Q3 2020 Fortress Transportation and Infrastructure Investors LLC Earnings Call
Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q3, Twentytwenty fortress transportation and infrastructure investors LLC earnings Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one on your telephone keypad. Please.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Mr., Alan and draining. Thank you Sir Please go ahead.
Thank you operator.
I'd like to welcome you all to the fortress transportation infrastructure third quarter 2020 earnings call.
Joining me here today are Joe Adams, our Chief Executive Officer, It's got Christie, Kelly, our Chief Financial Officer.
We have posted an investor presentation in our press release on our website, which.
Which we encourage you to download if you have not already done so well.
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 Sad 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.
Leading 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.
Oh, Yes, you see.
Now I would like to turn the call over to Joe.
Thank you Alan.
Start I'm pleased to announce or 22nd dividend as a public company and our 37th consecutive dividend since inception.
The dividend of 33 cents per share will be paid on November thirtyth based on the shareholder record date of November 16th.
Now, let's turn to the numbers.
The key metrics for us or adjusted EBITDA, and fad or funds available for distribution to.
Adjusted EBITDA for Q3, 2020 was $58.6 million compared to Q2 2020 of 66.5 million.
Q3, 2019 of 112 million.
On a normalized basis, excluding the gains or losses from the sales.
Q3, 2020, adjusted EBITDA was 59.7 million compared to 65.7 million in Q2, 2020, and 74.9 million in Q3 2019.
[noise] Fad was 39.9 million in Q3 2020 versus 47.3 million in Q2 2020.
120.7 million in Q3 2019.
On a normalized basis, excluding sale proceeds and non recurring items Q3, 2020, Fad was 23.9 million compared to 38.2 million in Q2 2020.
And 48.7 million in Q3 2019.
During the third quarter, the 39.9 million Fad number was comprised of 74.5 million from our aviation leasing portfolio.
Negative 300000 from our infrastructure business and.
And negative 34.3 million from corporate and other.
Now, let's turn to aviation.
Q3 for aviation was a pretty good quarter.
Financially the cargo business continued to shine.
Passenger recovery flattened out so we came up a little short of our expectations.
Passenger flight hours on our fleet have improved every month since April and we expect that trend to continue.
As countries and economies continue to battle, the virus and work towards an effective vaccine.
As we expected demand for engine leasing is picking up for all engine types as airlines dramatically cut optional maintenance restoration shop visits until available Green time is consumed.
We ended the quarter with approximately 60% engine utilization on our fleet.
That are engaging now with several airlines to set up leasing programs for 2021.
Looking to 2021, our total existing fleet of approximately 1.5 billion on invested capital.
Should generate approximately 375 million.
Oh, the EBITDA per annum, where our target of 25%.
We are also targeting new investments and CFM 56 engines and related aircraft and have approximately seven and 70 engines seven zero under L O y.
Totaling approximately 200 million of capital.
We would expect that incremental investment to generate a higher EBITDA return of approximately 35% per annum.
Were 70 million in 2021.
Bringing total aviation EBITDA to over to approximately 450 million.
EBITDA per annum.
And with 120 million of cash at September Thirtyth.
At a $250 million Undrawn revolver, we have ample liquidity to capitalize on these extremely attractive investment opportunities.
We also last week entered into an exciting maintenance partnership with Lockheed Martin, which will provide f. tie with numerous benefits and advantages.
In managing and growing our CFM 56 owned fleet and providing third party services to airlines well.
Well, giving Lockheed Martin a steady supply of shops as its for their impressive bunch here all facility.
Financially the benefits of this partnership to after I shouldn't materialize soon in early 2021.
Firstly, we expect to save approximately $500000 per shop visit in 2021.
And with our own fleet in excess of 200 engines or 40 shop visits per annum.
Represents a 20 million savings in 2021.
Secondly by setting up the module factory, we can optimize the part out of engines and our goal is to monetize the equivalent of 20 engines for a gain of approximately 1 million per engine.
For an additional $20 million in.
In 2021.
Lastly, we plan to establish CFM 56 programs with airlines, many of which we've already begun discussions and negotiations.
With cash cash conservation programs for airline set an all time high.
When available spares with Green time running down our timing is optimal.
Our goal for 2021 is to enter into programs with two to three airlines covering 250 engines or 50 annual shop visits.
With our current set of practices and contracts.
We are targeting a profit of $1 million per shop visits for F tie.
With the savings in excess of that for the airline while also providing the airline was significantly quicker turn times due to our new innovative module factory approach.
So in total our goal is to generate an incremental $100 million per annum starting in 2021.
[noise] also very exciting [laughter] is our advanced engine repair joint venture.
As a reminder, if and when we have approval for for all five parts the savings to us will be over $2 million per shop visit and will give us proprietary position to perform.
$6 million average shop visit for approximately 2.5 million.
And the first of these products is in the final stage and should be commercially available very soon.
Now turning to Jefferson and infrastructure.
The Big News a Jefferson continues to be the significant progress made on the three major pipeline connection projects both from a construction management perspective and from negotiations around commercial deals with Motiva owned by Saudi Aramco, Exxon and other credit worthy third parties.
As a reminder, these three major projects, which are now two to three months from completion and operation will connect or Hardwire. The Jefferson terminal with the two largest refineries in North America.
Have such as such we have been and are actively engaged with both refineries regarding numerous opportunities to receive blend store and export a wide variety of crude and refined products.
And as the projects get closer to the actual operation.
The number of options and combinations keep expanding.
We're also looking at adding additional pipeline connections to further solidify our market position and competitive advantages.
In Q3, Jefferson was able to post its third consecutive quarter with positive EBITDA of $4.3 million up from 3 million in Q2.
The improvement was driven by rationalization of costs during the pandemic driven downturns.
Increased refined product volumes and 100% utilization of our storage.
Of note. This was achieved in spite of having no crude by rail moves into the terminal in Q3 due to compression and WCS versus W.T.I. spreads and less refinery demand. We are now starting to see increased demand spreads widening and have trained scheduled again for waxy crude.
Utah in Q4 of this year.
In the Canadian market is showing activity again, both near term and long term.
At least one deal you went recovery unit or D. Are you project is moving forward with plans movements to the Gulf coast in the second half of 2021, which we are well positioned to handle.
D. or use will provide a steady regular flow of heavy crude by rail, which Jefferson is fully capable today of receiving storing blending and shipping.
[noise] so at all not a bad result in Q3 in an extremely challenging demand environment with major advances in connectivity and ops Optionality just about here and we can't wait for 2021.
Turning to report though.
Construction of our phase, one NGL and natural gas liquids trained to ship loading Transloading operation is now complete.
The work took longer than originally scheduled due to cold weather related issues.
So with construction complete we are in the process of testing and commissioning the system.
And as we communicated last quarter, our 186000 barrel cavern has been successfully pressure tested confirming our ability to store propane in it this.
This is important to us because of the size of the propane market is much larger than the butane market.
We're currently in negotiations with both producers and off takers for propane delivery beginning in early Q2 2021.
But to go she spends are going well and we expect to have firm commitments either late Q.
Q4 of 2020 or early Q O Q1 of 2021, we expect to be shipping our first cargos of propane early Q2 of 2021.
As to other opportunities at Repauno, we continue discussions with the wind farm component manufacture and alternatively bio fuel manufacturers and finally the road construction.
Of the bypass into Repauno is progressing well and is expected to be completed in Q2 of 2021.
Bottom line on this is COVID-19 has caused some additional challenges at repauno, but as to the commercial discussions.
We are seeing parties and reengaging and the discussions are going well.
[noise] unlock ridge.
Q3 was a good quarter for our Frac sand business, particularly when considering the industry wide slowdown in natural gas drilling activity.
We translated over 200000 tons of Frac sand, which was in line with budget and for the first three quarters of 2020, we translated.
Over 700000 tons of Frac sand, which is approximately 14% ahead of budget.
As a result of longer just strategic location in the core of the Marcellus and Utica shale regions, one of our largest customers as indicated interested in extending our existing contract for five year term.
And in addition in the third quarter longer it signed a second to your contract with a commodities trading company to Transload in store road. So.
The power plant construction continues to be on budget and is tracking to an earlier completion date in November 2021, which is guaranteed by or construction firm further.
Furthermore, we continue to see a high level of interest from power intensive industries looking to sign new facilities that long rich.
In addition, we have numerous ongoing discussions with data centers.
Whose interest is driven in part by our recently announced initiative with GE and new fortress energy energies zero division to blend carbon free hydrogen as fuel for our power plant as early as next year.
We're very excited about this initiative is long rich will be the first purpose built hydrogen burning power plant in the United States and worldwide to blend hydrogen in a G H class gas turbine.
In conclusion like most companies, we continue to see pressure on our businesses in Q3.
Decision times had been moved to the right for sure, but we continue to make good progress on all of our long term plans.
We look for two years to find the right at MRO partner and Lockheed Martin Martin We believe we have found that partner.
Together, we are going to be able to change the landscape of the CFM 56, five b seven be maintenance market for the next 20 years.
This relationship combined with our P.M.A. initiative.
Put us in position of having offerings to the airline industry, which no one will be able to match. This.
This has taken years of hard work focus and dedication from a lot of talented people.
But the vision that we had and initiated four years ago. It was close to becoming reality.
That's a long ridge, the hydrogen initiative that we announced with GE.
And the zero Division of New fortress energy is already being felt in the market [noise]. The conversations that we're having with major data center users have accelerated.
And our more serious.
The financial impact to our remaining 50% interest in long beach will be meaningful.
Of equal importance in our mind is in fact that this first of its kind initiative in hydrogen power will be an important step in the world's goal of zero emissions.
For sure the financial gains from this initiative are not lost but of equal importance is the fact that we are now playing an important role.
And the aspirational goal of zero worldwide carbon emissions.
And we are confident that our experience with this project will lead us to more carbon free power project investments.
For Jefferson our goal has been to build a core business that generates a fair return, but opens up once that infrastructure in place multiple additional high margin expansion opportunities.
Right now we are engaged with several major projects with our neighbors.
Which could and will lead to such an outcome.
As I look back on Q3 and compare it to all our quarters. Since we went public I think we remembered as one of our most important from a strategic initiative standpoint.
From the MRO deal with Lockheed Martin to the P.M.A. deal hopefully days away to the hydrogen initiative at long rich and to the aviation growth opportunity I mentioned earlier after.
F. Ty will come out the other side of this pandemic a better stronger company.
With that let me turn the call back to Allen.
Hi, Joe Operator, you May now open the call to keep money.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Your first question comes from the line of Guiliano Bono of Compass point.
Good morning, and thank you for taking my questions.
I think I used to I'm, sorry, I'm not to have related topics here.
Well, when we think about the Lockheed transaction and the roughly 500000 a per shop at a savings.
Is that going to is that included in the.
At $375 million, even though that you're you're concerned you're out you're discussing for fiscal 21 for aviation.
No no that was meant to be the incremental total the three parts of the Lockheed totaled a 100 million and that's incremental to the 375.
That makes a lot sense I think <unk> when I think about the <unk> because of accretion I'd, especially brought up some <unk>.
That would all flow through the aviation segment and that would be accretive to the guidance. We've got 375 and then the air Force at 450, if we included the additional engines that you're putting on purchasing yes.
Yes.
That is great then I'm going to take a little bit of a step further just think about it from a timing perspective for a few different initiatives Im centric catalysts out there you mentioned, Jeff hopefully become a yeah approval is days away. If you could just get a quick update around you know where you are in the process itself.
I think you have the application into the first part and you're waiting approval on the first part and I'd be curious around the second part is the applications and then if you have a sense of timing for the second quarter.
That's correct, yes. The first part there's two parts one we started three years ago or essentially fully engineered built in developed that's the first part of the application is complete.
And as I mentioned, we're waiting and the F. has been with US all the way along the way. So we don't anticipate you know significant delays from here. So that that were very helpful. The days away. The second part is will be finalized in the fourth quarter. The final application should be should be a need.
By the end of this year and same thing is the F has been you know involved all the way along the way. So we don't anticipate major delays beyond that so those are the first two and then as you remember we started work on three additional parts and last year. So that would be we would expect to be done in 2000.
22.
That makes sense and then <unk>.
I have a little bit of different topic. When we when you think about Oh Reagan the remaining 50.1% interest.
Obviously, obviously as you get closer to two completing that you know the incentive essentially sold that stake probably increases dramatically and so that was kind of curious on that side was there. How you think about that asset from a monetization perspective and <unk>.
Obviously, you know we can think about your completed projects and having much higher multiples. Obviously then the first early 49.9% stake that was sold but just thinking about you know monetization opportunities and what you might potentially target there and obviously.
Obviously Jefferson is a little bit of different situation, because you probably have a little bit more progress before that becomes a salable in part, but just thinking about monetizations of assets on the infrastructure side.
Yeah, Doug you're right I mean, that's.
Definitely would be something we would look at and think about it should be operational in Q3 of next year a year, you know year from now or even earlier than a year from now so.
And at that point, that's when you have the maximum amount of contracted revenues. So there are a lot of people that we've talked to over the over the you know God.
Prior years that expressed interest, but but they only want to invest when something was was up and running and operating not under construction. So mark it widens out and I also think as I mentioned it that if we have a.
Carbon free pass to power generation through hydrogen [laughter], that's also going to be significantly higher value than than a carbon power plant of which there are many so so I think the combination of those two things would make it something that we will consider you know it you know earlier than.
Then probably the other two that you mentioned.
That makes sense I appreciate the time and I will jump back in the queue. Thank you. Thanks.
Your next question comes from Josh Sullivan.
Benchmark.
Hi, good morning.
Good morning.
Just.
Cards it to the tightness in the aerospace engine market. Thank you.
You're looking at you know the.
A couple of quarters, what is your sense of the overall industry Green time remaining now are there any metrics that give you confidence that were rather than air traffic that we're we're chewing into that in our shop visit schedules tightening or the pricing on parts in the secondary market. Just curious what gives you confidence that you know this dynamic is playing out.
Well when we look at all the data and you know we have the same information and we we had previously indicated weve you know our numbers would indicate by Q2 of 2021 you'd be out of spare engine capacity that's if.
Lots of engines or you know can be moved efficiently from one airline to another but but they can't and so I think the most recent indicator that we have as you know real customers with airlines or conversations with airlines that are happening now.
Where airlines are looking at their own planning and seeing that they're going to need engines, maybe earlier than that and that's why we're having conversations you know now Rick.
Writing programs, which started in 2021.
Because I think they're going to they're quickly going to see that they may not have as much available capacity as they as they would like so I think they're looking at starting programs now because there is a lead time to getting these things you know in position.
Well, that's why I think our timing with you know the Lockheed Martin program is optimal because [noise].
We've started moving modules and engines into that facility now and can begin supplying engines to airlines.
No pretty quickly in 2021, so we feel like the you know the timing of that.
As well as the you know the using up of Green time is really optum on.
Airlines are looking as you know to maximize cash and save cash and so [noise].
Going to the end of the program to say that we can we can supply even engines without you having to invest in older engines. This is really attractive. So we're hopeful as I mentioned that we can our goal is to is to sign up.
250 engines, which isn't really that much with.
We did have over 20000 engines in the world, it's not that much to get and ER and the contribution you know would be meaningful also.
Position us to be a service provider as well as a leasing provider, which I think is quite valuable.
Got it I mean do you see other partnerships <unk>.
With other parts are distribution coming coming into play here as you kind of expand the capabilities that the lucky Emerald relationship.
Yes. It is one more part I think that that is the used serviceable material is an important component and that's something that we're working on which would give us really a comprehensive solution across the whole the whole engine. So.
That's something that given our.
Yeah, you know we know all the players and we've had meaningful discussions we have quite a bit we're an attractive partner because we have 200 engines.
And we're going to be you know, adding to that so I think that a that is something that we can we can we've done a lot of work on it I think is something that is sort of the last piece of the puzzle.
And then just one on the sale leaseback market has it remained active you think we'll see another another wave of interest just as global airlines kind of settle into the new reality here.
Yes, I think it's going to be a very tough winter for airlines. So.
Cash you know, they're doing everything they can to survive and sale leasebacks as a source of cash that they're going to tap I think that.
Earlier. This summer there was if you know a lot of activity some of the deals got done and then some of the deals I think you just been.
Pushed back because you've got a lot of government money got coming into the airlines and.
Do you get government money coming in the Airlines then everything takes longer because you have another party to negotiate and look at everything so, but I think that those deals are not dead and they're actually you know, we'll we'll be very there's going to be an active sale leaseback market.
I think for at least the next year.
Yes, thank you for the time.
Yes.
Your next question comes from Chris Wetherbee a city.
Hey, Thanks, guys.
I wanted to touch on the aviation.
Outlook for next year.
Yeah, a little bit and kind of walk through what exactly is included in terms of the assumptions around that I know you talked about some of the incremental engines kinda going into that as well but.
Talk a little bit about sort of underlying market conditions that support that and then obviously the glass question around sale leasebacks kinda. If anything it's included in that you know I just want to make sure I understand what the walk up is from where we are today.
15, and kind of what happened to me that.
That number.
Yes.
So what so if you look at our current fleet, it's about 1.5 billion and [noise] well.
We should do probably about you know 290 300 million off of EBITDA This year, which is below our target.
I mentioned the impact to covert on that you know.
Sort of right in that range of 50 to 60 million you know impact this year. So we see that returning to more normal we actually had an EBITDA.
Pretty close to that you know is going up in the high 2028, 29, 30%, but we're saying Okay next year, we think.
You know weve the airlines that Weve back to survivors and you know we will.
See a return to a 25% EBITDA margin based on you know analysis of our portfolio and we do have a good chunk of assets in the freight market, which is doing really well and we'll continue to do well and we've added customers like air France, and a couple of other sovereign airline so we feel pretty good about 25% on 1.5.
Billion. So that's the 375 million.
Then.
Turning to this the incremental investment we have to.
200 million of capital under L Y to invest in about 70 engines of C. Diff all Cfmfifty six engines. So that's what we've been talking about where we've been targeting.
And the the attractive the pricing on it is very attractive because.
There are a few there are few competitors with capital that are looking to buy assets right. Now so we're able to get very good pricing. It's about 3 million per engine on average we have some engines are we're buying is actually as cheap as a million dollars. So there's a bit of a range, but on 3 million of average for CFM 56.
We believe we will generate with with in our assumption on utilization for that is approximately 75%.
And I think that could end up yeah, I think that's a reasonable assumption there could be there could be some upside there because I think as I mentioned, there's there's likely to be a tight market.
75% utilization generates that 35% EBITDA margin on that 200 million. So that's an incremental 70 million. So if you take three.
375, and 70 million year. It you know that the 450 number for approximately 450.
Her on an EBITDA for us for 2021, that's without adding any incremental benefits from the Lockheed Martin partnership, which I mentioned, which we believe will approximate 100 million.
Okay.
And there's nothing incremental from a national carrier sale lease back or anything like that at all as well no. No I think we'll see other good investment opportunities I really do I think the the market is stressed its as you know and it's it's likely to present other.
Opportunities, but were not factoring that in at this point.
Okay. Okay.
That's very helpful. I appreciate that and then.
I guess I just wanted to touch base on Jefferson just trying to understand maybe the trajectory of that business coming out. Obviously, I think you mentioned crude by rail opportunities and kind of decelerate slowed pretty meaningfully.
Could you talk about sort of pipeline connections and maybe other potential opportunities to Jefferson as we roll into 2021.
Yes so.
The three projects you know will provide meaningful [laughter] connectivity, an upside for us and it's it's we'll have six pipes.
That should be completed in December that will connect us to the Exxon refinery.
Initially you know the plan is is really we've only got one of those that's being utilized today, so that would be the refined products to Mexico.
So we have obviously lots of conversations going about utilizing those other pipes and that's why I mentioned.
The opportunities in the news, there's a definite to affect you have when you actually are building something in or about to complete it you get a much more serious focus and conversation than when you're when you're in the early stages of planning thing So [noise].
So were.
We're hopeful that they'll be a lot higher utilization on those the timing of that is difficult to predict indefinitely. The slowdown in demand that did the refineries are seeing the demand destruction has been pretty significant so [noise]. So.
So the timing is probably the challenge, but once the pipes are done you know the the leverage is significant.
Thats one part of it the other parts or the crude part where we have an inbound crude pipeline connection from Cushing. So that'll connect our refinery for crude which is very important for us to be able to to blend because as you bring crude by rail and you.
Do you need to blend it with another type of crude so the crude connection to <unk> to the pay line connection from Cushing will give us a very competitive and cheap blend stock for crude by rail.
Then crude by rail as I mentioned is that I'm showing no signs of activity again, we've got trains booked from.
From.
Utah into the terminal four Motiva and Motiva is is the other part of the opt out is the other pipeline connection. So we're building the pipe from Jefferson to Motiva. So.
So we can blend bringing crude by rail blend and then ship by pipe so its very efficient supply chain.
And and then lastly, as I mentioned I alluded to we've got other pipeline connections that the more options you give these refineries some weren't interested they'd become and so are we now will have multiple connections, but we can if we can add an additional options. Then we provide you know a really high value service because.
They can switch sources, you know as prices move around so.
So were expecting you know significant upside opportunity again on on the crude side as well as on the refined product side. It's just again the timing of you know predicting that as is hard but once the pipes are there.
We were we're going to use them.
Yeah, Okay, that's great detail I appreciate the time thank you.
Your next question comes from Justin long of Stephens.
Thanks, and good morning.
I just wanted to circle back on aviation and some of the 2021 commentary Joe I think you said on the Aloe wise that you're expecting to close the assumption is that utilization will be 75% I wanted to clarify is your assumption that utilized.
Nation will be at a similar level for the existing assets. When you gave that guidance for for 2021 and is there anything you can share on the trend in utilization in October.
Yes, yes, the assumption is the same for the existing portfolio approximately 75% and.
We're seeing very high utilization on the freighter fleet and as I mentioned, we exited the quarter in September with 60% overall utilization on existing engine portfolio. So its been coming up.
Every every quarter the average for the quarter as you know in the low fortys. So it started out lower and it's been building.
And as I mentioned part of the reason that Q3 was challenging as it didn't you know July and August it didn't pick up until later in the quarter closer to September.
So we're expecting that that trend and you know we have engines that.
We delivered it also took longer to get engines, you know delivered during Q3, given like the travel restrictions and just getting getting things moved around but.
Fourth quarter, we're expecting you know that 60% to be trending staying there are going up and then and then as I mentioned, we expect as we deploy.
Deploy the new engines and we see you know an increased tightening market. We expect that 2021, we'll be at 75%.
Okay and in October have you seen that 60% exit rate hold steady or has there been any improvement.
I would say steady.
Okay.
And then I you know this quarter you mentioned that you harvested some non core assets in aviation I was curious you know if.
That's something we should expect to continue going forward or if this is just something isolated in that in the third quarter and maybe you could provide an update on how your assets in aviation break down by customer today.
Sure.
So the we.
We did harvests and engines and mostly those it was cfsix 80 in PADD 4000 switcher engines it fly.
On 740 Sevens, primarily or seven six sevens in the freight market.
And the reason we sold some of those or is it rather than invest as is most of those were unserviceable engine. So you either have to invest in another shop visit.
Or you can sell them into the part market and then part market is pretty strong given the demand for freight fine. So from an investment point of view it made more sense for us to sell them into the part out market than it did put them through a full restoration and invest for another four to five year cycle.
So it was really just sort of a timing issue in terms of.
Taking a better.
Did from the parts market and then making an investment in putting in putting in for another four or five year shop visit which may or may not be you know.
But the outlook for 12 to 24 months for those engines is pretty good the outlook for you know 60 months is a little it's hard to it's a little cloudier.
In terms of the portfolio.
We have about.
20% of the portfolio and in the freighter market and.
That is.
Doing pretty well so as obviously thats.
A bigger portion of our revenues, we have about 60% in the.
A narrow body market.
Which is athree, twentys, and 70 Sevens, and CFM engines, and about 20% and 757 and seven six market.
Which is is underpinned most of those that we own in that seven fund seven six are not cargo planes today, but there's a strong bid from from cargo companies buying those planes to convert them to cargo.
So total you know portfolios similar to what it was in Q3 I'd.
I'd say on the customer.
Customer concentration now our largest customers air France, and Oh, we've added a couple of state owned.
Sovereign credit so I'd say, there's been a little bit of a shift towards.
Towards that way on the narrow body side and you know there's another deal that we're fairly far along on that is close to what do you push that that number even higher so I.
I think that's that's the trend line is you'll have we'll have more stayed on sovereign sovereign credits in the in the narrow body side.
Okay very helpful. I appreciate the time.
Thanks.
Your next question comes from Devin Ryan of JMP Securities.
Hey, Good morning, Joe I'm, just really one question for me.
And when I come back to aviation here, one element of the combination of a lucky program, but it's at least very interesting to us is the vertical integration of the business.
I think that gives the platform a number competitive advantages over other bus orders I think it could also potentially change the valuation framework relative to others over time and so I'm curious.
You, whether you guys would consider separating aviation from the infrastructure business, especially if you're getting to the types of upside numbers next year that or projected just given that that's a quite a level of scale in the industry. So just thinking about the potential to separate the platform.
Arms to clean up the corporate structure, and obviously simplify the story and whether you can actually do this based on current debt structure or even something you're open to explore.
Oh, yes, we've we've talked about that before and we're open to looking at I think we expressed the goal that we would like.
If we did separate them to have each aviation and infrastructure have a billion dollar market cap connected to them. So there's enough liquidity in both.
And so that's.
That's one goal and I think it is something you know that we could manage with the debt structure and we've got you know ideas, but we don't have a specific timeline or action plan at this moment I think it would it's something though that we believe longer term would make a lot of sense and it's something that we're you know we're going to continue to to think about and try to figure out that the bill.
Yes timing.
Okay, great. Thank you.
Thanks.
Your next question comes from David says a lot of Barclays.
Taking my question.
Just on the aviation side.
I guess my question is.
Given the harvesting of engines you did this quarter and air France deal you did last quarter has given you a shift in your geographic end markets.
And what do you feel are kind of the benefits and risks of having you your current shift.
Geographic end markets from here.
Well weve.
Kevin I mean, we've shifted slightly to Europe with air France, you know, adding but we still have a fairly diversified you know between Asia Europe in U.S.U.S. being the smallest north America being smallest but.
But you know the assets are very very fungible. So I think you know that's the beauty of Aviations, you can move them around and.
We don't see it right now the you know the global marketers is moving pretty much in lockstep. There's there are times, where certain regions do better than others and that's that's moved that direction, but [noise].
Right now there's a relatively it's not you know extremely.
Significant in terms of being in one market versus another so I think that.
We're happy with the mix, we have and I think as I said I think we will see a bigger shift to state owned.
Or sovereign airlines, just because those are the airlines that are you know getting to fund the funding from from governments and that's where the you know the assets are going to are going to be the most stable in the most solid. So I think you know we're trying we're targeting those tears specifically so as as I'm sure you know everybody would say it would make sense.
So.
You'll see a shift to two sovereign credit system as opposed to Oh any region in particular.
Thanks, and then on.
The maintenance side.
As the approval timeline appears to be stepping up.
Have you gotten orders in <unk> and <unk>.
How quickly can you ramp up to start processing your order.
Yeah. The production is in the works so there's there's a pretty quick inventory availability.
And there are orders for parts already so once the part is approved it can be made very quickly you know and we've we've indicated our.
Interest in orders as well for a given given our orders for our owned aircraft are owned engines for next year.
So there's not a big lag. This has been you know it's been a long process of getting approval. So there's been plenty of time to plan production.
Great. Thanks.
Thanks.
Your next question comes from Ari Rosa of Bank of America.
Hey, good morning, Joe So yeah. It sounds like you have a lot of confidence in that in the $450 million EBITDA figure for next year.
Similar to kind of Christmas question.
To what extent is that kind of contingent on a recovery in.
In passenger traffic or something of that sort and and kind of in line with that do you see this quarter is kind of being a trough for what we should be able to expect in terms of EBITDA and fad going forward, because obviously, you're still covering the dividend which is great but.
But I think you know as as you mentioned in your prepared remarks. This is probably a little bit softer than what some of US were looking for so in terms of looking at 2021.
Just maybe if you could give some parameters around how much confidence you have in that 450 number.
And what that implies for kind of sat across across the business.
Well you know obviously, those we feel pretty good about it but but obviously you know cogut is still out.
Out there and you see Europe, and Germany, and France, you know taking steps to shut down again.
The other hand, you have countries in Asia, where they didnt know infections in Taiwan.
And China is back to pre Covin flying levels. So it's it's quite varied around the world, but people are figuring out how to manage it and people are flying the U.S. had a million passengers in September so sorry.
So I think people are getting their app without a vaccine. Obviously many airlines are are pushing hoping for you know vaccine and therapeutics and.
And the sounds around that from people that know better than I know is that people are pretty optimistic that there will be something available you know pretty soon know what now how quickly that you know it was effective or not and then you also see airlines starting to do rapid testing British Airways. It falling London, you can get a rapid tests now three days a week for every.
But he on the plane so the airlines are working and.
Countries and try to figure out people want to be you know back.
Back you know flying and traveling so it's not without some risk that you know that there is a you know a snap back but it feels like it's going to keep keep moving up and getting better.
And what happened I think a little bit in the third quarter or is it just took longer people were not rushing you know to get there as quickly as you know it seemed like they were.
So that the risk I think is more on the timing side, but but we feel pretty good that something you know people are getting better and people are improving how they manage and you know there's a lot of you know.
A lot of good signs out there you know, although you know this week doesn't feel.
Hard to feel great about it but it's it it does feel like we can.
People will will get a handle on it and 2021.
Should be much better we hope.
Got it understood.
Then just in terms of the MRO deal Milwaukee is obviously very reputable in this space.
Maybe you could talk a little bit about kind of the nature of the discussions that you had with them and you.
Yeah, if I could ask you to speculate why do you think from their perspective, they chose appetite as a partner.
Well the we've been talking about this for two years, we've been looking and trying to find the right partner for it for us for our business and.
Well, we were looking for is you know someone who who valued or you know have a flow of business and and we have as I mentioned 200 engines, which is 40 shop visits a year.
Already and they see and we see the opportunity that's gonna grown so that's.
That's what's very attractive that's what we brought to the table and lots of people were interested I mean, we we had conversations with.
All over the world with many many different parties, but.
But Lockheed is very reputable as you point out they have a fantastic facility is probably the best facility we.
Have any of them that we saw with 300 shop visits here and stuff that sealed air Canada engine engine shop.
And their timing is they needed they <unk>. They don't have a lot of flow there and then post covidien <unk>. The outlook is got even further pushed out so I think that's what they they liked what we we wanted to get on the ability to to have to be an important customer and to create this module factory.
Is something we've also been talking about before because if you can have nodules.
Available you can avoid.
A full restoration shop visit pre covered was taking in some cases, you know nine months so.
So if you actually only need to work on the low pressure turbine and you need a one you need a module you can pull that off and you can have an engine.
Out with.
Within 30 days, so you can dramatically reduce the.
The time that engine needs to be you know idle so.
That that was not easy for us to be able to get from from a lot of different mros that they does wouldn't wouldn't accommodate that or they didn't have the space of the availability. So.
That was a big part of the.
A discussion and they did have the room they have the capability and they are actually very excited about that capability, what it will do for their business and ability to attract other business and.
We did that deal without having to invest in their their shop, they weren't looking for us to buy an interest some of the other deals. We were looking at we would have had to invest capital, thereby tooling.
Headed by an equity interest in.
We were able to avoid all that so I think that what we got was what we everything we needed.
Without having to you know to to really do something that we didn't want to do.
Got it that's that's great color Joe Thanks for the FX effect. Thanks.
Thanks.
Your next question comes from the line of Frank a lot to us so.
Yeah, Hi, Joe Thanks for the taking the question one to follow up actually on that last question on the Lockheed partnership.
So I get that you guys are able to bring in volume or two or the MRO business, which is in need of.
Shop visits.
But.
Why isn't Lockheed doing this directly.
HM.
You guys had said that you are targeting 250 engines 50, [noise] visit the year and you're able to save a million dollars or I guess more than a million dollars on the proprietary or I guess on the module part.
But what.
It feels like Lockheed giving up too much it maybe I'm reading into that too much.
Is it are they that desperate [laughter], there's no that ER, yeah, well I think it is it is a difficult time for an tomorrow. So I don't think that.
I don't I wouldn't characterize them as desperate, but I do think if it helps them in at a critical time, but if you look at the maintenance MRO business. We've talked a lot of these airlines that they very few of them are owners of engines and so in order to create a module factory in.
Need inventory and you need to own engines and you have to have a critical mass.
And I'm, not saying the ammo shops couldn't do it but they don't do it they they very few go to their board and say I want to be in the engine leasing business and I'm going to go invest in several hundred million dollars and and build the business when they have no history or capability or leasing team or whatever and so it's a very.
To go integration.
So we came at it and you know we do a fair amount of business with other M.R.O. shops as a private label provider of engine. So whenever I will go out and pitch.
There shop as it services to an airline in Euro and says can you get me an engine, while my engineers in the shop and a lot of the times your Mros will come to US and say do you have an engine for us and so we're like a private label leasing provider of spares.
So so weve.
Weve been and we serve the aftermarket so we don't we're not the OEM.
So you also have to find and MRO, who is you know aftermarket oriented as opposed to OEM oriented and those further limit you know that the number of people that have you know that are in that market.
So it was you know it was it was a long hard and but it worked out great for us timing wise and I do think it's a good deal for for Lucky as well because you know there's going to be a lot of flow and this hopefully gets them started on on bringing other customers and other business and then.
If we start doing pmeight.
And we developed a program with an airline that could that could end up falling to them as well. So I think they see upside is in addition, this is not just you know a deal they had to do.
Okay, that's actually a really great color appreciate that so.
Hey.
So effectively the you guys are bringing to bear capex in the form of engines.
And your sort of leasing out base what.
So how much is that going to cost are you guys and then.
How much are the minimum volumes.
And is there.
Any economic share with Lockheed and steel.
Oh, we don't rent space, so, but we do have some minimum volume commitments under the seven year and I would I would characterize that as modest in very manageable from our point of view, but but that's that's something that was very important to them and we are committed to that but we don't pay rent. So we're just going to.
Be using to.
The shop for shop visits and we'll also have the ability to store modules and keep modules there.
So.
So that.
So that's you know a very attractive in terms of that and we are.
You know if you think about the industry Airlines don't have capital maintenance shops don't have capital and we are one of the few places that you actually are willing to invest in and engines so that.
That gives US you know huge tick a big boost to the business right now that we didn't anticipate or we didn't see a year ago, but the timing on that and if we can go to airlines and partner and say we can provide you know all of your needs and do it for a lower cost and alike and save you capital that's it.
That's a pretty compelling proposition that I think is going to be.
The very significant for us going forward.
Yeah.
Sounds like a great deal.
And just one last question for me I'm, just kind of following up on that 75% utilization you guys expect for your engines in 2021.
[laughter] most most of the question is around pricing power or.
Are you having to yet or are you having to reduce pricing in that scenario, where a utilization.
Bounces back next year.
No with the engine leasing business has never been really a price sensitive business from that point of view that.
It is the prices tend to be set by the Oems and they said prices very high because they're always charging lot for their parts and raising prices. So we fall under that umbrella.
And it's it's.
Usually when someone needs an engine. They don't go out with an RFP, they actually called a handful of people and they get.
Engine and its typically not the CFO who's negotiating with you. It's just it's somebody that has to get an engine because they need to fly a plane.
On it in the maintenance side. So it's it's very difficult to move engines by cutting the price is what I'm, saying, it's it it's much more of a demand you know driven need based decision is not really we.
We haven't seen pressure on rents and maintenance reserves also keep going up every year, because the Oems keep raising prices.
Okay.
Great. That's all I had thanks, so much thanks.
Thanks.
Your next question comes from Randy Binner of B. Riley.
Hey, good morning, so shifting back away from aviation appreciate the comments on Jefferson terminal and the pipes coming to completion in December.
I apologize if I missed it but was there did you give any kind of quantification of financial impact for that.
You know looking longer term I know, it's not as defined as everything we talked about aviation, but some parameters. There and then possibly also on the long Ridge data center saving opportunity.
Just kind of maybe digging into timing and the longer term financial impact if you could.
Yes. So we've we've said that Jefferson when the pipelines are built in operating will be added approximately 80 million EBITDA run rate what is you know a.
A little harder given the cobas delays for the.
Refineries is predicting the timing exactly of that but we will have the pipes done in the next two to three months and we're hopeful that we'll have commercial deals in place shortly thereafter to get us to those to that number or even higher.
Oh in terms of long rich, we have engaged a number of.
Datacenters and and.
Uh huh.
Talk to them about providing them the site and the power and so we have multiple proposals out.
And I think the hydrogen play is one that's actually very helpful. Because it.
It's not just any dataset site at that point its data center with a hydrogen story or hydrogen play which is very very helpful. So well.
We turned on the power plant in the third quarter of next year and so we're hopeful that before we turn it on we'll have actually signed and you know for a tenant and a construction project by then and then hopefully you know early this early in 2021 as is our goal.
Okay, but at this point, there's no. There's no numbers you broad broad numbers, you can give as you're still under negotiation.
Right, we did say that if we're able to sign.
Sign up I mean, because if we sign up a tenant.
On our site, we will generate.
Closer to sort of mid Fortys in terms of dollars per megawatt hour verse.
Versus high Twentys <unk> today so.
So significantly higher power revenue and if we are able to to contract.
Half of the power power output.
That the EBITDA for the total power plant would increase from 120 million up 240 to 150 million.
And obviously, if there's a hydrogen play or you know component to that.
We think that the multiple the valuation multiple would also be much higher.
Perfect. Thank you.
Yes.
Your next question comes from Rob Salmon of Wolfe Research.
Hey, good morning, John Thanks for taking the question.
As we think about the utilization outlook or for 2021, and 75 can you help us bridge kind of the improvement from roughly roughly 60% in September after that that we live with it.
Riyadh and have a better run rate exiting September than the overall average.
It's just related to timing of some recent deals or is there something related to a vaccine that that's embedded in your forecast.
Sure. So we we exited the quarter at about a 60% average and so it's been steadily trending up if you look at.
Every month over the last since since April it's been trending up.
And we also have a number of programs that have been taken up by some airlines that over the next few months and we talk about early 2021, we're seeing demand for engines now that we have.
So so weve taken you know the numbers and in prior to coal that we were our engine utilization was as high as 80%. So so we basically mapped out and we continue to see high utilization on the freighter fleets.
And and it's really the recovery of the past year markets that is taking.
Taking the numbers.
Up to this to back to levels, where the historical historically were and.
Part of that as I mentioned is the fact that shop visits are way down. So if you have.
Excess available engines and you stop doing all shop visits you quickly use up a available engines and you'll see engine utilization. So you know increase went well before aircraft utilization because aircraft last you know a very long time engines have to go into shop every five.
Five years.
I think that's a nice segue into my follow up question on the Emory deal with with Lockheed.
Right.
You guys have got capacity increase up to 300 units annually.
Can you give us a sense of where that minimum is I realize you probably can't speak to exactly the level, but clearly you're going to have a need for 40 shop visits a year kind of how many visits above that or above that amount are you guys kind of required Q.
Tap throughput at Athens facility for the module factory.
Although the minimum would be well below that amount not above it.
So it's so it's it's not something that that I think is is a significant you know commitment or worry about us being able to meet that minimum.
But I mean in Denmark, Hauser frankly, it's like you're require your between required 40 shop visits annually I'm, assuming it's above the 40, but obviously significantly below 300.
Oh, you mean, what our fleet would be.
Correct, Yeah like what your required throughput is going to be any way on an annual basis.
When you say requiring him.
When you say required you know the minimum is going to be very low of what a minimum committed you know now we have to give.
As part of the deal.
Well below what is what our current you know requirements are.
So you can approximate how many shop visits you'll have by just taking you know 20% of the total number of CFM engines, we own which is if I said, if we had 200 engines, 20% is about 40 shop visits a year today.
And we expect that to grow but the minimum that weve committed is well below that number.
Okay. That's really helpful. Just so you can understand kind of the risk return parameters are there and my final question is with regard to that 200 million of Aloe wise can you give us a sense of when you expect that capital to be deployed just so you know.
Well, we're kind of incorporating a right.
Level EBITDA from yellow eyes for kind of 2021.
It's just under I think it will be [laughter] I think it will be late Q4 and early Q1.
Perfect I appreciate the time guys.
Thanks.
Your final question comes from Robert Dodd of Raymond James.
Hi, guys I'm, just a follow up on that well bus and then then one other quick on the EM all those Joe on the minimums does that minimum haven't escalated over time or is the I in a building in the assumption of growth or is the minimum you know the minimum no I'm going to say.
And it has it's like a has rollover points too. So you know you don't use it you can roll it.
So it's very flexible I I don't think that will be significantly the I've very little concern about that minimum that we ever get anywhere near it.
Okay perfect all the other <unk> on the various elements you talked about what we see the full 50, an EBITDA from some of the equipment. The Lockheed various components of that you spelled out in that could add up to you know eventually like an incremental 100 million a year.
She mentioned when he said that you know based on existing contracts. It cools, except I said did that include any benefit from the pots approval or not and to put it in that perspective is that if your first part got approved by the FDA and they say tomorrow.
What would the would the impact from that already be included in what you've you've discussed or would that be incremental on top of that and could you give visible talk if it would be incremental [noise].
Well I think when you go through the pieces to it the element that I think that will be.
Facilitated but not necessarily required to get that is being able to manage shop visits for other airlines as I mentioned, the partnering of 250 engines.
Or 50 shop visits a year the the approval of those parts.
It will be will be helpful for us to make that million dollars and save the airline a million.
So.
It's not entirely.
Is that entirely impossible, we can't we couldn't do that without it but it will be facilitated by that so I would say, it's a portion of the 100 million.
Is really a.
A function of us having these first two parts available next year.
Got it I appreciate it thank you yes.
There are no further questions at this time I would like to turn the conference back over to Mr. Andreani for closing remarks.
Thank you operator, and thank you all for participating in today's conference call. We look forward to updating you. After Q4. Thank you.
This concludes today's conference you may disconnect at this time.
[noise].