Operator
Good day and thank you for standing by. Welcome to the second quarter 2026 FTI aviation earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please advise that today's conference will be recorded. I would now like to hand the conference over to your first speaker today, Alan Andrini, Investor Relations. Please go ahead.
Thank you, Marvin. I would like to welcome you all to the FTI Aviation Second Quarter 2026 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer, David Marino, our President, Nicholas McLeese, our Chief Financial Officer, and Stacey Cooperis, 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'd 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. FTI today operates in three principal businesses, aerospace products, asset management, and power, which are each driven by our expertise in aftermarket turbine performance. Each of these three achieved amazing results in Q2, including aerospace products increasing production over 60% year-over-year and adding new capacity, bringing our total physical CFM56 module production capacity to 3,000 modules per year, which is enough to achieve our 25% market share objective and produce 100 mod 1s per atom. SCI finished investing the 2025 SPV, made a regular and special distribution to investors, and launched the 2026 SPV with a target raise of $6 billion, which will take us in just two short years to over halfway to our target for asset management of $20 billion of AUM. Power signed an anchor customer for our proprietary Mod 1, with many more expected to follow, which if it is as successful as we believe it will be, will extend the economic useful life of the CFM 56 by decades. Well done to everybody and a big thanks to the dedication and enthusiasm of our 1,500 plus employees. The second quarter was a continuation of many of the themes we discussed on our first quarter call. So this morning we'd like to build off those key objectives we laid out and update you on the progress of each. Starting with aerospace products, first let's discuss market share. Last quarter we said accelerating market share growth was our top priority for 2026, and that's exactly what's playing out. Our market share grew from 12% to 14% this quarter as gains from our production capabilities, parts procurement strategies, and overall maintain, repair, and exchange MRE customer adoption continued. We're confident this trend will continue as the market develops and our differentiated approach to engine maintenance delivers time and cost savings to our customers. Second, as the market for CFM56 and V2500 engines matures further, demand for engine solutions from top-tier airlines, even those with in-house engine MRO capabilities, remains very strong. We offer flexibility, customized pricing, and scale that no one else can match. And these large programs are very sticky. We made more progress again this quarter. As some of our peers have noted, the CFM56 market is supply-constrained, not demand-constrained. Today, our module production is increasingly directed toward our third-party customers rather than to our own aviation leasing pool. This is a deliberate shift in allocation, and it reflects the strength of third-party demand, the superior economics of putting our module output to work in customer-facing channels, and our ongoing focus on an asset-like balance sheet. In the second half of the year, we'll continue to prioritize market share and long-term customer relationships over our on-balance sheet assets. Third, production and footprint. We've always talked about expanding production capacity well ahead of growth and more recently about adding maintenance capabilities east of Rome, Italy. This quarter, we advanced two exciting developments, one in Egypt and one in Indonesia, that bring us closer to our customers, add module production, and diversify our footprint. David will talk more in a few minutes on those. Now on strategic capital, the 2025 SPV is now fully committed from an investment perspective, and execution is on plan, with the vehicle completing its first targeted quarterly cash distribution on June 30th. SCI's inaugural asset-backed security, or ABS, issuance during the quarter also enabled a special distribution to investors in July. and we've launched the 2026 SPV and the vehicle is actively making commitments to acquire aircraft today. Our business plan for SCI has always been to make the vehicle launches programmatic and we are excited to have graduated to the second SPV. We've demonstrated that combining our investment capabilities with our engine maintenance solution creates differentiated outcomes for our partners, and this has resonated and resulted in strong support across our investor base. Finally, F-Type Power, the business continues to make great progress towards its commercial launch in the fourth quarter. As we announced last week, J&F Power Systems, our joint venture with Jera Group, signed a master supply agreement with a leading U.S. hyperscaler and an initial purchase order valued at $1.465 billion for 2027 Mod 1 deliveries. We're very proud of our combined teams for their hard work in establishing this great long-term relationship. I'll now hand it over to David to share more details.
Thanks, Joe. First, I'd like to talk about our mindset at EFTAI. At our core, EFTAI is a company of entrepreneurs. Each of our businesses, aerospace products, strategic capital, and power, we are disrupting industries with large addressable markets and deploying capital where it generates the most attractive long-term risk-adjusted returns. We're always thinking ahead to the next challenge because the next challenge creates the next opportunity. This quarter, we focus not only on execution, but also on continued investment in the foundation for future growth. I'll start with execution. Aerospace products delivered strong top-line revenue growth of 78% year-over-year and 18% quarter-over-quarter. Second quarter adjusted EBITDA of $250 million was up 51% year over year and up 12% from the $223 million in the first quarter. EBITDA margins of 29% were in line with the prior quarter, which is a continued reflection of our decision to prioritize market share and large customer penetration. We expect this to be the trend line going forward as our scaled production capabilities allow us to bring volumes to markets that others cannot. On the production front, we refurbished 296 CFM56 modules this quarter across our four facilities, an increase of 61 percent compared to Q2 2025. That brings first-half production to 566 modules, which is ahead of our mid-year target. We now expect total module production for 2026 to be 1,200 modules, up from 1,050 we originally projected, reflecting the continued momentum in our shops, as well as the hard-working commitment of our fast-growing team. Joe mentioned that we're in a supply constraint, not a demand-constrained environment for the CFM56 engine, and I want to drill down on that a bit. First, the CFM56 population remains very young. Forecasted aircraft and engine retirements remain low, and aircraft lives are being extended. Against that backdrop, we have made a proactive shift to direct our available module production for third-party customers. Long-term, this is structurally positive for FTI and for the longevity of the CFM56 business, but it does negatively impact our near-term aviation leasing results. Between prioritizing an asset-light balance sheet with less asset reinvestment and placing a smaller portion of our module production back into our leasing fleet, we now expect 2026 aviation leasing EBITDA to be lower than our most recent guidance. Nicholas will share a revised outlook shortly. This is a further reflection of our strategic evolution from an asset-heavy leasing business to a company focused on advanced urban technology built to disrupt the world's aviation and power markets. We are confident we are allocating our capital and resources to the most value-add markets for our investors with a commitment to creating long-term shareholder value. Against a supply-constrained backdrop, we have now, we have spent considerable time and resources over the last 12 months identifying the best maintenance partners worldwide in key regions where adding capacity is both strategic and drives network efficiencies. Today, we are pleased to announce two new strategic shop partnerships, as well as our expansion at our Rome, Lisbon, and Montreal facilities. The first strategic partnership is with GMF Aero Asia in Jakarta, Indonesia. This 250,000-square-foot facility has both 5B and 7B heavy repair capabilities, as well as an engine test cell and over 200 technicians. The facility is majority owned by Garuda Group, an important FTI customer, and we look forward to moving large volume of engine work for airline in Southeast Asia to this shop. The second is with Egypt Air in Cairo. This facility is over 100,000 square feet, also has a test cell and today is focused on the 7B. We believe labor availability in Cairo is very attractive and we look forward to building connectivity between the Egypt Air shop and our Rome and Lisbon facilities to further strengthen our Europe and Middle East maintenance network. Staying on the theme of expanding capabilities, we are also developing a new test cell at our Quick Turn Europe facility in Rome that will include both CFM56 and LEAP testing capabilities. We've talked about LEAP engine maintenance being an important part of FTI's future, and this is an intentional investment in our broader LEAP plan. As the LEAP engine matures, we want the infrastructure in place to extend our maintenance model to next-generation engines, and Rome will be an important anchor for that. We're also grateful for the strong support of ADR at Fumuchino Airport, a critical partner in the continued growth of our quick-turn facility. Finally, we have been very impressed with our Lisbon team and we're committed to making them a significant player in Europe. We are adding 113,000 square foot facility to our network with the goal of expanding production capacity to over 300 modules per year. On the cargo front, we announced a partnership with AEI, a leader in 737-800 freighter conversion. The combination of FTI's engine maintenance capabilities and AEI's conversion leadership will deliver customized, greater solution at a scale and at a lower cost. This partnership also reinforces how we think about the CFM56 lifecycle, maximizing value in passenger operation, extending life through cargo, and ultimately redeploying proven turbine technology into mobile power. Next, I'll share a few updates on the strategic capital. The 2025 SPV is now fully committed with over 300 aircraft closed or under LOI and has transitioned to harvest mode, making its first regular quarterly distributions on June 30th. We expect distributions to continue every quarter until the vehicle is fully realized in four to five years. Our team continues to focus on capital market transactions that maximize returns by reducing the cost of asset-level debt and optimizing the financing structure to align with portfolio cash flow. One big accomplishment during the quarter was SEI's first ABS issuance, MRE-2026, which consisted of $612 million of bonds and allowed for a special distribution to investors in We've officially launched the 2026 SPV and are actively putting aircraft LOI for the vehicle. Eftai will remain a large co-investor in the vehicle with a 15% commitment, and the investment strategy and structure will remain consistent with the 2025 SPV. Importantly, with all the engine maintenance being performed by Eftai, creating a large competitive advantage. Turning to F-Type Power, this was a landmark order for the business. As Joe mentioned, our joint venture with Jera Group signed a five-year master supply agreement with a U.S. hyperscaler, along with an initial purchase order valued at $1.465 billion. This single order fulfills a key portion of our targeted 2027 Mod 1 delivery equipment delivered in batches through November 2027 to support customers' rapid power infrastructure build-out. The commercial structure of this agreement is worth highlighting. The order came with a significant advance payment at signing, followed by milestones-based progress payments through production, testing, and commissioning, meaning the customers funding the production ramp as we go, which meaningfully de-risk our working capital investment in the business. And the five-year master agreement is built for expansion. It establishes the framework under which the customer can issue additional purchase orders so incremental volume can be added quickly without renegotiating terms. Beyond this agreement, we are in active customer conversations to build further backlog for 27 and beyond. We won't be providing further commercial updates until agreements are finalized, but the level of inbound interest reinforces our conviction in the market opportunities. Importantly, the Mod 1 is not a stop-gap solution. It's a platform we are already evolving. Our technology roadmap includes SCR for emission reductions and combined cycle for efficiency gains, product advancements that position the Mod 1 to compete with grid power on cost and reliability. This is a product built to last for the next two decades and with an anchor customer are signing a commercial launch on track for the fourth quarter. We're just getting started. I will now hand it to Nicholas.
Thanks, David. The key metric for us is adjusted EBITDA. We continued the year positively with adjusted EBITDA of $291.4 million for the quarter. The $291.4 million EBITDA number was comprised of $249.7 million from our aerospace product segment, $88.2 million from our aviation leasing segment, and negative $46.5 million from corporate and other, including intra-segment eliminations and startup expenses associated with our power initiative. Aerospace Products delivered another good quarter with $249.7 million of EBITDA at an overall EBITDA margin of 29%. This was up 12% sequentially from $222.6 million in Q1 of 2026 and up 51% year-over-year compared to $164.9 million in Q2 of 2025, reflecting continued momentum from production growth and operating leverage. Turning to aviation leasing, as David mentioned, we continue to evolve our business model to be more asset-light, with SEI now being the home for leased assets. This, in turn, will result in a smaller aviation leasing business in the near term until growth resumes in 2027. The remaining leasing portfolio continues to perform well and generated approximately $88.2 million of EBITDA in the second quarter. This included $5 million of insurance recoveries, $48 million in balance sheet leasing and gains on sale, and $35 million from 2025 SBV management fees and co-investment returns. Our balance sheet continues at a leverage profile in line with our target range of 2.5 to 3 times and ended this quarter at 2.7 times. During the quarter, we also redeemed up par the $105 million of 8.25% Series C preferred shares outstanding and received a credit rating upgrade from Moody's to BA1, underscoring our continued balance sheet strength and the success of our transition to an asset life strategy. Next, in the first half of the year, we generated $255 million of adjusted free cash flow, which included funding the final $95 million capital call under our 2025 SPV equity commitment for SCI. For the full year, we are maintaining our target of approximately $1.2 billion of adjusted free cash flow before new growth initiatives. This reflects our decision to reallocate module production to aerospace products over maintaining the engine leasing portfolio, as well as an additional 30 million of R&D investments in F-Type Power to advance new capabilities. These impacts are partially offset by enhanced economies of scale in aerospace products, driving an improved working capital outlook. On new growth initiatives, we are accelerating the Mod 1 production build-out by 150 million following successful engineering testing and robust commercial demand. While a capital coal financing facility for the 2026 SPV will bridge a substantial portion of FTI's equity co-investment funding into 2027. Inclusive of this, overall, we are updating total adjusted free cash flow for 2026 from $915 million to $878 million. To expand on David's earlier point, as we continue to prioritize an asset light balance sheet, our aviation leasing EBITDA will naturally decline until STI's contributions fully kicks in. Given the strong demand we have discussed from third parties for our module production, this has shifted more than expected year to date. Therefore, we are revising our 2026 aviation leasing EBITDA to $475 million for the year, and we are reaffirming our 2026 aerospace products EBITDA of $1.05 billion. Next, I would like to discuss 2027 guidance. We expect to generate total business segment EBITDA of $2.3 billion, broken down as follows. Aerospace products of $1.4 billion, aviation leasing of $450 million, and power of $450 million. With that, I'll hand it back over to Joe for final remarks.
Thanks, Nicholas. Just as a quick summary, as our aerospace products business continues to benefit from a supply-constrained environment, we make further strides to an asset-light model. and F-Type power advances, we remain confident in both our 2026 and 2027 outlook, including our free cash flow expectations. As a result of this confidence for the fourth consecutive quarter, we're announcing another increase to our dividend from $0.45 a quarter to $0.50 per share. The dividend will be paid on August 24th to shareholders of record as of August 12th. This marks our 45th dividend as a public company and our 60th consecutive dividend since inception. As we look ahead to the rest of 2026, our focus remains on building and expanding on the durable, scalable, and differentiated platforms that deliver value over the long term. The investments we're making across aerospace products, strategic capital, and power will continue to strengthen our competitive position, expand our addressable markets, and support sustainable growth for many years to come. With that, I'll turn it back to Alan.
Thank you, Joe. Marvin, you may now open the call to Q&A.
Operator
Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To reach out to your question, please press star 11 again. Please stand by or we'll compile the Q&A roster. And our first question comes from the line of Christine Ligua of Morgan Stanley. Your line is now open.
Hey, good morning, everyone. So maybe following up on your 2027 outlook and F-Type Power, I was wondering if you'd clarify a few things. So, you've talked about a $250 million EBITDA for power in 2027, but at the same time in your supplemental deck, you've talked about an over 100 module deliveries in 2027. So, if we just do that math, that seems to imply only about $4.5 million in EBITDA per module, which seems to be significantly below the economics that you had provided before. So I was wondering, can you clarify whether your 2027 outlook accounts for 100 error derivatives, or is this a lower number, and how do we reconcile this with the terms of the strategic agreement you've provided with Jared? Is this an apples-to-apples on 100, or are there changes in units we should think about?
Sure, sure, happy to do that. So just the first point is the $450 million does not assume 100 units. It's materially less than the 100 assumption. And just by background, since this is a new business for us, and happily we have the first signed contract in hand for a portion of next year's production, we took a look at a range of outcomes possible for 2027 and came up with a range of $450 million to $750 million. And what we decided to do was start with the $450 million at the bottom end of the range, where we have the highest conviction and the most visibility, such that as we sign up additional customers and contracts, which we very much expect to do, we hopefully will be raising that number up from $450 million, not decreasing that number. So the economics, you know, we're seeing on the first contract are consistent with our, you know, previous expectations. We're very pleased with the outcome to date. But we want to, since it is a new startup, you know, business for us next year, we wanted to start out on a, you know, on very firm footing.
Great. And, Joe, just to follow up on that, I want to confirm, then, with the economics for power going forward, is it still about that $1 to $2.5 million per megawatt for the CFN56 conversions?
Well, you want to talk? Yep, this is David. So, Christina, as you can imagine, it's commercially sensitive, so we're not going to be providing exact numbers. Obviously, we're working through various customers, and that is an important piece. I would just reiterate what Joe said, right? The unit economics, there's not been any change to those unit economics. I would think about, you know, obviously we're still targeting 100 units for next year. As you know, you know, it's a building we're starting, it's a business we're starting for zero. You know, there are going to be some ramp-up costs and there are going to be, you know, timing could shift. So we just wanted to start off with a number that was the most conservative and then be able to build from there.
Super helpful. And if I could sneak a third one in. In aerospace products, you are clearly spending money for capacity to be able to get to your long-term market share target. In terms of margins, can you talk more about what's driving that pressure, any color on how we think about mix? And also, right now, GE has said that they are 40% oversubscribed on service visits this year, 20% spare part delinquency. It seems like that's a fairly robust environment for engine MRO. So even if you were increasing market share, I would have thought that margins could have been maintained. Can you talk about the dynamics there and where you think margins could bottom in this industry for your specific business?
Sure, Sarah, I'll start with that. And as we talked last quarter, a lot of the margin compressions come from mix in that we have a higher percentage today of the heavy shop visits, more of the full performance restoration, which means you make a similar amount of dollars per engine, but you have to invest more to get that. So it naturally mathematically produces a lower outcome. And where we want to get to with customers is where we do everything for the customers so that they no longer have to do any engine maintenance, CFM56 engine maintenance, on their own. And so we are inclined to go for, say yes, and take market share. And we indicated that for what we classified as the near term, which I would say is probably one to two years, we expect margins to be around 30%. We can take a look at it as we get out further, and we have increasing market share, increased penetration about whether we take price up, but we're trying to set expectations around 30% for the near term.
Yeah, and I would add that, look, we're thinking about the business in a long-term environment, right? So, we're looking for over the next decade, and for us, we're, as we mentioned, we're intentionally working with and targeting tier one airlines, right? We see, you know, enormous benefits not only for CFM, but other engines, future engines, as well as benefits, you know, with fleets, for example, being able to enter into new sale leaseback transaction. We mentioned that on our previous call, but it's important to reiterate this for us. Scale is very important because it benefits all our businesses, and that's the way that we're thinking about it. So, you know, 30% margins or, you know, it's the margin that we're going to hold. We feel very good about the long-term value add of achieving those margin profiles.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Sheila Cayago of Jeffrey's. The line is now open.
Thanks. Good morning, guys. I wanted to ask about aerospace products margins, so two questions on that. The first is just a follow-up to Christine's. When we think about the 500 BIPs of margin contraction, I guess how much of that was due to customer share gains versus heavier work scopes and how SCI as a customer factors into that.
Yeah, I think the mathematical example I walked through is helpful in that, you know, a lot of it is driven by the percentage of the heavier performance restoration work that And if you take, for example, a 6,000-cycle engine, which we might sell for $6 million, we can make approximately $2.5 million, which is about a 40 percent margin. If you add to that a full, you know, 10,000 cycle engine and you sell that for 12 million, let's say we make 3 million on that. When you blend it, if you do one of each mathematically, on one you're making 40 percent, on the bigger one you're making 25 percent, the average is about 30 percent. So a lot of the most, I would say, of the compression comes from the mix. And we want to do that because we want, as I said at the beginning, we want the customers to be using all of our engine capabilities. So even though you make less in terms of percent margin, you make more dollars. And so more dollars is what we're prioritizing.
No, that makes tons of sense, Joe. And then maybe as a follow-up to that, you announced Cairo and Jakarta. You guys are busy traveling all around. How do you think about how those two new sites funnel into just whether it's winning new business locally or how do you think about how that helps source engine feedstock as well as spare parts as well?
Hi, Sheila. This is David. I can take that. Yeah, so first off, obviously, it increases our production capabilities. So, overall, we're raising production capability capacity from 2,000 to 3,000 modules, which is obviously very important, especially when we're increasing market share and then introducing power. So, we're well ahead of what our target, the capacity we need to achieve our 27 EBITDA as well as our 100 mod productions. You know, as we mentioned, it's always important for us to build a presence near a customer, right? We did not have a facility east of Rome, so that was something that we continue to reiterate. We're very happy with both locations, right? They all, you know, number one, they have the infrastructure already built out of both. They have world-class facilities. They have capabilities, tooling. They have also a test cell. Number two is they have, you know, access to technicians, right? So both areas have, you know, a lot of young talent. Jakarta, for example, has, you know, close to 40 million people within the city and the outskirts. And then Cairo has, you know, over 20 million. So we obviously, you know, have done this a few times. We have a playbook. We're, you know, going to effectively put a lot of throughput through those shops. And they're going to guarantee capacity. So that's really kind of the goal. Each of these, you know, strategic partnerships have two phases. The first phase is we, you know, again, guarantee throughput and we get capacity. And the second is we want to be a long-term, you know, shareholder and be, you know, a partner. So they're effectively the same exact framework that we've done the other shops. And they're key, you know, to getting closer to each of the airlines in those regions as well as getting closer to the country. Great. Thank you.
Operator
Thank you. in one moment for our next question. Our next question comes on line of Josh Sullivan of Jones Training. Your line is now open.
Hey, good morning. Just as far as the comments on shifting away from the legacy leasing and towards the asset light model, how should we think of that whole segment as SCI becomes a bigger contributor? Is it still primarily a leasing business next year, or are we going to be calling it something else? Is there any reorg at some point, I guess?
Hey, Josh, this is Nicholas, I can take that. So as we exit the year, we expect Q4 to be a majority earning stream from the SEI. And so going into next year, you can think of it over a majority of SEI earnings will be, or sorry, a majority of aviation leasing earnings will be from the SEI. So as we look to potentially resegmentation in next year, effectively, that's how you can think of it, is the three businesses we speak of, so aerospace products, power, and strategic capital, our financial reporting should be reflective of that.
But I've started to refer to it, as you may have noticed, as asset management. So that wasn't an accident.
I can imagine it was. Maybe just shifting over to the LEAP, you know, LEAP to TESEL for 28, you know, what timeline could the LEAP enter, you know, the whole FTI ecosystem, say, across an FCI or global facilities? And then how do we get our hands around the size of that LEAP market potential versus your CFM56, V2500 market share comments as they are currently?
Yeah, I'll start. I mean, most people expect that the lead market will be two to three times the size of the CFM56 market in terms of annual maintenance spend. So it's going to be a very, very large market. And we still expect to be in that engine in 2028, 2029, most likely starting with investments through SCI, through the SPVs, which will get us in. But we have the engineering know-how, we have the capability, it's a similar, you know, construction of that engine. We have licenses, and we will have a test cell. So we have a full playbook ready to use at the time we think, you know, the economics, you know, work out in total. Great.
Thank you for the time. Thanks.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Brandon Ogrinsky of Barclays. Your line is now open.
Hey, good morning, and thanks for taking my question. So I was wondering if you could update us on the power, you know, Mod 1 prototype, because it's my understanding that you do have one up and running in Florida. Is that correct? And I guess is it initially meeting your expectations, and obviously you announced the customer backlogs. Maybe if you can elaborate on that, please.
Hey, Brandon, this is David. I'll take it. So we're very pleased on the Mod 1 testing. It's been going through a rigorous of testing, and performance has been exceptional. Just to reiterate, we started the majority and completed the majority of the testing first in Montreal, the first five months of the year. And, you know, we used our test cell, which for us is a huge advantage, right? Many folks don't have a test cell, and, you know, let alone has the ability to dedicate a test cell for R&D. So that allows us to work through the engineering process very efficiently. now you're right. The testing has moved to Miami where we have a genset and the unit is up and running and we're very pleased with the testing thus far. The way I would think about it from here on out is the turbine will just continue to run, right? We're building hours. We're building time on the field. That's a very important piece when it comes to being able to talk to customers is the more hours that we accrue. So, that's going to continue ongoing from here on out, But we couldn't be happier with, you know, the Mod 1. I would also reiterate this, and this is obvious to folks in aviation, but the CFM56 is the most reliable unit ever produced. It's got over a billion hours. We're expecting that to be the most reliable unit on the ground as well. So, you know, we couldn't be more pleased with the testing thus far.
Thank you, David. And maybe for Nicholas, but you guys are targeting, like, 40% production growth next year in core aerospace products, I guess, how much of that do you think you can attribute to the SCI vehicle too? And, you know, are you making any progress with longer term contracts with airline customers as well? Thank you.
Yep. Thanks, Brandon. I think I'll take the first question. So what we have communicated historically is that the SCI will be about 20% of aerospace products revenue. And so going forward, we still expect that's a good range for analysts to model in. And so regarding module production, you can basically reflect that it will be in alignment with that as well as revenue.
Yeah, and just on the module production, I think this is an important piece to clarify. So we did set out module production targets for next year of 1700. The way I would think about that is our internal production goals for the shops, right? I wouldn't necessarily try to do division based on EBITDA. Obviously, the goal is to produce extra, you know, excess modules to be able to, you know, continue to ramp the business as well as to be able to use into leasing.
In any development of long-term contracts with your airline customers?
Yeah, we, yeah, as I'm, as we've always mentioned, you know, that the product itself is very sticky so we have many customers that effectively we have visibility you know for their fleet for the next four to five years where you know we work through exchanges obviously the timing can shift quarter to quarter depending on utilization we like to effectively give them or transact an engine right before the the engine comes due that's very good for the airline because they're able to use every cycle within the engine that's always our you know motto is we want an airline to use every cycle. So we have these programs with airlines, and that's exactly what we've been building out, I'd say, for the last five years. You might talk about the cargo business opportunity as well. Yeah, so one thing that we did announce was our partnership with AEI on the 737-800 cargo, and that's important, right, because really there's right now a shortage of engines that are fit for cargo, right? And when you think about, you know, the operations on passengers and cargo, they're very different, right? A cargo aircraft could operate, let's say, a fourth of the utilization versus passenger. So it's important to build engines that have smaller cycles for that operation, right? So for us, it's great because it allows us to use those engines and be able to maximize the returns for those engines. And for cargo customers, it's great because they don't want to effectively overbuild engines and have to, let's say, pay extra. It would impact the leasing economics. So, look, that's always been the goal was to do the full life cycle. You know, we think about it as you start off in passenger, right, that has its own utilization, then, you know, moves into cargo, right, that's got a less utilization, and then ultimately into power where effectively the engine is either operating base load or is operating, you know, it could operate in theory backup. so it's going to be very little cycles per year. So that really allows us different customer types where we can effectively target the engines we're building or remanufacturing for the best mission.
And we expect that roughly we could produce about 20 cargo aircraft a year, which would require 40 engines, and so that becomes an aerospace products customer base you know, that's really sort of more or less incremental to what we serve today in the pastor side.
Operator
Thank you. One moment for our next question. Our next question is Chris on line of Juliano Bologna of Compass Point. Your line is now open.
Good morning. Congrats on the results. You know, a couple of questions that kind of asking were already addressed, but, you know, I think an important question topic here is if you can really reiterate the value proposition and the long-term opportunity for F-Type Power because it's obviously a large business that's new, but it has, you know, a lot of opportunity and, you know, there's, you know, it could go on for a number of years going forward. But I'd love to hear, you know, your input there.
Sir, Giuliano, this is David. So we think about the power, the mod one value prop, really three points. Number one, speed to power. Number two, scale. And then number three, cost, right? So we want to win on all three uh number one speed to power right it's having the units available now obviously as you know it's a very uh supply constrained market but it's also being able to install the unit quickly right so our unit is mobile which means it can be installed in less than two weeks that's very different than a you know a large frame engine uh a frame turbine that takes let's say 12 to 18 months as a construction um so we have a huge advantage to speed to power Number two is scale. What's important for our customers is scale. They're looking for gigs of power. So being able to use our units at scale creates a differentiated product out there versus anyone else. I would say that's fundamentally true to, obviously, our business where we have the capacity, we have the feedstock, and also for our partner, Jera, that has the scale, and then we're working with them to be able to scale both our businesses. So for us, we're very comfortable in delivering that. And number three is cost, right? And cost comes in many different forms when you think about the operating costs for power, right? It includes, number one, lower maintenance, right? So we're going to be, as we mentioned, doing maintenance via exchanges. So that's going to dramatically lower, you know, how many times the units are, you know, out of service. So that means you need less redundancy. It's going to be lower maintenance cost, as well as naturally you're going to need less redundancy because the units are smaller and you can stack them up versus, let's say, a very large 300 megawatt, you know, combined cycle turbine. And then we're, you know, to that we're going to continue to develop more ways to, you know, improve efficiency, right? So one thing that we're working on right now is combined cycle efficiency. So the engine itself is combined cycle capable. It, you know, produces excess heat that can be recycled to produce extra megawatts. So we're thinking about that. That's obviously something we have in scope, something that's going to make this entire unit very, very attractive. And that's overall how we're thinking about, you know, the evolution of the product is we have the mod one today. Really, the goal here is speed, but we want to continue to develop add-ons and improve the product where it can be the best, you know, power turbine out there.
That's very helpful. And maybe, you know, one follow-up on that, you know, it's a little note that, you know, doesn't seem to have been caught or garnered much attention, but in the presentation, you know, you highlight 100-plus units for 2027 and growing multiples thereafter. I'd be curious, you know, when you think about multiples, is that, you know, could that double, triple, could it be 200, 300, or more over time? You know, because that seems highly relevant when we're talking about 27 potentially being 450 to 750 in the range of potential outcomes.
Yes. I mean, it is clearly not lost on us and JARA that, you know, this is a big opportunity. And as David mentioned, you know, this is a continuous improvement business. Unlike aviation, where by law you're not allowed to change the engine design, in power you can, and you can make improvements. And so our goal is to make this competitive with any source of power, you know, available anywhere. And if that is successful, obviously this is a much, much bigger opportunity, and also with a tremendous duration to it. We have their existing aeroderivatives out there today operating that were engines that were produced 50 years ago, 5-0. So we are keenly focused on that, as is Jera. As David mentioned, scale was something, when we thought about this business in the first instance, we sat around and said, what's the only engine that you could have enough of to really achieve scale? And the answer is, there's only one. and happened to be the one we had focused on as a business, so that was a happy coincidence. But it's very much on our minds, and we achieved a lot of the difficult objectives that we had to overcome in the beginning.
We're past those, which is very exciting. I appreciate it, and I will jump back in the queue.
Operator
Thank you. We'll move on for our next question. And our next question comes from the line of Shannon Doherty of First Bank. Your line is now open.
Hey, good morning. Thanks for taking my questions. So maybe for David, do you remain on track to deliver the first power unit in the fourth quarter? And since we're getting close to first delivery, will you be breaking out the P&L for power, or is it only going to be reported as joint venture income? How do we think about, you know, the accounting here?
Yeah, I can take the first one and then pass it to the big list for the second. Look, as we mentioned, you know, nothing that we've said. Right now we're changing. We're still, you know, targeting delivery end of this year and then 100 units. Obviously, we did not put guidance for power this year. I think it's probably conservative to expect, you know, deliveries 2027 at this point.
Yep. I'm going to shout out on your second question. So you'll see it in next year's P&L in two places. So first is when Efti sells the turbine to the JV. That will be reflective similar to how we report airspace products today, which is you'll see revenue and cost of goods sold. Then the second piece is then ultimately when the JV sells it to the customer. As we are an equity stake in that, you'll see an unconsolidated earnings and other income. But it will all be under the heading of power.
That's correct. It's all power as a separate group.
Great, great. Thank you. And, Joe, maybe one for you, just bigger picture here, you know, with the ongoing conflict in the Middle East and volatile energy prices, a lot of investors have worried about an increase in retirement rates and a hit to values on old tech narrowbodies. Are you seeing anything here? You know, maybe moving into the LEAP business is the next natural solution as the global flea evolves sometime next decade. Any color would be great.
Sure. So, you know, obviously, jet fuel A has bounced around. It went from $2 to $4 and back to $3. So there's a lot of volatility, which everyone is keenly aware of if you're in the aviation business. But the customers have limited options to change the mix of the fleet. And the economics of the NGs and COs are still very, very attractive for the airlines. What they have been very good at is raising fares. to a little bit to their own surprise is that they had pricing power and they're using it. So the answer is we are not seeing any change in mix or fleet decisions by the end user. And if you talk, you know, I was at the air show last week, and I think Airbus is telling people they're sold out until 2032. So you don't have a lot of, you know, ways to change the mix. the best answer for the airline industry is raise the fares, and that's what they've done.
Operator
One moment for our next question. Our next question comes from the line of Ken Herbert of RBC. Your line is now open.
Hi. Good morning. Thanks. Maybe Joe or David, can you give an update on the CFM56 PMA blades, how those are performing in the market, and what you're seeing in terms of yields on the production side?
Yeah, we're not... I mean, all I've said to people is that it's performing, you know, as expected, and we're not giving a lot of detail on mix or usage at this point.
Okay. As you think about sort of broadening the PMA portfolio, are you looking at other opportunities?
And maybe just as we tie this in, how could this eventually play a role in supporting F-type power as well? yeah that's it's it's a great uh use for f-type power because as you know there's no faa to certify anything so you just you can use any part as long as it performs well so power is a is a tremendous outcome and chromoly actually you know it's become one of their biggest segments is selling to the power industry and as you know there's a shortage of single crystal casting capability in the world. So it's certainly, you know, very much in our, you know, repertoire for power. I would say we're always looking at different ways to lower costs. You know, that's kind of our DNA is to go, you know, line item by line item and shop is to try to figure out how to do it better and faster and cheaper. And PMA is one alternative. And, you know, in terms of, you know, capital allocation, you know, growth is our number one priority. We are looking at additional opportunities in both capacity to overhaul engines, but also repairs and piece part, engine piece part manufacturing. So we're always looking at different companies. Pacific Aerodynamic is a great example we bought, and now they're gearing up for compressor blade, you know, repairs to be in-house and using proprietary technology. So we've got a number of projects underway in that of a similar vein to continue to just keep driving down costs and building the competitive advantage that we that we have to keep it keep it moving forward.
Operator
Yep. Thank you. One moment for our next question. Our next question comes to the line of Andre Madrid of BTIG. Your line is now open.
Maybe a pivot back to AAL just to really understand this here. I think, you know, we all understand the shift to an asset-light model, but just given the telegraph nature of this transition, the 100-mil leasing EBITDA revision does seem a bit aggressive.
I just want to ask a bit more importantly just what changed quarter to quarter.
Yeah, I would just say we've always – this has been our objective, you know, going back, you know, several years, two, three years, is to shift our leasing activity over to SCI. And it is, unfortunately, you can't, it's not precision driving the way SCI grows and you have the opportunity to reduce the balance sheet. And what happened is, you know, we have SCI ramping up, but we had the opportunity in the first, in the second quarter, first half this year to reduce the leasing on the balance sheet. So it didn't exactly, you know, on a quarter to quarter basis sync up, but the strategic goal is exactly in line, and it's just happening on the leasing side a little bit ahead of the SCI buildup.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Myles Walton of Wolf Research. Your line is now open.
Maybe just a quick follow-up on that. So you had $100 million of EBITDA being derived from those assets. the assets move to AP. Maybe can you just describe where are the economics of moving those assets to AP? Because obviously the AP EBITDA didn't move.
Miles, I can take that. This is David. Yeah, so the way that I would think about it, right, is really the change is attributable to two things. Number one is we are prioritizing growing AP market share, right? So effectively, instead of taking modules and building engines for lease, we're directing all the production capacity to growing aerospace products. So effectively, that translates to lower maintenance capex on the engine leasing business, which means, you know, we're not replenishing the engines once they run out of green time. We're effectively building for AP versus building to replenish engine leasing. That's the first part. The second part is obviously, you know, on the SCI as it continues to ramp up, you know, we often are closing aircraft in tranches or in portfolios, and closings can shift quarter to quarter. However, these aircraft are all under contract and have economic close dates, which means the economics continue to improve, so you're effectively getting the benefit of rental and maintenance reserves. So it's from an investment standpoint, it's positive, but obviously it's going to shift, you know, SCI pickup for the quarter.
Okay. So, we will see that economics, it's just shifted into the future quarters. Is that the take, David?
Yeah, on the SCI piece, that's correct. And I think, as Nicholas said, going into the fourth quarter, we expect SCI to be the majority of aircraft leasing. That's going to continue to scale. Look, it's obviously, in a way, we're starting this business and growing this business as well from zero. So that's part of the ramp-up period, which is obviously as we scale it, there's going to be less variability in that business.
Okay. And then one for Nicholas. I think you said that the SCI-related EBITDA might be proportional to sales, but I guess I was thinking of SCI as being a captive customer, one that you don't have to necessarily chase down for market share gains. You pretty much control it. So why is the SCI margin not more consistent with what you were thinking about earlier in the year and last year and the year before in terms of 40% as a target?
So for the SCI, it's never been necessarily about margin targets. It's all about bill to suit of what engines we're replacing. So as a reminder, there's approximately 300 aircraft, so that's 600 engines in the first vehicle. So what happens in the exchange nature is what EFTAI is rebuilding to is what is needed for the SCI for the remainder of the lease term. So if they need an engine with only a year or so or two years remaining on the lease term, so let's say a low cycle build, then we'll build to that. F-Time might get a high margin build on that. But then similarly, if they need an engine exchange right away within the first year of the vehicle, and we're doing a heavy rebuild for, let's say, a five to six years lease term, those margins will be below that number.
It's the same mix issue that we talked about, you know, with margins for any other third-party customer. SCI is similar to any other, you know, large airline. It just happens to be, you know, we're the GP, but it's similar in nature.
All right. Thank you. Yep.
Operator
Thank you. One moment for our next question. Our next question is from the line of Jeff Kaufman of Citizens Bank. Your line is now open.
Thank you very much, and congratulations.
I have a longer-term question. Thinking about the 27 EBITDA guidance, you've given us kind of the pre-cash generation on 26. Can we imply what that looks like on your 27 EBITDA and maybe talk a little bit about how you would like to use that free cash, either shareholders, augment growth, special projects.
Just as this free cash begins to grow, talk about the conversion from EBITDA to free cash as EBITDA gets bigger, and then just kind of where you really want to use it.
Yep. I can take the first part of the question. So if you look at FSI's results in 25 and how we're projecting on free cash flow in 26, you can see that our free cash flow conversion is approximately in line with other aerospace peers in that 60% to 70% range. It is, of course, a little premature to be giving a detailed number for 27, given the tremendous amount of growth opportunities we're looking to do next year. However, what I will say is that for F-type power, moving into this industry, it is a much higher cash conversion cycle for two reasons. First, it is the industry norm that a lot of customers will do advanced prepayments, and we noted that in our press release for our first customer contract. And then the second reason is because of the optionality between aerospace products inventory and what we can place into power. So what that means is as we do efficiencies of scale, you'll see a lot of synergies between the two businesses, and that ultimately means we should optimize inventory further.
And then on the capital allocation, our number one priority has been growth and it will continue to be growth. And in that regard, we're always looking at acquisition opportunities for additional maintenance capability and capacity is one. And two, we look at repair, piece part repair and piece part manufacturing opportunities. So we've got, you know, acquisition opportunities we're always looking at and we're always evaluating you know, different growth opportunities, and that's the number one priority. We did also increase, you know, I think we've increased the dividend now four straight quarters, five cents a quarter, so it's been going up. It's now 50 cents or two dollars a year, so we continue to return capital to shareholders in that manner.
Okay, thanks for squeezing me in. That's my one.
Operator
Thank you. I'm sure no further questions at this time. I'll now turn it back to Adrian Drini for closing remarks.
Thank you, Marvin. And thank you all for participating in today's conference call. We look forward to updating you again after Q3.
Operator
Thank you for your participation in today's conference. To conclude the program, you may now disconnect.
