Earnings Call Transcript - FTAI Q1 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q1 2021 Fortress Transportation and Infrastructure Investors LLC Earnings Conference Call. As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host, Mr. Alan Andreini. Please go ahead, sir.

Alan Andreini, Host

Thank you, Patricia. I would like to welcome you to the Fortress Transportation and Infrastructure First Quarter 2021 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer; Scott Christopher, our Chief Financial Officer; and Bo Wholey, the CEO of our Long Ridge Energy Terminal. 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.

Joseph Adams, CEO

Thanks, Alan. To start, I'm pleased to announce our 24th dividend as a public company and our 39th consecutive dividend since inception. The dividend of $0.33 per share will be paid on May 25 based on a shareholder record date of May 14. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA and FAD, or funds available for distribution. Adjusted EBITDA for Q1 2021 was $47.2 million compared to Q4 2020 of $46.2 million and Q1 2020 of $72 million. FAD was $14.4 million in Q1 2021 versus $54.2 million in Q4 2020 and $96 million in Q1 2020. On a normalized basis, excluding sales proceeds and nonrecurring items, Q1 2021 FAD was $9.8 million compared to $35.7 million in Q4 2020 and $67.4 million in Q1 2020. During the first quarter, the $14.1 million FAD number was comprised of $60.6 million from our aviation leasing portfolio, negative $3.8 million from our infrastructure businesses, and negative $42.4 million from corporate and other. Now turning first to Aviation. Q1 EBITDA for Aviation of $61 million was a slight improvement from Q4, as we expected. But also as we expected, we are seeing a meaningful uptick in activity in April and expect Q2 Aviation EBITDA to exceed $80 million. As an example, we have signed 20 new leases for CFM56 engines, of which 8 have already been delivered in the last few weeks. 75% of our fleet is 737NG and A320 CO aircraft and engines, which are flown mostly in domestic shorter-haul markets, which are poised for a strong rebound by Q3 of this year with many airlines planning flight schedules that are equal to or greater than Q3 of 2019. And 20% of our fleet is operating in the cargo markets, which continue to experience record high demand. Thus, our fleet is extremely well positioned for the recovery.

Alan Andreini, Host

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

Operator, Operator

Your first question comes from the line of Josh Sullivan from Benchmark Company.

Joshua Sullivan, Analyst

Nice quarter here. Sounds like you guys have a lot of irons in the fire here. But maybe if we could start with the Lockheed joint venture on the new module store. You mentioned strong initial demand in the remarks. Can you just elaborate or maybe quantify what that initial response looks like? Any common thread among early adopters as far as customer profile or assets they're registering here?

Joseph Adams, CEO

Yes. We have a lot of information. We timed the launch on Monday to coincide with the big Orlando maintenance and repair conference that started on Tuesday. So that was intentional. As part of a marketing effort, we were with a lot of the right people to be in front of, and we received a very good response from the target group. The target group is primarily aviation maintenance procurement personnel who buy and manage the parts supply and engine components for their maintenance businesses. The modules simplify their life in many ways. So there was a very positive response from some very large airlines that, in some cases, have their own maintenance shops. This illustrates the degree to which they're looking at cost savings as well as capital efficiency, which was positive.

Joshua Sullivan, Analyst

Got it. That's all very helpful. And then maybe just a second question. The demand you're seeing on the aviation side, the step-up you're pointing to here in Q2, implies some strong sequential activity. What are you seeing that gives you that confidence? And then maybe what is your domestic versus international travel profile breakdown?

Joseph Adams, CEO

So when you talk about domestic, are you referring to the U.S.? Or are you meaning domestic markets around the world?

Joshua Sullivan, Analyst

Domestic markets around the world.

Joseph Adams, CEO

About 75% of our fleet consists of A320 COs and 737 NGs, which are predominantly domestic aircraft. We have been deliberately targeting that market, and we're likely to keep growing in it. The rest of our fleet is in the cargo market. Those are our primary focus, and those two markets are currently among the best in aviation. We're heavily concentrated on domestic, which we like. What we're noticing aligns with what we've anticipated; there's still a fair amount of inventory and green time available out there that airlines can continue to use before they require shop visits. Shop visits are being deferred. Airlines are looking ahead and thinking, 'If I'm going to fully use my fleet in Q3 of this year and possibly Q4 and Q1 next year due to pent-up demand, I'm going to run out of capacity fairly soon regarding engine availability.' Airlines are often not great at planning. So, as I mentioned, we've already leased out a number of engines, and I believe some are to carriers coming out of restructuring and bankruptcy who need lift and lack many options. The next group will likely be airlines realizing that they will soon need engines. They are lining up negotiations for lease agreements and going through inventories, inquiring about available engines to ensure they secure them in advance of demand surging. We've also seen RFPs coming out from airlines looking for significant numbers of engines, so there is a lot of planning going on.

Joshua Sullivan, Analyst

That's great, thank you.

Giuliano Anderes Bologna, Analyst

I guess a quick question, kind of going back to what you mentioned last quarter on the aviation segment. You said roughly there are 3 components contributing to EBITDA: existing engines, new investments, and parts and maintenance joint ventures. Last quarter, you projected around $450 million of aviation EBITDA for 2021, around $50 million for infrastructure, leaving out the corporate segment. I'm curious how those pieces still come together and how you're thinking about that for 2021 given the early results.

Joseph Adams, CEO

Yes. We didn't really expect much out of Q1, as I mentioned in the last call, and that has proved to be true because restrictions were heavily in place in Q1, as you know, but they are now opening up, and everybody's planning for recovery. We're still of the view that the $450 million for 2021 is achievable. The components were roughly $320 million from the existing portfolio, $80 million from new investments, and $50 million from the three joint ventures with Chromalloy, Lockheed Martin, and AAR. It will be heavily back-end loaded, so we anticipate a significant jump in Q3 and Q4, which aligns with what we've discussed.

Giuliano Anderes Bologna, Analyst

That's great. And moving a little bit to your comments about potentially starting a bitcoin mining venture at Long Ridge. One of the most important components of bitcoin mining is usually power cost. I'm curious what your cost per megawatt hour is at the power plant. Additionally, do you have two existing contracts or supply agreements? And have you considered canceling any if the venture were to be successful?

Joseph Adams, CEO

Yes. We've looked at a lot of companies starting up and converting coal power plants and other older assets, and we think our cost is by far the lowest. We are vertically integrated; years ago, we decided to develop our own gas, so we are actually integrated back to the gas in the ground. Our cost of power for the first 20 megawatts is about $12 per megawatt hour. This is far lower than most people because many ignore costs that are convenient to overlook. One reason the first 20 megawatts is significant is that our power plant is rated for 485 megawatts by the manufacturer; we can produce 505 megawatts in actual capacity. The first 20 megawatts is the cheapest electricity, and we only pay for the cost of fuel. In addition, we have about 457 megawatts contracted today, or 94% of production, giving us flexibility without terminating any existing contracts. If we wanted to expand, we have the right under our long-term offtake agreements to terminate those contracts under make-whole provisions. If we elect to terminate those contracts under the provisions, the counterparty would owe us money. That's a very interesting dynamic. We structured it that way deliberately so we can find other off-takers and immediately replace those contracts.

Unidentified Company Representative, Company Representative

Yes. The machines that will start running Monday are the S19 PROs, and the next batch we are looking at is most likely the S19 J Pro, which is the newest model and one of the most efficient in terms of energy usage.

Joseph Adams, CEO

Yes, those are 100 terahash per second or 110 for the S19 J Pro, right?

Giuliano Anderes Bologna, Analyst

That's great. That's very helpful. Just one last quick question, I'm curious about the average cost further down the structure, kind of what the cost might be for core production capacity.

Unidentified Company Representative, Company Representative

Probably around $16, $17.

Joseph Adams, CEO

Yes, that's about right.

Christian Wetherbee, Analyst

Joe, maybe if we could start on the aviation side. You mentioned obviously the ramp-up that you're expecting in the second quarter from what you did in the first quarter. If I look back over the last couple of years, last year was a significant under-earning year. I wanted to get a better sense of what the portfolio looks like today and what potential initiatives you are working on to build a better adjusted EBITDA when some of these new initiatives are in place?

Joseph Adams, CEO

Yes. We've moved more towards the CFM56 engine, which now makes up about 50% of our total investment. That has increased from about 30% prior to this period. We have additional deals in the pipeline that we believe will add to and grow this portfolio, and we've also increased our cargo business. The decrease in our portfolio has been seen primarily in 767 passenger business and some 757 passenger as we focus more on CFM56 and cargo. This transition was strategic, particularly accelerated by the pandemic. To clarify our operations, we want to earn 25% adjusted EBITDA on invested aviation capital and also develop revenue from services that are not tied directly to owning assets. It's through joint ventures like Chromalloy, Lockheed Martin, and AAR that we think we can earn $50 million this year, with that number being somewhat unlimited in upper bounds. Thus, we've expressed intentions to accelerate efforts to let airlines outsource maintenance for their CFM56 fleet, utilizing the module factory as a key mechanism for this strategy.

Christian Wetherbee, Analyst

Okay, that's helpful. Regarding Jefferson, with the pipeline news, are you able to provide your perspective on the available opportunities given some recent rail M&A activity? How do you view transactions in this space impacting you?

Joseph Adams, CEO

Yes, we have a point of view, and we've engaged with both Canadian parties looking for support. It's an interesting dynamic, and never some change is constant. The different permutations and options are interesting. I think it may work out better for us since we’re developing a long-term flow of product from the Canadian market by rail. I expect to see ongoing and beneficial dialogue which is positive for both of our interests.

Christian Wetherbee, Analyst

Sounds like a promising avenue. Thanks for sharing that. One more quick question on the broader infrastructure investment perspective. The government infrastructure plans seem potentially beneficial. Can you provide an overview of grants that could reduce FTAI capital needs and what you are seeing in terms of project readiness?

Joseph Adams, CEO

Yes, we are exploring a lot of grant opportunities at various projects, including Repauno where there are around four government grant programs. We're looking at Long Ridge for supplemental grants as well. There's significant funding available specifically for green-focused projects. Having projects that are semi-ready greatly eases access to funding.

Robert Salmon, Analyst

With potential infrastructure opportunities present, how does this impact your future capital plans? Additionally, any implications on operating structures given proposed changes in taxes?

Joseph Adams, CEO

We don't foresee changes in our plans. We're looking to maintain a 2:1 coverage on the dividend and might be moving towards an increase by the second half of this year. We've assessed the proposed changes but believe they’ll have a negligible effect on our structured plans.

Justin Long, Analyst

Could you speak to your expectations for aviation EBITDA in the third and fourth quarters given the second quarter guidance?

Joseph Adams, CEO

If you do the math, you can expect over $100 million for each of Q3 and Q4, which aligns with historical performance. Q3 typically has higher utilization, contributing to a stronger outlook.

Robert Dodd, Analyst

Can you comment on the operational capacity of the La Pano facility and any lengthening timelines on long-term commitments?

Joseph Adams, CEO

Yes, we're seeing strong commercial response since launching and bootstrapping with operations. With substantial pipeline and backlog, we're looking at getting multiyear commitments post-summer from offtakers for additional capacity.

Frank Galanti, Analyst

Could you break down capital expenditure needs regarding your aviation operations and how that measures in a normalized environment? Also, what's the current state regarding Long Ridge power investments?

Joseph Adams, CEO

To maintain our aviation fleet, we estimate around $50 million of maintenance CapEx annually. We completed significant capital expenditures for Long Ridge.

Robert Salmon, Analyst

Could you provide a sensitivity analysis for bitcoin prices against FTAI's annualized EBITDA?

Scott Christopher, CFO

A sensitivity of about 10% change in bitcoin price leads to a $12 million EBITDA impact either way based on the current projections for 20 megawatts.

Joseph Adams, CEO

We want to remain flexible with holding onto bitcoin and focus on executing to capture operational costs-scaled returns from mining—decisions will depend on market valuation dynamics.

Alan Andreini, Host

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

Joseph Adams, CEO

Thanks.

Operator, Operator

And this concludes today's conference call. Thank you all for joining. You may now disconnect.