FTAI Aviation Ltd (NASDAQ:FTAI) Q4 2023 Earnings Call Transcript

FTAI Aviation Ltd (NASDAQ:FTAI) Q4 2023 Earnings Call Transcript February 23, 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 welcome to the Q4 2023 FTAI Aviation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would 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 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 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 $0.30 per share will be paid on March 20 based on a shareholder record date of March 8. 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 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 Products segment, a 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 Q3. Additionally, on the acquisition side, we acquired at attractive prices, $229 million in new equipment, comprised of 10 aircrafts and 33 engines, which will contribute to further growth in future Leasing EBITDA. We’re very comfortable in 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 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 and 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, acceptance of and demand for our second focus engine, the V2500. With this, we have the ability to become the leading full-service aftermarket power provider for all 737NG and A320neo 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 will turn the call back to Alan.

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

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Q&A Session

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

Kristine Liwag: Hey, good morning, everyone.

Joe Adams: Good morning.

Kristine Liwag: Hey, Joe. On the leasing portion, we saw a sequential decline in revenue. Can you talk about what drove this slight stepdown?

Joe Adams: Yes. The biggest driver was we had four aircraft A320s on lease to Bamboo Airlines, which we terminated in the third quarter last year. So they were taken back, they were off leased for Q4. And there’ll be off leased for Q1. That revenue is about $5 million per quarter of EBITDA. And the reason we did that is 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 a very NPV positive for us, but it had a negative impact on revenues and EBITDA in Q4 and will also affect Q1 of 2024.

Kristine Liwag: Thanks. And you know, Joe, saying that you were able to release these assets at a higher monthly lease rates and better terms, can you talk about the overall environment that suggests that it seems like demand continues to outpace supply? So is there a general view when you’ve got assets up for re-lease, like how much of a step-up in the monthly lease rate 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%. So if the operator is either 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 than 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. In the quarter, you were able to acquire 33 engines and 10 aircrafts. Can you talk about the availability of assets in the market? I guess to some degree you guys are very unique because you’re the asset owner and you also have an MRO capability. Does this give you an edge in being able to buy assets that maybe other just pure leasing assets or operators may not be interested in?

Joe Adams: Yes, absolutely. We — particularly on the engine side, if an engine is tagged unserviceable, it’s very — there are very, very few buyers for that engine other than pure part-out companies, which typically pay very low prices. And so we’re uniquely positioned because we can take an engine that’s tagged unserviceable and repair it. And it could be — the best situation is that it’s unserviceable because of only one module, in which case we get the other two modules at a discount when it’s really not. They shouldn’t be trading at a discount, but they do because it’s coupled with an unserviceable module. So we are — we can buy anything. And so when people put up packages and some buyers like to nitpick, and they’ll say, I want that one, I want that one, but I don’t want that one.

The seller is 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 other people for that reason. There’s nothing we can’t digest.

Kristine Liwag: Great. Thank you for the color.

Joe Adams: Thanks.

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

Josh Sullivan: Hey, good morning.

Joe Adams: Good morning.

Josh Sullivan: So I just wanted to get some color on the market response for lease rents after the FAA put in the production cap 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 to today?

Joe Adams: Sure. David Moreno will take that.

David Moreno: Hi, Josh. 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 $45,000 to $50,000 plus maintenance reserves. Those days are now long gone. Today…

Joe Adams: [That’s for one] (ph) CFM56 engine.

Josh Sullivan: Yes, that’s per engine. Yes. Today those days are long gone. Lease rates are up $75,000 plus maintenance reserves and those continue to rise as there’s a shortage of CFM and V2500s today in the market.

Joe Adams: And the cap, as you mentioned, the cap on the MAX production means that people are going to keep their NGs and CLs longer because they can’t meet their growth projections with the new aircraft. So that cap is likely to extend the imbalance between supply and demand for at least a couple of years.