FTAI Aviation Ltd (FTAI) 2023 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q2 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 second 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. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.

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

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

Thank you, Alan. To start today, I'm pleased to announce our 33rd dividend as a public company and our 48th consecutive dividend since inception. The dividend of $0.30 per share will be paid on August 29, based on a shareholder record date of August 14.

Now let's turn to the numbers. The key metrics for us are adjusted EBITDA. We got another strong quarter with adjusted EBITDA of $153.1 million in Q2 of 2023, which is up 20% compared to $127.7 million in Q1 of 2023 and up 2% compared to $150.7 million in Q2 of 2022, where we had over $64 million of gains on sale in that quarter. During the first quarter, the $153.1 million EBITDA number was comprised of $125.9 million from our leasing segment and $30.1 million from our aerospace products segment, and negative $2.8 million from corporate and other.

Turning now to leasing. Leasing had a good quarter, posting approximately $126 million of EBITDA. The pure leasing component of $126 million came in at $94 million for Q2 versus $91 million in Q1 of 2023. With strong demand for assets and the peak of the Northern Hemisphere summer season, we expect Q3 will grow incrementally. Additionally on the acquisition side, we closed on 15 aircrafts and 23 engines at very attractive prices, which will contribute to further growth in future leasing EBITDA. We remain confident in leasing EBITDA of $350 million to $400 million for the year, excluding gains on asset sales.

Part of the $126 million in EBITDA for leasing came from gains on asset sales. We sold $69.6 million book value of assets at a 31% margin gain of $31.9 million, benefiting from strong demand for assets globally. We have more asset sales coming in the remainder of the year and continue to be comfortable assuming gains on asset sales of approximately $25 million per quarter, or $100 million for all of 2023.

Aerospace products had yet another excellent quarter with $30 million of EBITDA and an overall EBITDA margin of 44%. We sold 37 modules in Q2 to 9 unique customers comprised of 3 new customers and 6 repeat customers. We see tremendous potential and continue to feel good about generating $20 million to $30 million and quarterly EBITDA and think $100 million plus in 2023 EBITDA remains very doable.

We feel confident about this number because we're seeing an expanding backlog of aerospace products business with other leasing companies, MROs or maintenance and repair and overhaul 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.

Nice quarter here. Given the strength in the aviation leasing side and the issues the newest generation of engines are facing, and now we have RTX geared turbofan engine looking at some accelerated shop visit cycles into an already tight MRO market, and you don't have any GTFs. But have you seen any of the GTF pressure starting to playout for demand in your products and services?

Yes. The airlines we talked to are all holding on to their old last-generation equipment. So we've seen airlines decide to extend leases. They're looking for more assets, the A320 CL family or the 727, 800 those markets are very tight. It's very hard to get additional capacity. This is going to put more pressure on those fleets, because you're going to have -- with the GTF, it's estimated you'll have 1,200 engine shop visits over the next 12 months, 200 in the next 2 to 3 months. So that's in the busy summer season, trying to schedule that between now and September is going to be extremely challenging.

So anybody that has existing flying assets is going to keep them and they're looking for more, and there'll be more demand for spare engines. So I think, as you pointed out, it's already a very tight market, and this is going to turn the stress up another couple of levels in terms of putting more demand for the assets that we own.

And then maybe, what are you seeing as far as the sale-leaseback market? There are large deals in the bidding process, maybe does your pipeline look like? Or what really gets the market going again?

Yes, it's interesting, it's picking up. We -- I mean, previously, I think in the last few calls, we've been saying that the best buys for us have been assets that are off lease, that have -- we can buy cheap and put cash flow attached to it and then create value that way. We're now starting to see that we're very competitive, again, on assets that are either on lease or with sale-leaseback transactions with airlines. And we think it's primarily because the -- a lot of the mid-tier leasing companies are relying on debt financing provided by the ABS market, which is really not available. And it's very challenging for people to price out deals with no debt or with much higher cost debt.

So it's not that we've increased our pricing. It's that the market seems to have come to us. So we're seeing in several portfolio deals that are very attractive with cash flow attached and sale-leasebacks, which never seem to go away totally because airlines always need money. So those markets, I think, for the next -- at least for the next 6 to 9 months, we see very good investment opportunities, that's a fairly recent development.

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

Great quarter here. One question I'd be curious about. Obviously, we're seeing some very strong performance at the module factory, and new service material is driving this product segment. You're also seeing strong leasing EBITDA.

If I look at the first half of the year at the segment level before corporate, you're analyzing at $585 million to $586 million of EBITDA already, and you've been talking about $550 million to $600 million at the segment level. Just curious how you're thinking about the confidence level around that range, because you're growing rapidly and already running out closer to the high end of that range in the first half of the year.

Yes, our confidence level is pretty high. So it's every quarter you have behind you, it's easier to look and hit the year. So I think -- and we have pretty good backlog at this point as you can tell from my comments. So I think that if the environment doesn't swerve in some fashion against this, which doesn't look at all likely, we've got -- we're pretty confident in those numbers through the year. So that's good. And generally, you've got pretty decent visibility out 3 to 6 months on what activity is in the pipeline.

That's great. And maybe just for a little more context. Obviously, leasing, we have a good sense of where that is, and you probably have a good sense of the pipeline, but also on the M&A side. But -- and then thinking just on the product side in terms of the drivers, that give you a little bit confidence there. I'm curious if -- where the -- how the backlog looks on the module factory side? If you're continuing to see, yes, module volume demand continuing to step up where you've been seeing it for the last few quarters?

Yes. So it's -- we've mentioned we've had a high level of repeat customers. I don't think anybody that we've done business with hasn't indicated they're going to do more. And many of those customers have already put in orders for the balance of this year and indicated what they might do next year, as they have visibility on their shop visits. So it's very good. And we add new customers as well. As you can see, we continue to develop the repeat business, but we're also adding -- each quarter we will add a handful of new customers, which will also grow. So I think the backlog on modules is excellent and visibility is increasing.

And people once they've used it, can say, well, now I'm going to use it in all my shop visits. And that gives us a longer term view into what the pipeline will look like. It allows us also, helpfully, to prebuild inventory. So we -- the more visibility we have about what the customer is going to do, the easier it is for us to increase our throughput and turn time, because we can preposition assets in that way. The other business is the USM, the used serviceable material business, and we see that increasing. We've been running, as we indicated, we are probably had approximately 30 tear downs last year. We've been running at that -- a little bit higher than that in the first half of this year, but we're going to increase the rate of tear downs. And we've taken a number of engines in to inventory and started the processes.

As you probably are aware, it takes about 3 to 6 months before you get revenue, because you have tear down the engine, label all the parts inspect and many of those parts have to be repaired. So they have to be sent out and then brought back. So we see that level of tear down activity increasing to over 40 engines in this year and see very, very strong demand as the original equipment manufacturers, as you're probably aware are putting a price increase in -- on August 1 of this year, which was quite a bit earlier than they've previously done it.

So I guess if you annualize that rate increase, it's -- that's also well into the double digits. So new part prices are going up rapidly. So used serviceable material is very valuable. And we have probably the biggest supply of used serviceable material in the world, maybe other than the OEM who doesn't like to sell USM anyway. But that, that gives us quite a good tool to get additional business and cross sell modules and other maintenance services. So we're going to take the USM activity level up in next 2 quarters.

And our next question comes from Hillary Cacanando from Deutsche Bank.

So in the aerospace segment, the total revenue declined sequentially, but the EBITDA margin was a lot stronger than last quarter at 44% versus 32% last quarter. Could you give us some color on what's causing that difference? And I guess just related to that, should we continue to some lumpiness going forward?

It's primarily a mix that it's hard to control that quarter-to-quarter. But it was favorable this quarter because we had slightly less used serviceable material sales and we also had more core modules that we sold, which tend to be higher margin. So we had less of the lowest margin and more of the highest margin. We would continue to suggest that 35% is still a good place to hold in the middle as it -- for modeling purposes, we think that's a sustainable number and not -- it will not always be above to the degree it was this quarter, which was really just driven by mix.

And then there's -- occasionally, there's just an opportunistic sale that you happen to have the right -- the right asset at the right time for somebody who desperately needs it. So you can also see sometimes we intentionally make sure we have that asset. So that's part of the business.

Got it. And then, I guess, on the stocks. Since you got to the K-1, FTAI stock has gotten included in a number of indices and was recently included in Russell 2000 last month. Do you know if any other indices are looking to add you to their index? If you can just kind of provide more color on that?

This is Alan. We think that the next one that we're going to be considered for is the S&P 600, and that could be at the end of -- as early as the end of Q3. And the estimates are from the index folks is that, that number could be another 12 million to 15 million shares.

And our next question comes from Brandon Oglenski from Barclays.

Joe, I was wondering if you could provide us an update on the product approval process with the FAA and where that stands?

Yes, everything is progressing and on the time line that we've talked about previously, which is we expect the additional 4 products to be available around the end of this year. And other than that, we're not providing any more detail about process around that.

Okay. But still on track for end of year. And strategically, Joe, I guess, how do you look to leverage that portfolio? Do you think it's going to be more powerful for you in your own assets or is this going to be something that you think flourish is more third-party sales?

Both. I mean, I think we've always felt like we're going to use it and we'll be a quick adopter. So -- and that we believe will facilitate other people adopting it. And as we saw with the CF6-80 engine previously, we put PMA in those engines and lease them. And no airline in the world had any issue with leasing an engine with PMA. And some airlines will say, well, we wouldn't necessarily put PMA on our own engines, but no one would not lease an engine.

So similarly, we expect that to be similar in this market as it is. And that's why I think the integration of our products and the ability to cross sell is very powerful and that we have a solution for everyone. There's nobody out there that we can't offer something to of value to help save on maintenance expense, which is an increasingly stands out on P&L's of airlines, as you're well aware. The CASM numbers are going up and maintenance -- and particularly engine maintenance is one of the big drivers. So we think that this -- our ability to offer a wide range of products to anybody that owns an engine or flies an engine is really powerful.

Okay. Appreciate that. And then on the capital side, I guess are you comfortable with where you're running debt levels right now? And do you think you need a little bit more cash? So is there capital required going forward?

We've had access -- I mean, we have a revolver that we've always had access to that access our liquidity. And we've had good access to the debt markets and the preferred markets. So We think that the credit metrics are improving as we've told people we expect to be in the mid-3s debt to total EBITDA, which we achieved -- you look at the numbers we achieved that this quarter, which we were just saying we were hoping to achieve that by the end of the year. So that's good. And we think that, that will position us to be strong BB.

In my experience, as long as you're strong BB, you pretty much always have access to capital. So We're very close to that and think we're in a good position. The need for capital is really driven off of investment opportunities, which is a good thing. And as I mentioned, we are seeing an increase in opportunities which we didn't really expect. But the world is funny and things are always changing. So we're well positioned. If opportunities present themselves to further increase our position in CFM56 market.

And our next question comes from Frank Galanti with Stifel.

I wanted to ask on -- ask about PMA approval for airlines in both the leasing and the module factory. So has there been a change in the past couple of months on further PMA acceptance? And if possible, it'd be helpful to sort of know, of the LPT modules sold, what percentage of those have PMA in it?

I don't think we've sold any modules with PMA. And is that correct? We are flying in our leased fleet what 15 or so engines? About 15 engines with PMA in the CFM56 fleet. We've had 100% of our CF6-80 fleet and Pratt 4000 fleet has PMA in it, which always has been the case. So we've -- in the CFM56 fleet, we have about 15 engines that we're flying and leasing to other airlines, that are flying with PMA.

Is there any particular reason why there wouldn't be PMA in the LPT module from a customer or from a strategic, like, market entry perspective?

No. And as I said, if you look at the development of the CF6-80 engine market, we expect it to be similar. So ultimately, it's purely a matter of timing as to when an engine needs a restoration of the LPTs. And when it does, that's when there's an opportunity to use PMA. You can't -- you just -- you wouldn't necessarily take an engine off wing that doesn't -- is not due for a shop visit and swap out good OEM parts for PMA. You just do it when it's ready and in the shop.

Okay. And then sort of switching it up. Just from a generally higher interest rate environment, how does that from your perspective affect the lease business, particularly lease rates?

Well, it's had a -- I mean, I would say our -- at the lowest rate, our cost of debt was -- we did an issue of 5.5%. And estimates right now, we're trading in this probably 7.5% range on cost of debt capital. So our -- just to bring it to our personal situation, our cost of debt is up about 200 basis points. But I would say our return on assets that we're looking at deal wise is probably up 400 to 500 basis points. So from an investment point of view it's fine. We are we're more than covering the increased cost of debt.

The other side of it is, how does it affect the industry? And I alluded to that earlier and I think a lot of sort of mid-tier leasing companies that used to go out and raise an equity fund and assume they were going to be able to leverage that with relatively cheap debt are struggling. That's hard. It's hard to get the debt. The debt is way more expensive than it was before by orders and magnitude, not 200 basis points, but multiples of that.

So the numbers don't work, which means that they're either not competitive or prices come down or -- and all of that is what sort of leads us to be in a pretty good position, because our cost of debt is up a little bit, not a lot. And we don't leverage each individual deal. So we're in an environment more like 2010 and 2011 where, he who has money or she who has money is in a good spot. So that's kind of the -- that's the macro. On the new aircraft side, we don't really participate in that market. So you'd be better to ask the people who have big new aircraft orders than us.

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

So, Joe, could you talk about the opportunity in the repair market. I know you've spoken about this a little bit in the past. But I'm curious how you're thinking about this opportunity today, both in the U.S. and then in Europe as well. And would you look to potentially do an acquisition here to create some more scale initially versus trying to build it organically from scratch?

Yes, great question. We -- since we last spoke up in Montreal, we have made progress on the repair joint venture, we took a trip through Europe and met with quite a few different options and we've narrowed it down. And so I think we are progressing with -- on that and we had expected or hoped that we would have something by the end of this year that would be in place. And I still believe that, that seems doable and we're still very interested.

As I mentioned, we're increasing our tear down activity fairly meaningfully, which means our repair volume is going to be up materially. Which makes us an even better partner for people who have repair products. So I think it's only gotten better and the repair market is, a lot of people are paying attention to it now because OEM parts prices keep going up and up and up. And so recycling or fixing or repairing, is pretty attractive -- it's a pretty attractive business for everyone. So very excited about that.

Would we buy versus build? And I think we're trying building something from scratch is probably the best overall economics, but it takes a long, long time. So I don't -- I think we'd rather avoid that. And if we can get into something sooner, that would be better. It could involve investing some modest amount of capital, but it's -- I doubt that it's -- we're not going to -- there's no one company out there that has the portfolio that we could sort of acquire. And so it's probably more of a partnership structure.

Got it. Very helpful. And then maybe just a question on your externally managed structure. So you clearly have had a longstanding relationship with Fortress since inception. But just given the growth trajectory of FTAI and the size and scale of the business today versus just a couple of years ago, would you ever look to internalize the business and move out from under the Fortress umbrella?

Well, we got a lot of benefits in being part of Fortress. And we also are in the process of being sold. Fortress is under contract to be sold to Mubadala, which would likely not close until around the end of the year. So it's really a decision the new owner would need .

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

Congratulations on the quarter and the EBITDA growth. So question, you partly answered it, I think, about capital allocation. Right. I mean, obviously, I usually ask about the dividend. The dividend is extremely well covered from free cash flow. Your leverage is now in the middle of your target range for that strong BB.

I mean, what's the appetite for -- and is there any type of allocating capital to increase in the dividend? Or is it just the opportunities for investment in acquisition of assets are just much more attractive? I mean, can you give us -- you've given us the delever, acquisition, dividend kind of priority order before, but you've already hit your leverage kind of target. So can you rank where you view the priorities on capital allocation now given the leverage has improved significantly.

Yes, it's similar. I mean, the number one priority has always been investment opportunities. And as I mentioned previously, there's an uptick in activity there. So I think that is got our attention at the moment. So that's number one. We've never not been able to buy assets that we wanted to buy. And so we want to keep that string unbroken. So that's number one.

And secondly, it's making sure that we have the good credit metrics to maintain BB and to be strong BB, which as you said, we're they're probably a little ahead of schedule. So that's good. And then after that, we would then look at dividends and stock buybacks. But I think the priority is still acquisitions is number one, debt level number 2, and then equity activity.

Got it. And if I can one, what would it take confidence wise? You've been very clear, you're very confident in the guidance. What would it have taken exactly for you to increase the indication for the aerospace products. Obviously, $100 million plus is still your indication. You're at effectively $60 million already for this year with a building pipeline. So are you just being conservative or the comment where unless the market swerves against you? Are you worried about a market swerve or is it just pure conservatism?

Well, I'm always worried about the markets swerves. We've had 2 of them and I didn't predict.

Yes.

So never know. But I mean, it feels very good. And as I mentioned, everything -- we went from having everything working against us to having everything working in favor. So I'm happy about that. And I'm -- every day I wake up, I say, I hope this continues.

So that's -- so no, we're not worried about it, but you always have be worried about it, because it's the airline industry. But no, I think it really is just the passage of time. This is still a relatively new business. We've got new customers and feedback that is very positive in building orders. But I think time is really just -- it's still in the early innings. It's actually really early innings for us and the industry. And I just think it's -- time is sort of what we really just need to continue to build the track record.

And I'm showing no further questions. I would now like to turn the call back over to Alan Andreini for closing remarks.

Thank you, Justin, and thank you all for participating in today's conference call. We look forward to updating you after Q3.

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