Q4 2023 FTAI Aviation Ltd Earnings Call

Participants

Alan Andreini; IR; FTAI Aviation Ltd.

Joe Adams; CEO; FTAI Aviation Ltd.

David Moreno; COO; FTAI Aviation Ltd.

Kristine Liwag; Analyst; Morgan Stanley

Josh Sullivan; Analyst; The Benchmark Company

Myles Walton; Analyst; Wolfe Research

Guiliano Bologna; Analyst; Compass Point

Frank Galanti; Analyst; Stifel Financial Corp.

Brian McKenna; Analyst; JMP

Presentation

Operator

Good day and welcome to the Q4 2023 funding three FTAI Aviation's earnings conference Call. (Operator Instructions) As a reminder, this call is being recorded. I'd like to hand the call over to Alan Andreini, Investor Relations. You may begin.

Alan Andreini

Thank you, Michelle. I would like to welcome you all to the FTAI fourth-quarter and full-year 2023 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; Angela Nam, our Chief Financial Officer; and David Moreno, our Chief Operating Officer. We have posted an investor presentation in 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 annual report filed with the SEC.
Now I would like to turn the call over to Joe.

Joe Adams

Thank you, Alan. To start today, I'm pleased to announce our 35th dividend as a public company and our 50th consecutive dividend since inception, the dividend of $0.3 per share will be paid on March 20 based on a shareholder record date of March eighth.
Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We ended the year strongly with adjusted EBITDA of $162.3 million in Q4 2023, which is up just over 5% compared to $154.2 million in Q3 2023 and up 31% compared to $123.5 million in Q4 of 2022. During the fourth quarter, the $162.3 million EBITDA number was comprised of $121.8 million from our leasing segment, $54.6 million from our aerospace product segment and negative $14.1 million from corporate and other.
Now let's look at all of 2023 versus all of 2022. Adjusted EBITDA was $597.3 million in 2023, up 40% versus $428.1 million in 2022.
Turning now to leasing leasing had another good quarter, posting approximately $122 million of EBITDA. The pure leasing component of $122 million of EBITDA came in at $99 million for Q4 versus $102 million in Q three. Additionally, on the acquisition side, we acquired at attractive prices, $229 million in new equipment comprised of 10 aircraft and 33 engines, which will contribute to further growth in future leasing EBITDA.
We're very comfortable to end up producing approximately $425 million of leasing EBITDA for 2024, excluding projected gains on asset sales of approximately $50 million, part of the $122 million in EBITDA for leasing came from gains on asset sales. We sold $33.5 million book value of assets at a 40% margin for a gain of $22.7 million in the quarter, benefiting from exceptionally strong demand globally for our portfolio of assets, and we remain comfortable assuming gains on asset sales continue at continuing at approximately $12.5 million per quarter or $50 million for all of 2024.
Aerospace products had yet another excellent quarter with $54.6 million of EBITDA at an overall EBITDA margin of 34%. We sold 61 modules in Q4 to 17 unique customers comprised of six new customers and 11 repeat customers. We see tremendous potential in aerospace products and feel good about generating EBITDA for 2024 towards the middle or higher end of the $200 million to $250 million range. We continue to expect strong growth in aerospace products as customers experience the clear benefits of our MRE. products and programs, we are both expanding the number of customers and the usage per customer at an accelerating pace.
Additionally, we are very pleased with the introduction and acceptance of and demand for our second focus engine, the V. 2,500. With this, we have the ability to become the leading full service aftermarket power provider for all seven three seven MG. and A. through 20 neo aircraft globally.
Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be between $675 million to $725 million, not including corporate and other.
With that, I'll turn the call back to Alan.

Alan Andreini

Thank you, Joe. Michelle, you may now open the call to questions and answers.

Question and Answer Session

Operator

(Operator Instructions)
Kristine Liwag, Morgan Stanley.

Kristine Liwag

Hey, good morning, everyone. From a Joe. You know, on the leasing portion, we saw a sequential decline in revenue. Can you talk about what drove this decision?

Joe Adams

Yes, yes, the biggest driver was we had four aircraft, a three 20s on lease to bamboo airlines, which we terminated in the third quarter last year. So they were taken back. They were off lease for Q4 and they'll be off lease for Q one. That represents about $5 million per quarter of EBITDA. And the reason we did that is that the credit wasn't great. And we had other opportunities to put those out on lease at higher rates and better terms. And so ultimately, it's very NPV positive for us, but it had a negative impact on revenues and EBITDA in Q4 and will also affect Q1 of 2020 for 2024.

Kristine Liwag

Thanks. And you know, Joe, you were saying that you were able to re-lease these assets at a higher monthly lease rate and better terms, can you talk about the overall environment that suggests that, you know, it seems like demand continues to outpace supply resurge in that general view when you've got assets up for re-lease, but how much of it, but in the monthly lease rates are you seeing for those assets?

Joe Adams

Well, it depends on when the lease was originally done. But in general, lease rates for aircraft are up anywhere from 20% to 40% or so, if the operators do not a great operator or the operator isn't willing to pay market rates, then you move the assets. It's always more expensive to move and to keep it where it is. So you favor extensions over new leases. But in this case, we just didn't have confidence in the Company. So we decided it was better, much better to move them.

Kristine Liwag

Great. Thanks. And if I could squeeze one last question on in the quarter you were able to acquire 33 engines and 10 aircraft about the availability of assets in the market. I guess to some degree you guys are very unique because you are the asset owner and you also have an MRO capability. Does this give you an edge and be able to buy assets that may be other just pure leasing as assets or operators may not be interested in?

Joe Adams

Yes, absolutely. We particularly on the engine side, if an engine is tagged on serviceable, it's very very, very few buyers for that for that engine, other than pure part-out companies, which typically pay very low prices. And so we are uniquely positioned because we can take an engine that's tagged on serviceable and repair it and it could be the best situation is that it's on serviceable because of only one module, in which case we get the other two modules at a discount when it's really not it shouldn't be trading at a discount, but they do because it's coupled with another serviceable module.
So we are we but we can buy anything. And so when people put up packages and some buyers like to nitpick and they'll say I want that what I want that wanted, but I don't want that when the buyer, the sellers like I don't want to deal with that. I want one buyer. And so we're able to acquire, I think, much more effectively than than other people do and for that reason, there's there's nothing we can do no digest.

Kristine Liwag

Great. Thank you for the color, and thank you.

Operator

Josh Sullivan, The Benchmark Company.

Josh Sullivan

So I just wanted to get some color on the market response for lease rents after the FA. put in production on the MAX earlier this year? And I guess maybe it would be helpful to also understand just how lease rents have walked from pre-COVID levels today.

Joe Adams

Sure. David Moreno will take that, Josh.

David Moreno

So lease rates typically are 60,000 plus maintenance reserves during COVID. There were special arrangements made, let's say, power by the hour or rates that were 45 to 50,000 plus maintenance reserves those days and now long gone today, one CFM56 and yet that's per engine.

Josh Sullivan

Yes, today those days are long gone up. Lease rates are up 75 plus plus maintenance reserves on and those continue to rise as there's a shortage of CFMB. 2005 hundreds today in the market and the cap, as you mentioned, the cap on the MAX production means that people are going to keep their NGs and CEOs longer because they can't meet their growth projections with the new aircraft. So that that cap is likely to extend the imbalance between supply and demand for at least a couple of years?
And then secondly, I just I know you've talked about the parts business averaging around 35% EBITDA margins, obviously 50 plus is a good result this quarter and EBITDA. But what are the moving parts around maybe EBITDA per module?

David Moreno

So it's a it's a function of mix, certain modules. We have higher margins on particularly the core, but it will be a function on the size of the customer and it will be a function on the timing and the urgency with which they need the modules. So it sort of all goes into the mix on a quarterly basis. And we've been averaging about 500,000 per module in each of the quarters. We've had a couple of times where we've had some positive surprises because in other reviews, we often can buy things really cheaply as I mentioned, we buy a package of engines. We might end up with a very low basis in a module that produces an outsized gain for that reason. So but I would say that the 5,000 is been pretty steady over the last couple of years, and it's a good assumption going forward until we have it's more PMA.

Josh Sullivan

Thank you for your time.

Operator

Myles Walton, UBS Research.

Myles Walton

Thanks. Joe. Could you talk about the 25 hundreds Emory program where it's being words, how big the contribution be? And then in respect to your comment that you do, your vision for FTI is to be the leading full-service aftermarket provider globally for the the NG and the or the CFM and the 56 in the B. 2,500 engine, can you give us a picture of what what does that mean in terms of quantum, who is the leader today,

Joe Adams

I'm not sure. So maybe a bit of history. I mean, we have owned the V2500 for several years, so it's not that we just discovery, we've had about 50 to 60 engines in the portfolio for a while. Starting about six months ago. We got particularly interested in it with the GGF. power powder metal issue coming on the scene, it was obvious that many of those had 25 hundred operators who had thought they would be phasing those engines out over the next three to four years, we're going to end up keeping them much, much longer. And that and that's the main driver what piqued our interest in that engine. So about six months ago, we started hiring people building up our engineering technical talent expertise, talking to MRO partners, lining up assets to buy direct.
And it's been it's been very, very successful. It's fallen in place, probably a lot better than I would have ever expected. And as the demand for shop visits is extremely high and a lot of operators who don't have the capital or the or the ability to shop those engines today. So there's a tremendous opportunity for us to step in and do that.
We have today about 15 engines in maintenance shops. We're using two different shops right now. There's multiple for items that we've discussed. And we're sort of it's a bit of a test drive right now where we're we've got some very attractive short term deals. And ultimately, we will select probably a long-term partner on the MRO side or two to work with over the next few years. But we haven't we haven't done that that fully. We also were very close on a large fleet deal where we would take over the management of engines on over 30 aircraft for an airline V. 25 hundreds, and we would then be responsible for engine exchanges. So we've as we have used the term MRE, we maintain repair and then exchange. So in an engine is around how these the shop visit.
The airline gives that back to us and we give them an engine that's been been through a performance. Restoration has hours and cycles that they that they need to keep flying So on that were fairly close out, I expect in the next few weeks, and we have a couple of other deals like that. So the or the prospects are pretty exciting and it is it does sort of give us a complete offering for anybody that operates a seven, three seven MG. and A. through 20 CO., we can provide CFM56 or V2500 power. And that really is our mission is to provide to airlines flexibility and the power they need. So we always have an engine available if they need it. And if they have too many, they give us they give it back to us without a fight over return compensation. So that's very compelling for a lot of airlines. And then we provide them immediate and tangible cost savings because they don't have to manage the shop visit. They don't have to have an engineering department.
They don't have to go provision spares and they don't have to find out that the change is what they thought was going to cost $1 million cost $4 million or so. And yet. There's a growing recognition that that is an easy thing for airlines to buy into as we can save them time and money and provide them great flexibility. As we say to them, what don't you like about that? Which part of it is is unpalatable and there isn't a target. So Intel.
So it's a great it's a great sell, and that's that's where we are shooting for, as our reason for being as a company is to is to provide that leading provider of aftermarket power to the global industry for those aircraft in terms of contribution next year, I mean, it seems to be $2,500 should add $25 million of EBITDA easily with some upside. So I'm on we're still early on. And as I mentioned, we've got a couple of large deals that could swing it one way or another, but but it is a yes, it's off and running in and I think very well received and great timing because of that, the need for that engine.

Operator

Guiliano Bologna, Compass Point.

Guiliano Bologna

Your line is open and congratulations on another great quarter. On my first question, I'm curious, what do you think you're seeing now accelerated acceptance in the aerospace area?

Joe Adams

Well, I think people that have used that have experienced the fact that they save time and money and they have great amount of flexibility and they they often come back afterwards and say, I wish I had known about this before. I mean, why why wouldn't I want to do this so that once people experience the ease with which they can avoid a shop visit, which is usually very painful for people know when I've talked to in the airline industry ever told me after south, that was a great experience. So they all have a stars. And I think what we provide is the easy button and it's caught on. And then word-of-mouth also helps because once one airline does it and they go to conferences and they have people in their engineering departments and other airlines. They tell them, You should look at this and it worked really well. All of that just keeps and building the momentum.
That's right. And then I guess the inevitable question, can you give us an update on the PMA submissions and program tour?
So great progress continues. We're very happy with the development of what we've seen in the test results, which actually speaks to the the performance of those underlying parts when they're in operation, which is critical and very important. So So all good on that on obviously, on the timing side, the FDA runs a very rigorous process, has been an extremely successful program for them TMA. It never had any safety issues, but they are extremely careful and thorough. So it's inherently very difficult to predict when the actual completion of those approval processes are received. But but we're very excited and we definitely ours are 100% sure it's worth the weight.

Guiliano Bologna

That's very helpful. And then one last one. Are you still seeing discounts for off-lease assets? It looks like you bought a lot of off-lease assets in the fourth quarter?

Joe Adams

Yes, as I mentioned, if you have an asset that needs maintenance you immediately, if it's off-lease needs maintenance, you've you've narrowed the field of buyers down to like a handful of people. And so that's that dynamic has not yet changed, and I'm not sure it will. I think people are still most of the people we see in the marketplace with capital to invest are looking for assets that are auto lease that don't need maintenance. So so that's really where we can. And as I said, we can fix anything and we relish fixing things because that's how you add value CoCreate.

Guiliano Bologna

That's very helpful. Thank you so much and I will jump back in the queue.
Thank you.

Operator

Frank Galanti, Stifel.

Frank Galanti

Great.Thank you for taking my questions. And I wanted to talk about sort of EFT Aviation's competitive positioning in the module swap business. And so first, I'm doing on the V. 2,500 GC., not having PMA at first party PMA. If you start talking about that dynamic relative to the CFM56. And then from a broader perspective, it's my understanding that that you can get module swaps from other people, other MROs, other airlines with MROs and to do module swaps and ended. This is sort of not a new function. And so from my perspective, it feels like P&A is the sort of competitive advantage here. And I don't see that or the modularity on the 25 hundred's relative to the CFM56 sort of my perception of it. Can you sort of talk about where I'm misunderstanding that or those know?
Sure. Well, there's a couple of concepts in there that are mixed together, but the there is PMA available for the V. 25 hundreds. So that's an option for us to be able to utilize PMA. We don't have the same arrangement where we develop the PMA. So we would be more of a on a consumer on a commercial basis with the with the manufacturers if we decided to use that. So that's that's an opportunity for cost savings on the V. 2,500. And there are other opportunities such as use serviceable material that we have a good line of sight to be able to utilize. There are some repairs that we have. We are working on.
An engineering team is working on. There are favorable agreements that we've struck with some of them, the maintenance shop. And so when you when you add it all up, it's not the same playbook exactly as the CFM56, but it's the same process of going through the cost of shop visit and figuring out where you can take out costs and where you can do things smarter and better. We think we can perform a full restoration of the V. 2,500, which today has a full list price of about 10 million. We think we can do that for 7.5 million. So it's roughly about a CAD2.5 million savings available for us to be there for our for us or for our customers or for both of us if you compare that on the CFM56 to savings with full PMA availability on our on our favorable terms of shop visits is roughly about 6.8 million. And we think we can bring that in a little about three and a quarter million or so. So it's a dollar amount wise, CFM is better and it's percentage-wise better. But V 2,500 is still good.
And the second question was about module availability and there are you can find modules on an ad hoc basis from an MRO. We actually buy some we bought modules from MROs and they buy from us. And because you don't always have the module, you're looking for and inventorying that. So that is one of the competitive advantages of our module factories. We have enough in our fleet over 400 CFM engines. That's 1,200 modules.

Joe Adams

There's no one that has anywhere near that availability that I'm aware of so inventories, a modules in a repaired state is a competitive advantage and I say repaired state because we do repair them and resource them. And if not repaired than their than they're pretty worthless from no credit for it from an airlines point of view. So it's a package is all of those things above.
And when we say people say what are you and we say, Well, we're we're an MRE. We maintain return exchange, which is very different than anybody else in the industry. And when we combine that with the ability to provide power, we have the ability to deliver what I think is our ultimate competitive advantage, which is flexibility and cost savings. That's our pitch.

Frank Galanti

Okay. That's helpful.
You.
And sort of thinking about the customer experience.
Then a little further on the module side to the left, I guess, into 4Q 22, the deck and said that you had sold over 100 modules to 26 customers. And based on this release, it said 100 semi modules to 30 customers. And if you sort of go through the press releases and look at each sort of quarter, you said, hey, there are new customers that are five or two or six in this quarter. You sort of add those up to 26 you get to 40. So is that some sort of from my understanding then there were 30 customer, 26 customers in 2020 to 30 customers in 23, but that's at least 10 customers that didn't come back in 23. Is that the right way to think about those numbers? I mean, can you sort of talk about from their perspective why that would be and you sort of saw that customer is going away in a year of note?

Joe Adams

I don't think the numbers are exactly right, but there are times where a customer to be a repeat customer has to have a need. So not every customer is a repeat customer every quarter. So in other words, we don't have a shop visit you don't need a module. So it's a timing issue. I think what we've said is we've have a very, very high level of repeat customer business, but sometimes you don't you might have a customer that goes out of business. So it's you can't have 100% repeat customer?
No, in every quarter. It just doesn't happen that way. You have to have you have to have the need, but it's been very, very high. The customers that have had to use our modules. I've always said that was a great experience, and I would like to do it again and they will do it again when they have a need.

Frank Galanti

Okay. Okay, great. Thank you for taking my questions.

Operator

Brian McKenna, Citizen's JMP.

Brian McKenna

Okay. Great. Thanks. Good morning, everyone. So it's great to see another very strong quarter within aerospace products. So within the $55 million of adjusted EBITDA in the fourth quarter. Was there any year-end seasonality or any one-off benefits? Or is it really just continued strength across the business given just increasing levels of demand for the products and services. And I'm just trying to get a sense of a good jumping off point for the segment to start 2024.

Joe Adams

Yes, I think we've mentioned to people, there was a onetime of $5 million and write-up in the value of quick-turn appetite.So we made an initial investment and quick turn in January and then bought consolidated and bought the remaining interest in December. But accounting requires you to revalue your initial investment to fair value at the time of consolidation. So that resulted in a one-time noncash accounting gain of about $5 million.
So I don't think we experienced any seasonality in the fourth quarter, and I don't think we have enough history and market penetration actually we'll see what seasonality effects there will be on that business yet. It's still growing too fast.

Brian McKenna

Yes. Got it. Okay. Great. And then just broadly, the business clearly is reaching new levels of scale every quarter here. And so if I look out over the next couple of years, cash flow is really going to take another step higher. So how should we think about the CapEx needs of the business over time, the absolute level of cash needed for investment back into the business. And again, I'm just trying to get a sense of how you're thinking about the timing of maybe generating some excess cash flow and then what some of the uses of that excess liquidity will be?

Joe Adams

Sure. So from a cash flow availability we think about it is if you start with EBITDA and you strip out gain on sale and then you deduct maintenance CapEx for the for the engines, which is what you would need to do to keep the engines flying in the repaired condition? Do you think that number's about between $60 million and $80 million per annum, so that leaves $300 plus million of available capital to do whatever we want with. So therefore, our priorities have been to manage to a strong double-B rating, and we think we should achieve that and we're there with one agent to agencies already, but we want to be upgraded.
So we want to maintain the strong coverages. Second is to do new deals. And obviously, we have a new engine now V 2,500. So we'll be investing capital in more than 25 hundreds. Today we own about 60. I would expect we will own probably 150 to 200 of those engines by the end of this year. So that's an opportunity for us to to invest, but it's discretionary.
And then thirdly, we generate cash, we would look to and either stock buybacks or dividends for excess capital. So so those are the priorities. I think it's this year is still a pretty active investing opportunities. So I think we'll see some really good deals, which I think would be accretive and generate very good results for shareholders. So we don't have we don't see a lack of investment opportunities at this point.

Brian McKenna

Got it. Thanks, Joe.

Operator

David Zimbalist, Barclays.

No more than Joe. Thanks for take my question. First one is yes, cash position. Yes, a little bit stronger. Could you talk about the near term kind of working capital needs and near-term capital intensity, given that you're expanding the products business out. Is that has that changed what you're thinking for working capital?

Joe Adams

It leads to cash and the revolver we have in the near term and no I mean, we had a year end, we had $90 million of cash, $300 million undrawn on the revolver, so almost $400 million of available liquidity. I think we have $200 million of LOIs in the pipeline right now for deals. And so we're we're good and we'll also we'll generate some more cash by selling assets to throughout the year. So So don't see any significant and needs or issues at this point.

Great. And then with the FAA, you talked about PMA kind of broadly process, but specifically the changes of leadership at the FDA and that with the FDA and the new focus around Boeing, you have the shift of resources there. Do you see either of those events that are impacting your PMA process here over the near medium term?

Joe Adams

I think that the the main issues that the FDA had from our perspective were during COVID. There was just a normal turnaround times and they lost they have high turnover of personnel or some experienced personnel. So those problems have been addressed and have been largely fixed from from what we see. So the other issues that you mentioned, the new administrator and the MACs have not. And we have had no saying that there's any impact from either of those. But the main thing was the was the staffing and the people coming into the office thing which has been has been addressed.

Thanks very much.

Operator

ELAM Grabe, BCIG.

Hey, good morning.
Thanks for squeezing me in. So I want to start with the well intervention vessels it looks like both didn't work during the quarter. How are you thinking about these assets, especially given the well intervention is going through a bit of an upcycle cash that could be recycled into the portfolio?

Joe Adams

Yes, you're correct. It was a bit of a headwind for us in the fourth quarter that both vessels were off-hire, the Pioneer, the smaller vessels now on hire. It started as charter in December. I think NextEra generated about $6 million a year in EBITDA. So that's and that's now on a five year five year charter. So it's in good shape and we're actively marketing that vessel for sale.
The other vessel, the pride they had a breakdown of maintenance is that on the crane, it's still in repair until March. And we expect that there's a charter in place for that to go on hire in April, which is actually a pretty good charter. So you will see continuing headwinds in the first quarter. And then hopefully both vessels will be on hire in the second quarter and onward, and we hope to sell both vessels hopefully this year.
That's helpful. And then just on the 2025 notes coming due early next year, are you planning to pay that down, reduce leverage or could we see those refinanced sooner?
It was actually late next year, I think so October next, yes. So that we have a lot of time we have over 18 months and we evaluate the market from time to time and think about those, but there's not is that a real important deadline yet. So we're we're monitoring it.
Okay.

Operator

Thanks very much, everyone.Thank you. That concludes the question-and-answer session. I'd like to turn the call back over to Alan Andreini for any closing remarks.

Alan Andreini

Thank you, Michelle, and thank you all for participating in today's conference call. We look forward to updating you after Q1.

Operator

Thank you for your participation. This does conclude the program, and you may now disconnect. And everyone have a great day.