchmark company. Josh your line is now open.

Hey, good morning.

Good morning.

With Chromalloy announcing it's now received FAA approval for a V2500 blade recently, what do you think the implications for the industry and then for FAA are going to be?

Well, I would take it as a positive. When you think about the most complex part of the entire engine, it's the high-pressure turbine blades. And the fact that that got approved and is evidence that the FAA is confident. They have an extremely rigorous process, as we all know, and it's been a great track record of success in the US, and worldwide. And getting that approved is a great sign for future parts, including the CFM56 parts that we're working on. So I take it as a great step and the process is working as it did before COVID and it's working now post-COVID.

And do you think lessors will be willing to use the product?

We are a lessor. I can't speak for everyone else, but we use data to guide our decisions. We have evidence that many of the parts have performed extremely well and are cost-effective. This is a key consideration for us when making decisions about our actions.

Good, thanks for the time.

Thanks. Liz, are you there? It seems the operator lost connection, so we're waiting for reconnection. Sorry about that. Liz? Liz, are you there?

Yeah. I'm speaking to my team.

Sorry, can you continue Q&A, please?

Yes. Can you hear me?

Yes.

It’s Hillary from Deutsche Bank ready to ask a question.

Oh, yes, sorry, I couldn't hear you. Okay. Thanks for taking my questions and congrats on a great quarter. So Joe, in the Aerospace segment, the EBITDA margin was 34% versus 37% last quarter. So I was wondering if you could just provide a little more details around that.

Yes, this is the first quarter that we included FTAI Canada in our numbers, and we have some legacy contracts from third parties that we took on with the acquisition. These contracts negatively impacted us because they have low or no margins that are winding down. If we adjust for that, our margin would have normalized to 200 to 300 basis points higher than what we reported. These contracts have a short duration, so we expect some impact in Q4, but we will be done with that by the end of the year. It was simply an effect of the acquisition as we assumed those obligations, but they are phasing out.

Oh, that's great. So then I guess as a follow-up, when those contracts roll off at the end of the year, will you be expanding your capacity, I guess, you know, when those roll off? And then when you said earlier that you could do, you know, 100 modules per quarter in 2025, are you including, you know, potential additional capacity available when those contracts roll-off or would that be additional modules that you referred to earlier?

Yes, we are improving our productivity for the CFM56 by reallocating employees from other tasks at the facility to focus on CFM56 jobs. This allows us to boost productivity significantly, achieving a range of 30 to 100 with essentially the same workforce. We're effectively tripling productivity with a comparable headcount. As I noted earlier, this facility was largely underutilized, and we are channeling our efforts into enhancing productivity there, which is already progressing well, even though we are just a month into this process.

Got it. So you are assuming, so within that 100 modules number, you are assuming that you'll be using the employees that were working on those contracts and be focusing them to your module.

Yes.

Okay, great. Thank you so much.

Thanks.

Thank you. And everyone, I do apologize for the interruption earlier, and we will proceed with our Q&A. And we'll take our next question from Giuliano Bologna from Compass Point. Your line is open.

Congratulations on another incredible quarter wrap performance. Something I was curious about was you've done a great job on the product segment, continuing to scale and grow the platform. I'm curious where you see a lot of the growth coming from at this point, and if there's been any kind of distribution between new customer growth or volume growth and how those trends continue to evolve?

Yeah, I mean, it is more organic growth. As we've said, we're focusing on the two largest engine markets in the world. Virtually every airline in the world operates a V2500 or a CFM56 engine, and we're still under 5% market share. So our focus is organic growth. And as I mentioned, as an example, with using the facility at FTAI Canada, we're able to triple the productivity with the same number of people. So the organic growth opportunity for us is right in front of us and it's extraordinary. And so we're not really focusing on anything other than that.

That's very helpful. I appreciate it and I'll jump back in with you.

Thanks.

Thank you. Our next question will come from Ken Herbert from RBC Capital Markets. Your line is open.

Yeah, hi. Good morning, everybody. Maybe, Joe, just to start off or David, you've obviously called out, you know, you're not seeing any supply chain issues in terms of executing some of the business today on the part side. It seems to be a major issue for the industry. Can you talk a little bit about how you've effectively managed to de-risk it sounds like your CFM56 and now V2500 availability to parts and the extended lead times there that a lot of other, you know, MRO shops continue to talk about.

Yes, and you probably noticed our working capital number increased from, you know, by roughly about $120 million from Q2 to Q3. And there's two reasons for that. One is we picked up about $50 million of inventory with the FTAI Canada acquisition. But secondly, we are purchasing a lot of parts to be able to enable our ramp up in productivity. As I mentioned, the 30 to 50 to 75 to 100, the best way to avoid supply chain disruptions is to pre-order and have a lot of inventory. And so there might be other ways, but that is the route we've chosen. We think it has a very high return on capital. You know, customers are very focused on the question, as I mentioned earlier, is we get the most often is can you actually get me the engines that I need and how can I be sure of that? And so we're buying more parts as an insurance policy effectively and we think it's low-cost insurance and high payoff. So that's part of the thought process and I think we're well prepared going into 2025 to be able to really execute the best we can.

Okay, that's very helpful. And then on just the, since the LATAM deal, which I think obviously was playing out very well for you, what's the pipeline look like of other potential opportunities of that size? Or should we be thinking maybe smaller opportunities or are there still some perhaps chunkier opportunities out there as we think about exiting this year in 2025.

Hey Ken, this is David. I'll take that question. So we're seeing many similar opportunities of that size, let's say 20 to 30 airplanes. And again, the real thesis around is not that the airline wants to raise capital through a sale leaseback, is they don't want to do maintenance. So that's really the thesis. So we're actively working those programs. And we expect to have some advancement probably this quarter, Q4 of this year.

Great. Thanks, David.

Thank you. Our next question will come from Brandon Oglenski from Barclays. Your line is open.

Hey, good morning everyone, and thanks for taking the question and congrats on a good quarter. Joe, I think you mentioned a pipeline or backlog in the release last night. So can you maybe give us some idea of how much contractual business you are attracting in the products segment? And then maybe longer term as well, how sustainable is your margin profile in the business? Because if we just simply look at other MRO providers, obviously a totally different profit profile.

Hey Brandon, this is David. I can take that question. So as far as backlog, the way that we think about that is that's heavily correlated with the repeat customers. Today, on average, about 66% of our volume is on repeat customers. And the more that you engage customers by nature, you're going to have a higher volume. So we expect that to continue to grow. And as I mentioned earlier, what we're working with is airline scheduling. So we're working on trying to understand when events are coming in, which gives us extreme visibility into future quarters and future years as far as engines and module matches. So if you're very good about as the business grows, we're going to get more and more visibility long-term on backlog. The second question as far as margin, right, again, we expect margins to continue to increase inherently, as the business grows. The reason for that is the same dynamic, is that the manufacturer is going to be increasing pricing year-over-year. So inherently, that is the pricing umbrella that we operate under. And then the second piece is we're focused on driving costs down every year or every quarter more and more. So we're rolling in new repairs. We're thinking about creative ways to use assets to drive further value. So our entire business is focused on driving costs down, and that's why we feel very good about our margin expansion.

But when you think about the difference between our business and an MRO business, one of the big differences is that we own the engine. And we own and work on our own engines. We don't do work on other people's engines. So the typical traditional MRO model is to get a customer to put their engine in your shop and then you mark up labor and parts and supply that engine back to them and you know, in many cases you might expand the work scope so you get a little bit more money, but that's a very different business. What we've done is said, we don't want to do any third-party business. We only want to work on our own engines. We want to streamline that. We want to have the single work scope, we want to be able to run it like a manufacturing operation, as efficiently as possible and high volume. So it's a different construct and as I've said many times, the key difference is that it is our engine. We own it. We build it, we put it on the shelf, airline comes in and our pitch is like, do you want it or not? Don't tell me what work scope you want to do or how you want to rearrange it. It's there, it's available, they're very fungible, so it's your call.

Appreciate the response, both of you. And then I guess on the capital side, maybe this one for Angela, but where do you see funding needs for the business now that you guys did some transactions here in the third quarter? And I think you have some offshore assets as well in the leasing business. Can you maybe give an outlook for them?

So on the offshore, we're very close on the sale of those, both those vessels, which it's not 100% done, so I don't want to jinx it, but I would be very surprised if it didn't close in the fourth quarter. And you know, it's on target with, you know, previous guidance we've given about the dollar amount. So we expect that to be concluded this year. And then on other capital needs, Angela can go to that.

Yeah. On other capital needs, one of the redemptions that are coming up is on our Series B preferred, which reset to our floating rate on December 15th. So that's something that we'll be looking to redeem similarly as we did for our Series A this quarter. So besides that and continuing to finish our plan on the V2500 engine purchases through the end of the year, we don't have any other purchases that we need capital for yet.

And our next maturity is until 2028.

Thank you. Our next question will come from Myles Walton from Wolfe Research. Your line is open.

Hey, good morning. Lou on for Myles. Joe, can you give us an idea of the average green time on the engines you've been buying, and if it's the same as the last couple of years? Is there also any difference between the CFM56 and the V2500?

David will answer that.

Sure. So the way that we invest in engines is we're looking at value on cost per cycle basis. So I'd say the composition of engines that we acquire today are a little different than they were two years ago. Right now we're focused on acquiring assets that need shop visits, so assets that are completely run out that we can add value, and then we can offer them for exchange or for lease. So we're really targeting value add activity on the engine side. As you can imagine, green time is more expensive today than it was, let's say, two years ago. So that's really the focus. The V2500 is also a very tight engine as well. So same strategy at the moment is we're buying run-out engines to refurbish those engines and offer them for programs. So that's really the focus at the moment.

All right, great. Thank you. And maybe just to follow up on that and earlier question on the V2500, you mentioned sort of the MRE and everything going on there. I'm just curious, are you guys doing the work there sort of through the MRE, sort of the original MRE, or is it really all being done by Pratt at this point with the relationship there?

Yeah, so the way I divide the responsibilities up is three things. First is acquiring the run-out engine, second is doing the performance restoration, and then third is taking it to market for sale, lease or exchange. We do number 1 and 3, and under the Pratt program, Pratt manages number 2, and they put all new parts, rebuild the engine to a full 20,000 cycles. There's certain other upgrades of thrust and potential from pre-select to select one that are available. In that Pratt contract, there are things they could do that no one else could do that we saw a lot of value in. At this point, number 2 is managed by Pratt. We have had discussions with Pratt about potentially having Montreal, FTAI Canada become a V2500 shop, but we don't have a conclusion on that. We would like to ultimately have that capability in Montreal, but that's something we haven't finalized the discussion on yet.

All right, great. Thank you. Just one quick follow-up. I guess PMA was originally $15 million to $20 million in this year. Not sure if that's still included or sort of been pushed. Just a way to think about that for 2025 at this point?

We're probably going to come up short on that this year, given that it's, you know, we don't have approvals yet. So I would say that we might have missed on that one.

And nothing on 2025 yet, I guess, to think about?

We've not given real guidance on 2025 at this point, so that's something, you know, we'll consider early next year.

All right. Thank you very much.

Thanks.

Thank you. And we'll take our last question from Steven Trent from Citi. Your line is open.

Good morning, and thanks very much for taking my questions. Just some quick ones for you. Could you sort of give us an update where you are with respect to insurance settlements as some of your competitors seem to be moving ahead in the court? So we'd just love to hear how that's going. Thank you.

I have divided the situation into three separate lawsuits. The first one has an agreed deal with the counterparty, which is the smallest and estimated to be around 10 to 11 million, and we expect to close that soon. The second lawsuit involves an umbrella contingent policy, for which we have had some discussions about potential settlements. The third lawsuit pertains to the all-risk policies being handled through the London court cases, which will likely take the longest to settle. However, there are some individual insurers exploring early settlements. This typically occurs as we approach the courthouse and face possible unfavorable outcomes, prompting insurers to realize that they need to act before it's too late. We anticipate seeing progress in this area, though predicting how much will materialize in 2025 is challenging. Nevertheless, I expect total recoveries to be around 150 million, which would all contribute as net income since we have previously written that off. I believe we are moving in that positive direction.

Okay, that's really helpful, appreciated. And one more kind of quick one for you. I mean, over the last year and change, your stock has done so well. And have you given any thought to entertaining the idea of a stock split? And I know the retail shareholder might not be your number one priority, but just thinking about high level, how you may reach out to these other elements of the market that may balk at today's price per share. Thank you.

Yeah, I've had one or two people recently bring that up and it's something I hadn't really looked at for a while, and so I've asked people for any data they might have to support whether that's something that increases and enhances value and if we can sort of get something that convinces us that it's a good idea, we'll consider it. But so far, what I've seen didn't seem very conclusive, but I'm open. Anytime anyone wants to present something which says they can make our stock go up, I'm open to talking about it.

Very helpful. Thank you very much.

Thank you. And that does conclude our question-and-answer session for today's conference. I'd now like to turn the conference back over to Alan Andreini for any closing remarks.

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

Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.