FTAI Aviation Ltd (FTAI) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by, and welcome to the Q1 2023 FTAI Aviation Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Alan Andreini, Head of Investor Relations. Please go ahead.

Thank you, Justin. I would like to welcome you all to the FTAI Aviation First Quarter 2023 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer; and Angela Nam, our Chief Financial 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. Reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.

Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements, and to review the risk factors contained in our quarterly report filed with the SEC.

Now I would like to turn the call over to Joe.

Thank you, Alan. To start today, I'm pleased to announce our 32nd dividend as a public company and our 47th consecutive dividend since inception. The dividend of $0.30 per share will be paid on May 23 based on a shareholder record date of May 12.

Now let's turn to the numbers. The key metrics for us are adjusted EBITDA. We began the year well with adjusted EBITDA of $127.7 million in Q1 2023, which is up 3% compared to $123.5 million in Q4 2022 and up 184% compared to $45 million in Q1 2022, which had been adversely affected by Russia's invasion of Ukraine. During the first quarter, the $127.7 million EBITDA number was comprised of $107.6 million from our Leasing segment, $27.4 million from our Aerospace Products segment and negative $7.3 million from corporate and other.

Turning now to Leasing. Leasing had a good quarter, posting approximately $108 million of EBITDA. The pure leasing component of the $108 million came in at $91 million for Q4, up from $85 million in Q3 -- that's actually for Q1. I'm sorry -- came in at $91 million for Q1, up from $85 million in Q4. With strong demand for assets and the commencement of the Northern Hemisphere summer season, we expect Q2 will continue to grow. We remain very confident in Leasing EBITDA of $350 million to $400 million for the year, excluding gains on asset sales.

Part of the $108 million in EBITDA for leasing came from gains on asset sales. We sold $92.2 million book value of assets for a gain of $16.5 million, slightly below our expectations, but we have more asset sales coming in Q2 and the rest of the year and are comfortable assuming gains on asset sales of approximately $25 million per quarter, or $100 million for all of 2023.

Aerospace Products had another excellent quarter, with $27 million of EBITDA. We started these activities at the end of 2020 and, in the last 6 quarters, have booked approximately $120 million of EBITDA without any contribution from PMA. We see tremendous potential and continue to feel good about generating $20 million to $30 million in quarterly EBITDA and think $100 million-plus in 2023 EBITDA remains very doable. We feel confident about this number because we're seeing a rapidly expanding backlog of Aerospace products business with other leasing companies, maintenance and repair organizations and airlines.

With that, let me turn the call back over to Alan.

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

(Operator Instructions) And our first question comes from Josh Sullivan from Benchmark Company.

Congratulations on the results and progress here. So you're now annualizing EBITDA at some good rates, and you walked through some of the components there. Just curious if the $550 million to $600 million EBITDA guidance is still the right framework at this point as well.

Yes.

That was yes? Sorry, it broke up there.

Yes. That was yes. Sorry, it was a one word answer. But yes. As we indicated, if you add up each one of the segments, it's very much on target. And we think, as we're heading into the strong season, Q2, Q3, that there's probably some upside in these numbers, as well.

And then, just within the gain on sales here, I know they can be lumpy quarter-to-quarter as you mentioned. But was there any particular program that moved around? Or how should we think about those gain on sales, moving forward?

No, it is lumpy. And typically, you get a lot of transactions that target closing towards the end of the year, and some of them, they slip over into Q1. So Q1 is usually the slowest because you've emptied out your bucket of deals, usually. So it's not unusual for Q1 to be a bit slow, and then it builds through the year. And most people have annual budgets that end in December, so you tend to see it growing towards the end of the year.

And our next question comes from Giuliano Bologna from Compass Point.

Congratulations on a great high-quality [beat] quarter this quarter. The first question I was curious about asking was around PMA. I'm curious if you have any updated thoughts around PMA, or if there's any change in kind of your opinion there, and if there's any update around the timetable compared to what you've laid out in the past.

No, there's no real change in the time line or what we've outlined before, which is we expect all 4 products to be ready for final submission in the middle of this year. And I would say good progress has been made on every front that you need to achieve to be able to do that. So there's no change in what we've said previously, and I would just say good progress on all fronts towards getting those parts in the market.

And then a slightly different area that probably doesn't always get much focus. You still have those 2 offshore assets that are in the Other category. I'd be curious if there's any update around potential thought process around maybe selling 1 or 2 of them this year. And then also, I'd be curious if those had any financial impact in the quarter, positive or negative, in the results.

Sure. There was a little bit of a negative impact of probably $3 million in Q1 because we had some repairs that needed to be done on one of the larger vessels. So that was a bit of a drag on the numbers this quarter, and the ship is back in service. So we expect the next 2 quarters to be good, so that should reverse.

In terms of selling, we're actively evaluating it and still believe that, most likely, the best timing to transact would be towards the end of this year or around the end of this year, given that the larger vessel just started operating in the well intervention market. And the more credentialized it becomes, the wider the universe of potential buyers. And that market has recovered a lot, so I feel better and better about being able to achieve that on that time line towards the end of this year.

And our next question comes from Frank Galanti from Stifel.

Congrats on the nice quarter here. I wanted to ask, sort of on the aerospace business, can you sort of talk about what the component -- I guess the makeup or the mix of that $27 million of EBITDA? How much is modules, how much is USM?

Yes. So this quarter, it was about 2/3 from the module factory, 1/3 from Used Serviceable Material, USM. It was a little bit more USM this quarter than there has been. As we've been predicting, that market is picking up, given parts shortages and price increases. So that's a good thing. We've indicated we'll probably be targeting about 40 teardowns a year, and we make approximately $1 million per teardown. So $40 million of EBITDA divided by $4 million would be $10 million, so there's a little bit of upside, I think, going forward for USM.

And then I think there's a lot of upside, as I've mentioned before, our module factors. We have a strong backlog of customers, some of whom are fully committed and some have just given us verbals that they're looking for programs of 8 or more modules a year. And the number of airlines indicating that keeps growing. So we feel very good about the recent customer mix, which in Q1 there were probably 7 customers out of the 10 who were repeats and 3 that were new customers. So we're progressing as we expected in terms of both growing the number of customers as well as growing the number of modules per customer.

And actually, I wanted to follow up on that comment. The question is really around customer stickiness, sort of like a churn number. I know it might be early in the business to sort of get a sense for that, but do you have a percentage churn that the business is currently operating under? Or I guess another way to think about it, is there a way to quantify how much capacity those 29 customers that you've used before? Are you at 10% of their shop visits? Are you at 5%, 25%, 50%? Is there a lot more room to grow in those customers, the 29 customers that you've worked with in the past?

Yes, there's a lot of room to grow. And as we've indicated -- well, first of all, I would say there's no churn in that we've not lost any customers. Nobody that has used the product has said to us or indicated that they wouldn't use it again. So that's a very good thing, and people like the product. And if you look at their total number of shop visits starting out, you're talking about airlines that have potentially anywhere from 10 to 100 shop visits a year. And so that's 30 to 300 modules per year. So if you're talking about doing 4 going to 8, you're still at a very small percentage of their total available shop capacity opportunities.

So we think that that number will continue to grow. We haven't lost any customers. We think people, once they use it, they will repeat it again. And in particular, as shop visit time, time in the shop keeps growing and getting longer, the more cost savings a module swap presents to the airline. So we think the advantage of using them will only continue to get better and grow in the coming years.

And just one clarifying question. You said 10 to 100 shop visits a year. Is that per customer or for the 29 customers in aggregate?

No, that's per customer.

And our next question comes from David Zazula from Barclays.

I guess first, on the Aerospace Products business, I think a lot of the investors we talk to are concerned about a macro slowing. Just would be interested in your assessment of the sensitivity of those businesses to a slowdown in the macro. Do you think it would reduce or increase demand, or how you think customers would respond?

We don't think it will have much of an effect because one is, because of COVID and the fact that airlines stopped doing shop visits for basically 2 years, most green time has been burned off. So there's very little available green time in fleets. Matter of fact, in the last month, we've had 2 or more airlines indicated that they need between 20 and 30 engines because they have nothing left. The bucket is empty. So I think that mitigates any type of macro slowdown.

And then, secondly, you always hear that, if there is a macro slowdown, the focus on cost-cutting accelerates. So more and more companies then go into a mode of, like, what can I cut, what can I reduce, and we offer cost savings. We're very direct about we can save you money on your shop visit, or you can even avoid a shop visit by doing a module swap. So we think that it's a great product if airlines really need to hunker down and focus on cost cutting.

Additionally, CFM56, I think you guys have done very well there, a lot of life left in that project. But as you're thinking long-term, are you evaluating any other further generation engines, ecosystems to get into? How are you thinking about that? What would you think of for long-term timing? And how would you evaluate among the different potential projects as you look on down the line?

Yes, we are thinking about it. We have 2 engines that we're particularly focused on right now, which we think are great candidates to do similar things that we've done on the CFM56. Really, we see the sweet spot for the CFM56 really running from 2024 to 2030. It's probably been extended out now because of delays in new aircraft delivery, difficulty with new engines staying on wing as long as people thought they would, supply chain disruptions, freighter conversions, all those factors are making the CFM56 life expectancy look longer and longer.

So we don't feel that we need to divert attention from the organization. But as I say, somebody in every company needs to be thinking 5 years ahead. And so we do have 2 engines that we're working on. I'm not going to disclose what those are, but feel like those would be excellent candidates for us to consider adding when the time is right to do that.

And our next question comes from Hillary Cacanando from Equity Analyst (sic) [Deutsche Bank].

So you had previously mentioned that you were looking at other maintenance-related products to developed this year. And I think you mentioned something about repair in one of the industry conferences. Would you be able to talk a little bit more about that, where you are in the process? And is this something that we can see happening this year?

Yes. That's a great question. It is something that we're very actively engaged and working on. I'm very excited about the repair market opportunity. It's growing quite rapidly. It's got a lot of support from both cost savings where you can -- essentially, you could repair a part, or 20% of the cost of a new part. So it's a great product, and there's a number of companies that are continuing to develop more and more repairs.

So we love the repair market. It fits perfectly into our portfolio. It also plays well on the ESG side in that you're not making a new part, you're saving the old one. It's a recycling opportunity. So ESG is good. It's very pro-repair business.

In terms of progress, we do have a couple, I'd say 2 or 3 specific opportunities which we're running down. And as I said before, we hope that we can do something material on the repair side this year in 2023.

And then I had another question. In your presentation, you noted that there's strong backlog from airlines, lessors and MROs. I was wondering if you could provide a little more color regarding where you're seeing the most demand? I would think there's a strong demand coming from the airlines. But I was wondering if lessors are just as willing to use used materials. And I guess, related to that, when you do get all your PMA parts approved, do you think that there would be strong demand from the lessors, as well? Because I would think the lessors may be a little bit more sensitive about using non-OEM parts since they have to market those products? Just wanted to get your thoughts.

Sure. So there's a few questions there. On the last part, the PMA question and lessors, I do think there's growing acceptance, and there's actual evidence of that, in the CF680 engine, which I've talked about is a great case study. And we bought 80 of those engines. We put PMA in all of those engines. We've done over 100 leases, never had any operator not take that engine because of PMA. And we've sold 53 of them or 54 now, where the prices were very competitive, or as good or better, than if it was all OEM equipment.

And ironically, many of the buyers of those engines were leasing companies. And so sometimes you can go ask them if they have PMA in their engine and they will say no, but they actually do. It's just they don't know it. So I think that the same fact pattern will play out in the CFM56 engine, as well. So I do believe that there will be growing acceptance in that.

In terms of where's the activity, I mean, the good news is there's growing activity from all 3 categories. You have airlines, as I mentioned. A number of airlines have used up all their green time and so they're looking at summer schedules and then they're deciding to keep the [NGs] and their NEO -- the [CL] fleets longer so they need more engines, or they might be doing an airframe overhaul that they didn't think they were going to do that now they need engines for the next 5 years. So airline demand for engines is very strong.

MROs as well, because shops are filling up, and sometimes shop turn times are slowing down or extending. So they need more engines to be able to do the shop visits that they have in-house and want to bid for.

And then leasing companies, it's really 2 different activities. One is we buy a fair amount of off-leased assets from leasing companies, so a lot of leasing companies don't have the ability to put a lot of assets out if they're off lease, particularly engines. And so we're a great buyer. And then we can solve end-of-lease return comp issues with module swaps, and we're doing more and more of that. So at the end of the lease, if an airline owes a lot of money, cash as a return compensation because the engine they're going to give back doesn't have a certain number of hours in the cycles, we can help solve that by doing a module exchange for less than what the cash outlay would be otherwise. So we have a lot of products and solutions that we can offer, and the leasing companies are sort of accepting of all those because they're just trying to get things done and move on.

And our next question comes from Brian McKenna from JMP Securities.

So what's the outlook for asset acquisitions for the remainder of the year? It seems like it continues to be a good environment to acquire assets, particularly for assets off lease. And then is there any increase in opportunity for sale leasebacks, given that we're likely going to see a softening economic backdrop here probably?

Yes. You're right on both counts. We're seeing a lot of off-leased assets available that we continue to be one of the best buyers for because we have the ability to scrap airframes and just lease engines, which a lot of other people don't. And so we're acquiring 2 package deals right now that fall right into that category at great prices. And then a lot of one-offs, leasing companies trying to clean up assets that they want to just get rid of and move on. So that area is pretty active.

And in the module business, probably half of our module sales involve us taking back a module in return, or as an exchange. So we're not really depleting the inventory on half of those transactions. We just then take that the runout module and then put it back to our factory and do it all over again. So we're able to replenish that.

And then you're right on there's still a number of airlines that COVID and Russia/Ukraine were pretty big jolts to the aviation system. And so there are airlines that have been sort of living on the edge for quite a while, and sale-leasebacks are returning in terms of activity because it's a great way of raising capital, and we've done quite a bit of that. And so particularly end of -- if an airline is looking at they have a new aircraft order and they're looking at phasing out a fleet, it's a way of raising cash today and forward-selling their airplanes. So we see all those areas of activity.

And the good news about the CFM56 market is there's 20,000 of those engines in the world. So it's enormous and will be for many, many years.

And then just a question on capital and liquidity. If the preferred market opens up again over the next few quarters, would you look to raise some additional capital through this part of the market? And then on liquidity more broadly, is there a minimum level of cash you'd like to run the business at?

We typically run around $25 million to $50 million in cash, and then we have availability on a revolver, so we feel that that's very comfortable and have been doing that. In Q1, we actually paid down debt. So that was good results in the quarter. We generated a lot of cash flow. And in terms of the preferred market, we will look to that periodically. We've always liked that market when it's open. And if it becomes available, we'll look at it again for sure.

And our next question comes from Robert Dodd from Raymond James.

Congratulations on the quarter. Back to that capital question, if I can. I mean, obviously, actually you paid down debt, you're now on just Q1 run rate EBITDA, you're at 4x debt-to-EBITDA. If things go right by the end of the year, you could be pretty close to 3x So I mean, given where that leverage path is heading, can you give us any idea of what you plan to do with the potential additional, at least from a metric perspective, and additional capital you could have available while being in your range? Is it accelerated asset purchases, accelerated inventory build in the module swap, or maybe a dividend increase? Or can you give us some idea of how you're thinking about allocating what could be an increased capital availability as we go through the year, potential capital availability?

Yes. I would speak in terms of priorities. Our first priority, as you mentioned, is to be sort of in the 3.5x debt to total EBITDA range, which we think gets us into the solid strong BB with all agencies. So that's #1 priority. I think we've been consistent about that. And so, right now, that's what we're shooting for. And obviously, we're on track to do that with these numbers. So that's good.

Then the second priority has always been investments. When you can generate 20% or 25% unlevered returns on new investments, those are things we've never not been able to do a deal we wanted to do. So, obviously, having the firepower to do that is critically important from an earnings growth point of view.

And then beyond that, we would look at all other options, including a dividend increase, stock buyback or further debt [pay-on]. We'd take a look at what the market opportunities are at the time and what the various security prices are. We would also have securities we could buy back as well, other than just common. So we've got a lot of different opportunities, and we would like to be able to avail ourselves of those issues if things get disrupted.

I mean just to that point, on the inventory of the modules, I mean, I think I've asked about this before, you've talked about it before. Are you revising up the inventory level you'd like to keep? Or would you revise up the inventory level that you'd like to keep, both modules and parts, et cetera, if demand plays out the way you expect it to? Or just the way you turn the components doesn't necessarily demand the higher inventory levels?

Yes, it's more of the latter. I mean right now, we're running the Aerospace products business with between $150 million and $200 million of capital, or working capital, which we turn frequently. And we think, as we grow the business, that number probably goes up to $250 million to $300 million, but we're talking about doubling and tripling the volume with that. So it's not very capital-intensive. It really is driven more by inventory turns, and you become more efficient as you have more volume.

And I am showing no further questions. I would now like to turn the call back over to Alan Andreini. You are available.

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

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