FTAI Aviation Ltd (NASDAQ:FTAI) Q1 2024 Earnings Call Transcript

FTAI Aviation Ltd (NASDAQ:FTAI) Q1 2024 Earnings Call Transcript April 26, 2024

FTAI Aviation Ltd isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the FTAI Aviation First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Alan Andreini, Investor Relations. Please go ahead.

Alan Andreini: Thank you, Shannon. I would like to welcome you all to the FTAI Aviation first quarter 2024 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 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 – 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.

Joe Adams: Thank you, Alan. To start today, I’m pleased to announce our 36th dividend as a public company and our 51st consecutive dividend since inception. The dividend of $0.30 per share will be paid on May 21 based on a shareholder record date of May 10. Now let’s turn to the numbers. The key metric for us is adjusted EBITDA. We began the year strongly with adjusted EBITDA of $164.1 million in Q1 2024, which is up 1% compared to $162.3 million in Q4 2023 and up 29% compared to $127.7 million in Q1 of 2023. During the first quarter, the $164.1 million EBITDA number was comprised of $104.8 million from our Leasing segment, $70.3 million from our Aerospace Products segment and negative 11% from Corporate & Other. Turning now to Leasing.

Leasing had another good quarter, posting approximately $105 million of EBITDA. The pure Leasing component of the $105 million came in at $98 million for Q1 versus $99 million of Q4 of last year. With exceptionally strong demand for assets and the commencement of the Northern Hemisphere summer season, we expect meaningful growth in Q2. We remain very confident in Leasing EBITDA of $425 million for the year excluding gains on asset sales. Part of the $105 million in EBITDA for Leasing came from gains on asset sales. We sold $31.9 million book value of assets for a gain of $6.7 million, slightly below our expectations but we have more assets that are coming in Q2 and the rest of the year and are comfortable assuming gains on asset sales of approximately $12.5 million per quarter or $50 million for all of 2024.

Aerospace Products had yet another excellent quarter with $70.3 million of EBITDA at an overall EBITDA margin of 37%. We sold 72 CFM56 modules in Q1 to 16 unique customers. Additionally, we sold six V2500 engines in Q1 to three customers through our recently launched V2500 engine program. We continue to see the tremendous potential in Aerospace products and are comfortable that we will generate approximately $250 million of EBITDA in 2024, the high end of our previous range. Our Maintained Repair and Exchange or MRE model for the two most widely used engines in commercial aviation produces cost savings and operational flexibility for airlines and aircraft lessors by allowing them to avoid shop visits through engine or module exchanges. Our recently executed perpetual power agreement with LATAM covering over 60 V2500 and CFM56 engines illustrates the growing acceptance of airlines and lessors to outsource this activity to FTAI aviation.

Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be approximately $725 million not including Corporate & Other. With that, I’ll turn the call back to Alan.

Alan Andreini: Thank you, Joe. Shannon, you may now open the call to Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Kristine Liwag with Morgan Stanley. Your line is now open.

Kristine Liwag: Hey, good morning, guys.

Joe Adams: Good morning.

Kristine Liwag: Yesterday you announced the successful execution of a perpetual power agreement with LATAM Airlines. Can you provide more color on what this agreement entails? How meaningful is this contract?

David Moreno: Hey, Kristine, this is David. So to provide additional color on LATAM, the deal itself is predominantly a V2500 maintenance repair and exchange contract. It does have a smaller component related to the sale leaseback, but what we’re doing is we’re building engines ahead of a shop visits and we’re providing engine exchanges that are avoiding shop visits for LATAM and offering flexibility. As far as EBITDA and how that’s going to show up, we’re going to be recognizing V2500 MRE contribution as soon as engines are exchanged. There’s going to be a ramp-up period. So as we exchange more engines, there’s going to be a ramp-up on Aerospace EBITDA. We’re expecting ramp-up to take about two to three years, as well as there’s a smaller contribution on the leasing side that’s going to commence as soon as we close those airplanes.

Kristine Liwag: Thanks, David. And then when you said the ramp up over two to three years, you said over 30 aircraft would be part of this agreement. Can you parse out the timing of when that could occur? And also regarding the EBITDA contribution of this deal what are the economics?

Joe Adams: Well, we’re not giving a specific number on that yet. I think the — it’s a bit of a function of how many engine exchanges occur and how quickly they occur and we don’t have certainty on that yet. But we do expect that it will ramp up such that we have — it will be a needle mover in years two, three, four, five for our Aerospace Products business. So that’s really all we’re saying at the moment at this point. It’s going to take a little bit of time for that to kick in. But then once it does, it’s a needle mover and it’s very stable.

Kristine Liwag: Thanks. If I could do one more follow-up on this. With the V25 MRE that you announced earlier this year, how should we think about the LATAM contract as a proxy for economics for additional V25 MRE. Should this be what we look at for additional V2500 contracts? Is this a good starting point, is this better? Any sort of context would be helpful.

Joe Adams: It’s a great starting point. And we would love to do more of these. And we hope we will. We have several projects that are similar nature. Each airline, obviously, has their own requirements and their own specs. So they’ll all be a little bit different but we hope this model is used by other airlines. And we — in discussions with the big operators of V2500s, we’ve gotten very positive feedback on this. So we expect to do more and we hope to do more.

Kristine Liwag: Great. Thank you. I’ll stop there.

Operator: Thank you. Our next question comes from the line of Louis Raffetto from Wolfe Research. Your line is now open.

Louis Raffetto: Thank you. Good morning.

Joe Adams: Good morning.

Louis Raffetto: Joe on the last or maybe October earnings call you said you thought maybe 200 module swaps not a precise number but ballpark for 2024 but doing 72 in the first quarter, any thoughts on that now? And then rolling into that obviously you’ve got module swaps, you’ve got the MRE and the V2500 where you just said you’re doing these shop visits ahead of time. How should we think about capacity limitations at this point?

Joe Adams: So on the first point I think we — my recollection is we indicated between 250 and 300 module swaps or exchange sales for this year for 2024, and so we’re obviously on a great path given the first quarter of that and we have pretty strong backlog. So we feel very good about that number. We have built our plan around being able to deliver that. So we have ample capacity at our two maintenance facilities that we use the Montreal facility and the Miami facility. So we’ve got adequate capacity to do that. Obviously we’re working to increase capacity and ramp up because we want to stay ahead of this and we do see substantial upside in the years ahead. So we’re building additional capacity but we have in place what we need to deliver this year.

Louis Raffetto: Okay. Great. Thank you. And then — I’m sorry go forward Joe.

Joe Adams: What was the second question, or did I?

Louis Raffetto: No. You covered both of them. Sorry, I was just going to ask a quick one Angela. Just any commentary around how to think about cash flow in the quarter and rest of the year?

Angela Nam: Sure. So our cash flows for this quarter as you can see, our operating cash flows were about neutral but that’s because part of our proceeds from sales is sitting and investing. We believe for the rest of the year our cash flow operations will improve significantly.

Louis Raffetto: Okay. Thank you very much.

Operator: Thank you. Our next question comes from the line of Josh Sullivan with The Benchmark Company. Your line is now open.

Josh Sullivan: Good morning. Just — with the addition of the V2500 here, can you just help us understand some of the relative savings maybe versus the GE56 for an airline. I want to say in the past you’ve talked about a $3.5 million differential on the GE56. But is there a way to think about that for the V2500?

Joe Adams: Yes, we have the same set of same approach to that engine as we taken CFM56 and we’ve looked at sourcing used service raw material doing hospital repairs potentially PMA better — being able to get better deals with MROs because of volume commitments. And it’s all on the table. The shop visit cost for the V is higher than the CFM56. It’s typically full front to back is $9 million to $10 million versus probably $7 million for the CFM56. So we think we can get similar dollar savings out of using all those albeit on a higher price. So it’s a lower percentage, but it’s still the same amount of savings. So I think we feel very good about that. We haven’t locked in all of the partners that we will — that we’re talking to right now on this program. And as the volumes increase and build we’ll be able to give more specifics around who we’re working with and what are the components of that.

Josh Sullivan: Got it. And then just given the move in the stock all the changes, do you have a sense of the investor base at this point versus last year? Any major changes you’re seeing?

Alan Andreini: You know, hi it’s Alan. There have been. And I think that there are people that are initiating on the stock right here. And I think when you see the 13 Fs filed for this quarter in May 2015 you’re going to see some names that you’ve never seen before.

Josh Sullivan: Great. Thank you for that, Alan.

Alan Andreini: Thanks.

Operator: Thank you. Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is now open.

Giuliano Bologna: Good morning. Congrats on the continued outflows on the product segment. What I was curious about asking was that — we would obviously love to have an update about PMA. But with that being said we’ve heard a lot of discussion recently about the industry pushing into PMA and increased demand for PMA from airlines. I’m curious if you agree with that? And why do you think that’s happening?

Joe Adams: Sure. So on the first part we continue to make very good progress on getting approval on the next set of parts. And we don’t have — we’re not giving a specific estimate on the timetable but very good progress. We — and the quality and the performance of those parts is going to be terrific and we’re very excited about that. So as I said consistently it’s worth the wait. On the acceptance PMA I mean, I think, that a lot of in the recent last year or so people focus a lot on the supply chain reliability and when you have a sole source for critical parts that’s a bad dynamic. And so I think people are recognizing that PMA not only delivers cost savings in a very high-quality product, but it delivers a second source of product which can be very, very important if you have an engine sitting in a shop and shop turn times are stretching out beyond six months now if you’re waiting for a single part and you have a single supplier.

And they tell you they can’t get you that for a year then you’re in a bad position. So that’s I think, why it’s becoming more talked about or maybe more people are recognizing that it’s not just a cost saving opportunity.

Giuliano Bologna: That’s very helpful. And I will turn back into queue. Thank you.

Joe Adams: Thanks.

Operator: Thank you. Our next question comes from the line of Hillary Cacanando with Deutsche Bank. Your line is now open.

Hillary Cacanando : Hi. Thank you for taking my question. So this one for Angela. Angela you have two preferreds that go from fixed to floating this year one in September and one in December. Obviously, you’ve had some great returns on those preferred securities. Could you talk about what your plans are for them? And how your discussions are going with the rating agencies?

Angela Nam : Sure. Hi, Hillary. So, yes, you’re correct in our Series As and Bs are converting to floating later this year. And we’re currently planning on refinancing those preferreds before those reset dates. So we continue to reassess that. In regards to the rating agencies, our current analysts are those that typically cover aircraft lessors. But each rating agency is recognizing the great contribution that we’re getting from the Aerospace Products business and the different metrics that will be involved in those sectors. So we are bringing in Aerospace Products business coverage analysts to each of our discussions with the rating agencies this year, which we think will be beneficial to our ratings.

Hillary Cacanando : Great. Thank you. And then my second question is just on the Leasing side. You mentioned that the demand for these assets remain strong. I know the gains could be lumpy. So how should we think about the segment for the rest of the year? And could you just talk about the pipeline for that segment? You sounded pretty excited about it in terms of what the pipeline looks like for the second quarter?