Earnings Call Transcript - WLFC Q4 2024

Operator, Operator

Good day, and welcome to the Willis Lease Finance Corporation Fourth Quarter 2024 Earnings Call. Today's conference is being recorded. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding our expectations related to financial guidance, outlook for the company and our expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect WLFC's views only as of today. They should not be relied upon as representative of views as of any subsequent date and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect WLFC's reports on Form 10-Q, annual report on Form 10-K and other periodic reports, which are available on the Investor Relations section of WLFC's website at https://www.wlfc.global/investor-relations. At this time, I would like to turn the conference over to Austin Willis, Chief Executive Officer. Please go ahead.

Austin Willis, CEO

Thank you, operator, and thank you all for joining us. On our call today, I'm joined by Scott Flaherty, our Chief Financial Officer; and Brian Hole, our President. Willis has historically been a company of industry firsts. In the early 1980s, Charlie Willis created the first independent engine leasing platform. In 2005, we did the first aircraft engine ABS. In 2022, we were the first lessor to establish a presence in GIFT City, India. In 2023, we did the first engine JOLCO financing. Also in 2023, we were the first aviation ABS to reopen the market. And last year, once again, we created the first engine warehouse financing. 2024 was a fantastic year for our business, underpinned not only by innovation, but by solid execution and results. In the fourth quarter, we delivered strong financial performance. And on an annual basis, 2024 represents our strongest year as a publicly traded company, generating an industry-leading return on equity of 21%. Our fourth quarter and full year results were driven by the ongoing strength of our core leasing business. For the fourth quarter, our total revenues were $152.8 million and pre-tax income was $30.4 million. For full year 2024, our total revenues were $569.2 million and pre-tax income was $152.6 million. Our exceptional company performance has allowed us to return capital to our shareholders while still supporting growth and leverage targets. To that end, in February of this year, we paid our third consecutive quarterly dividend of $0.25 per share. I would also like to point out that we acquired nearly $1 billion in engines and aircraft in 2024, comprised of 35% current technology assets and 65% future technology assets like the LEAP and GTF engines that power the A320neo and 737 MAX aircraft. Some of these assets were on lease, but others were purchased off lease and then subsequently put on lease. When we acquire engines, some of these are serviceable, while others are immediately disassembled for parts, depending upon their remaining service life. Our success at profitably deploying capital is a testament to the platform we have built and our ability to maximize the value of these assets. Over the past year, we have enhanced our engagement with the investment community to improve its understanding of the strength of our platform and long-standing track record. We held an Analyst Day in December, and I encourage you to review those materials, which can be found in the Investors section of our website. One of the key attributes is our flywheel business model, which we believe is a differentiator for Willis, outpacing the sector in terms of value creation. Our business model also enables us to generate a premium return and greater investment opportunities than others in our space. We also outlined the multiple strategies currently being pursued by aftermarket maintenance and services providers to address the maintenance needs of a maturing fleet of CFM56 and V2500 engines. Specifically, there are three primary strategies that I will describe today. The first is the traditional MRO route, where an airline will send an unserviceable engine for a full overhaul. This is often the most expensive path, but it will return the engine with the greatest amount of life remaining. Additionally, the process can take approximately six months to a year, during which the airline will need to lease in a spare engine if the airline doesn't already have one available. Just the spare engine lease could easily cost over $1 million, and that is if you can find a spare engine available to lease. The second route is through module optimization and exchange. This is a more bespoke solution that can offer time efficiency compared to a full overhaul. While this process is faster than an overhaul, the engine will still need to be sent to a repair facility like our two 145 engine MROs in the U.S. and the U.K. The modules will need to be exchanged, and the engine needs to be sent to a test facility, tested and shipped back to the airline. The third option is constant thrust, a product that we have successfully fielded with multiple airlines over the past decade. This is where we do a sale and leaseback on the airline's fleet of aircraft or engines. And when an engine becomes unserviceable, we replace it with another from our fleet. The downtime for an airline is as little as one day. From an airline perspective, we feel constant thrust creates the most value. Not only is the downtime minimized, but the airline only pays for the time and cycles it consumes. Building on that, I'm proud to announce that as of last week, we signed another constant thrust deal, this time for more than 20 CFM56-7B engines. We expect that this will provide a good return for us and significant savings for our customer. Moreover, it will enable us to deploy a meaningful amount of capital in a single transaction and create more feedstock of engines that we can repair in our two MROs, sell or part-out. It's important to highlight this transaction because we believe constant thrust will become more and more sought after as airlines look to transition from legacy fleets into NEO and MAX aircraft, and also because it's a good example of how our different businesses operate in concert to create value. For example, when the unserviceable engines are returned to us from our customer, we sell some, repair some, and disassemble others. The parts from the disassembled engines are funneled into our two MRO facilities to help get engines out the door faster and at lower cost for both ourselves and third-party customers. Finally, I want to reiterate how proud I am of our team for delivering sector-leading 2024 results. We have been in business for almost 40 years and have experienced consistent success by being innovators and having a deep understanding of our customers' needs and the assets that we manage. Our earnings reflect the benefits of scale and the premium we can achieve through our global platform. We run our business with transparency and integrity, and we are now starting to realize the fruits of our labor. And with that, I'll hand it over to Scott Flaherty, our CFO, to discuss our financial performance in greater depth.

Scott Flaherty, CFO

Thank you, Austin, and good morning, everyone. As you can see from our P&L, 2024 was a record year for Willis Lease Finance Corporation. The company generated earnings before tax of $152.6 million, an increase of $85.5 million or 127% compared to the previous year. Our standalone fourth quarter 2024 results showed EBT of $30.4 million, up from $21 million in the fourth quarter of 2023, marking an increase of $9.4 million or 44.8%. Looking at the P&L, our revenues for the year reached $569.2 million, setting a new milestone for the business. Key revenue drivers included core lease rent revenues of $238.2 million and interest revenues of $11.7 million, which reflect interest income from long-term financing products we’ve been offering for several years. The growth in these categories is mainly due to our total portfolio size of $2.87 billion at the end of 2024. Our total owned portfolio includes equipment held for operating lease, maintenance rights, notes receivable, and investments in sales-type leases. In 2024, we acquired equipment totaling $932 million, including capitalized shop visit costs. However, this growth was partially offset on the balance sheet by $126 million from equipment sales, $88.7 million from lease asset depreciation, $26 million from assets moved to held for sale, $11 million in impairment write-downs, and $40 million in payments received against our notes receivable and sales-type leases. Maintenance reserve revenues were $213.9 million for the year, a rise of $80.2 million or 60% from 2023. A portion of these revenues, $39.4 million, came from long-term maintenance reserves linked to engines that were coming off lease. Long-term maintenance reserve revenues increased by $24 million from $15.4 million in 2023, as we had 20 engines and aircraft with long-term leases ending compared to six assets in the previous year. Short-term maintenance reserve revenues reached $174.5 million, up from $118.3 million in 2023. This 47.5% or $56.2 million increase was driven by our overall portfolio growth, the growing number of engines on short-term leases, timing of revenue recognition, and contractual increases in hourly usage rates. We reported spare parts and equipment sales to third parties of $27.1 million in 2024, an increase of $6.7 million or 33% from 2023. Our WASI sales channel has become an essential outlet for recognizing residual values on our engine portfolio while also supplying parts to our customer fleets amidst a tight market. The gain on sale of lease equipment totaled $45.1 million in 2024, associated with $171.2 million of gross equipment sales, reflecting an effective margin of 26.3%. This compares to a gain of $10.6 million in 2023 on $85.1 million of gross sales or a 12.5% margin. In 2024, we sold or exchanged 43 engines and airframes, compared to 29 assets in 2023. Our trading activities play a significant role in keeping our portfolio relevant. Maintenance service revenue remained flat at $24.2 million in 2024, compared to 2023. Gross margins dipped slightly to minus 1% as we are still building out our fixed base operator services, which impacted overall margins. We believe that our maintenance service offerings enhance and create leasing opportunities and support the complete cycle of our company's assets. On the expense side, depreciation increased by 1.7% to $92.5 million due to the larger portfolio, alongside strategic sales aimed at managing profitability. Equipment write-downs totaled $11.2 million for the year, with $10.4 million occurring in the fourth quarter, including $6.3 million linked to our annual impairment review. In 2023, equipment write-downs were $4.4 million. During our annual impairment process, we appraised all our engines and aircraft. Comparing our 2024 appraisals against year-end asset book values reveals a market value exceeding book values by about $600 million, highlighting the value appreciation of long-term engine assets. General and administrative expenses were $146.8 million in 2024, up from $115.7 million in 2023, with G&A margins falling from 27.7% to 25.8%. The increase in G&A was largely due to personnel costs, with notable components including approximately $14.4 million in share-based compensation from a rise in the company’s share price, along with one-time payments to the company’s Executive Chairman and President totaling $3 million and $1.7 million, respectively. Incentive compensation increased by $9.2 million, based on consolidated pre-tax earnings, with another $9.2 million in wage increases resulting from hiring and general salary growth. Technical expenses, mostly arising from unplanned maintenance, decreased to $22.3 million in 2024 from $28.1 million in 2023, reflecting less engine repair activity. Net finance costs increased to $104.8 million in 2024 from $78.8 million in 2023, driven by higher indebtedness; total debt obligations grew from $1.8 billion at the end of 2023 to $2.3 billion at the end of 2025. The weighted average cost of debt rose from 4.22% in 2023 to 5.01% in 2024, partly due to maturing interest rate swaps from 2021. We also earned $8.2 million from our 50% interest in joint ventures. The company reported net income of $104.4 million attributable to common shareholders, factoring in GAAP taxes and preferred equity costs, which is a 159% increase from $40.4 million in 2023. The diluted weighted average income per share was $15.34 in 2024, up 146% from the prior year. Cash flow from operations rose by 23.8% to $284.4 million in 2024, primarily driven by growth in pre-tax earnings and tax benefits. In terms of financing and capital structure, we completed several financings and refinancings in 2024 to diversify and enhance our funding sources for future growth. This included completing our third JOLCO financing, the first-ever engine warehouse financing for $500 million, and refinancing our credit facility into a new five-year $1 billion revolving facility. We are committed to diversifying our funding sources and minimizing our overall cost of capital, supported by our banking and investor partners. In 2024, we returned capital to shareholders through a one-time special dividend of $1 per share and two regular quarterly dividends of $0.25 per share. Post-year-end, we declared and paid our third consecutive quarterly dividend of $0.25 per share in February, indicating the business's health and providing shareholders with a steady yield without compromising our cash flow and equity growth. Regarding leverage, which is defined as total debt obligations, net of cash and restricted cash to equity including preferred stock, our leverage increased slightly to 3.48 times in the fourth quarter from 3.25 times at the end of Q3 2024, as we seized year-end asset purchase opportunities. We aim for net leverage in the low 3s, understanding it may slightly rise as we pursue opportunities enhancing our overall business characteristics. I will now open the call to questions.

Operator, Operator

Thank you. And we'll go to our first caller.

Louis Raffetto, Analyst

Hi. You have Louis Raffetto from Wolfe Research. Good morning, guys.

Austin Willis, CEO

Good morning, Louis.

Louis Raffetto, Analyst

Austin, could you provide an update on the engine market and the values you're observing? Values were significantly strong in the first half of 2024. Are you still seeing values increase, or have they stabilized? Additionally, the gain on sale margins saw a considerable jump from 2023 to 2024, so I'm looking for an update on that as well.

Austin Willis, CEO

Yes. Thanks, Louis. We've seen a strong engine market generally, as you mentioned, and that's both on the whole engine asset side as well as parts. And on the parts side, it's not only the sales of parts, but also selling engines to third-parties as well. We do see some scarcity in the market for originating transactions for a typical engine that you might buy to put on lease to third-parties. That being said, we've been very successful at originating ourselves. And it's worth mentioning the value for assets right now makes it a little bit more difficult periodically to originate deals, but we're also beneficiaries on the sell side in the market. And as you mentioned, we've had a good gain on sale margin. But going back to originating transactions, we've been pretty darn successful at originating. And in fact, we have a pipeline that's considerably – well, that's frankly very robust. And it's really a function of our ability to originate transactions where we offer some kind of added advantage to the customer. So if you look at somebody who's just buying an engine to try to put on lease to a third-party, I think they're going to face some challenge. But for us, and the constant thrust transaction I mentioned in my prepared remarks is a great example. We're seeing a lot of opportunities to originate and in this case, over 20 CFM56-7B engines where we can actually solve a problem for the customer. And in this particular circumstance, the problem is bridging them from a maintenance standpoint. So we're helping the customer to avoid shop visits where we're in-sourcing that maintenance, and they're really only paying for the incremental hours and cycles that they consume. I hope that helps.

Louis Raffetto, Analyst

Yes, I appreciate it. Just a follow-up. You mentioned the two repair shops, one in the U.S., one over in Europe, I believe. I can't recall, do you have a test cell? Or is that something that you actually have to go out and sort of find for those engines where you do work on? And if that is the case, what's the availability of slots like?

Austin Willis, CEO

Thanks, Louis. We do not have a test cell. And you're right, we have 145 repair station work in the U.K. and another in the U.S. They do everything from borescopes to lease returns, preservation, teardown, QEC installation and heavy maintenance. We do not currently have a test cell. It's something that we are looking into. And it really varies. Sometimes it's difficult to get a test cell slot. Other times, there's a greater availability. So it just depends.

Louis Raffetto, Analyst

Great. I appreciate it.

Austin Willis, CEO

You’re welcome.

Operator, Operator

We'll go to our next caller.

Eric Gregg, Analyst

Hi, this is Eric Gregg from Four Tree Island Advisory. I have a few questions. First, regarding the 30 engines you announced in December concerning the LEAP-1A and LEAP-1Bs, assuming normal inflation, I expect there is a significant discount compared to current market prices, perhaps around 30 percent. Is that a fair assumption?

Austin Willis, CEO

Yes. I can't speak to any discounts we may or may not be getting from the OEM on the new purchase side. I will say we've been successfully purchasing engines new from the OEM for quite a long time, and we've been good at both deploying those assets out on lease and recognizing the value when we sell them.

Eric Gregg, Analyst

Great. What time frame should we expect for the delivery of those engines? Will it be in 2025 and 2026? The news release didn't provide much detail on that.

Austin Willis, CEO

Yes. So we don't have a specific delivery date schedule yet. We expect to work that out in the coming months.

Eric Gregg, Analyst

Okay. In terms of the announcement in June on the 15 Pratt & Whitney engines that were potentially purchased before year-end, were all those purchased?

Austin Willis, CEO

There were nine, and those were purchased, yes.

Eric Gregg, Analyst

Okay. And then there's been talk about the H1A HPT durability kits. Are those something that Willis is going to be investing in? And how long does it take to implement those durability kits?

Austin Willis, CEO

Yes. We do plan to implement some durability kits at the shop visits in the future, but it's going to take a while before those are fully integrated across the fleet. The durability kit includes several components, not just the HPT blades. It also encompasses other durability features like the reverse bleed system and improved client trust. Additionally, I'm pleased to share that our 145 repair station completed its first installation of the reverse bleed systems earlier this year.

Eric Gregg, Analyst

Perfect. And just higher level, with these durability kits as well as Pratt & Whitney being pretty close on its GTFA engines being certified, some of these newest technology engines are likely to become more durable and therefore needing fewer shop visits. How is this impacting your plans for the growth of your MRO operations?

Austin Willis, CEO

Sure. So our MROs currently serve primarily the CFM56 and V2500 markets. We do limited work on the GTF and the LEAP, but we do intend to grow that into the future. It's hard to say what the ultimate result is going to be with the GTF advantage and the durability enhancements on the LEAP. I know there's some optimism that it will increase on-wing life, and we certainly hope that, that's the case. But I think there's also a likelihood that this generation of equipment will have more shop visits than the previous generation. We also think that we're well positioned to take advantage of that, both on the leasing side and the MRO side.

Eric Gregg, Analyst

That's great. And just one last one. The last couple of quarters, the earnings from the JVs have been a little bit thinner than they were in some of the prior quarters. In such a strong engine leasing environment, what do you attribute the lower levels of JV earnings for the last couple of quarters?

Austin Willis, CEO

We've seen the earnings from the JVs doing pretty well. We think the JVs, like our own company, are going to benefit from scale over time as we continue to grow them out.

Eric Gregg, Analyst

Thanks.

Austin Willis, CEO

Hold on. Scott, would you like to add anything to that?

Scott Flaherty, CFO

Yes. I think you'd see similar characteristics in the JVs as you see in our overall business. And I do believe that sometimes you see gain on sales in the JV businesses that provide some pops to the earnings in any specific period.

Austin Willis, CEO

Thanks, Scott.

Eric Gregg, Analyst

Thank you.

Operator, Operator

And we'll go to our next caller.

Unidentified Analyst, Analyst

Hi. Thanks for taking my questions. Can you talk about the difference between the fair market value of the engine portfolio and the book value of the engine portfolio today?

Scott Flaherty, CFO

Sure. As I mentioned previously, we highlighted to our investor group about a year ago that there was a significant difference between the book value of our overall portfolio and the market value determined by our annual appraisals. At that time, this disparity was nearing $400 million. Our long-standing thesis suggests that while these engines depreciate in our profit and loss statements, their market value tends to appreciate over time. This trend has continued, and as we completed our year-end appraisals in December 2024, we found that the difference between the market value of our engines and their book values has now increased to almost $600 million.

Unidentified Analyst, Analyst

Got it. Thanks so much. Appreciate it.

Operator, Operator

We'll go to our next caller.

Sergey Glinyanov, Analyst

Hello, everyone. I’m Sergey Glinyanov from Freedom Broker. I want to start by congratulating you on another successful quarter. My first question is regarding short-term non-reimbursable usage fees, which make up about 74% of total quarter reserve revenue. What do you project for the ratio of reimbursable to non-reimbursable revenue in 2025? What trends do you anticipate affecting this, and how do you see it progressing? Additionally, what do you foresee as the distribution between the short-term and long-term parts of your portfolio for next year and beyond?

Scott Flaherty, CFO

Sure. Thanks for the question. Sergey, it was hard for me to completely understand your question, but I believe you were asking about the short-term maintenance reserves. And you can see that those have increased significantly on a year-over-year basis. And as I mentioned earlier, that's really been driven by the increased number in engines that we have on short-term conditions, which are non-reimbursable and which has been supported by the growth of our overall portfolio. We see this as a trend that will continue. And really, this has been supported a lot by the programs and the programs that we have been rolling out, which is supporting a lot of the engine transitions. We don't provide forecasts for our business, but I would say that we expect to see this trend continue.

Sergey Glinyanov, Analyst

Thank you. I understand. Lastly, what are the key factors influencing the take rates you anticipate? If monetary policy remains tight, could this alleviate some margin pressures and allow you to partially shift that burden to rent prices?

Austin Willis, CEO

Thanks, Sergey. I'm not 100% sure I understand the question, but I believe you're asking about interest rates and the impact on our portfolio. We've been able to reprice our portfolio historically as rates came up. And in fact, if you look at the ABS we did in 2023, I believe we were the only ones to do one that year, we really reopened the market, and that was a function of our ability to reprice as interest rates increased. Is that generally answering your question, Sergey?

Sergey Glinyanov, Analyst

Yes. Thank you.

Austin Willis, CEO

No problem.

Operator, Operator

We'll go to our next caller.

William Waller, Analyst

This is Will Waller with M3F. Question on the long-term lease portfolio. I've heard just through the industry articles and conferences that the extension rate is above average. What are you guys experiencing on extensions of the long-term leases? Is it above average in your portfolio as well?

Austin Willis, CEO

Hi, Will. Yes, I think it's safe to say, I mean, the rate of extensions is higher than what it historically has been. That being said, we don't blindly extend our assets. We take it as an opportunity to reprice. So we are seeing more extensions, but we're also seeing a lot of opportunity there as well.

William Waller, Analyst

So if you have a long-term lease that extends and you adjust the price, do you recognize the maintenance reserve income at that point in time? Or do you still defer it until the asset is returned?

Austin Willis, CEO

Generally speaking, we'll defer it until the asset is returned.

William Waller, Analyst

Okay. Is the portfolio still similar to what it was on September 30, with about 54% long-term and 46% short-term? Is that still the case at the end of the year?

Austin Willis, CEO

It's fairly consistent with that. You mentioned the mix of the portfolio, so I'll take this opportunity to briefly discuss our modernization. In our last call, we announced that we were about 46% or 47% in future technology assets. As of the end of the year, we are at 53% in future technology. I believe it's important as we consider how the market changes and the transitions we will face going forward.

William Waller, Analyst

Great. Thank a lot.

Austin Willis, CEO

Thank you.

Operator, Operator

And at this time, there are no further questions. I'll turn the call back to Austin for any additional or closing remarks.

Austin Willis, CEO

Thank you all for your time. Have a good day.

Operator, Operator

This does conclude today's conference. We thank you for your participation.