Q1 2022 Fortress Transportation and Infrastructure Investors LLC Earnings Call
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Good day and thank you for standing by welcome to the Q1 2020 to fortress transportation and infrastructure conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded.
Ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to our speaker today, Mr. Alan Andreini. Please go ahead.
Thank you John you I would like to welcome you to the fortress transportation and infrastructure first quarter 2022 earnings call. Joining me here today are Joe Adams, Our Chief Executive Officer, Ken Nicholson, our newly appointed CEO of FDI infrastructure, Scott Christopher <unk>, Chief Financial Officer.
He will become the CFO of <unk> infrastructure and Angela the.
The Chief Accounting officer, who will become the CFO at <unk>.
Aviation, which will be the new name of EFT Guy.
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 disclose 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 Fad the reconciliation.
If those measures to the most directly comparable GAAP measures can be found in the earnings supplement before.
Before I turn the call over to Joe and Ken 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 <unk>.
GAAP financial measures and forward looking statements and to review the risk factors contained in our quarterly report filed with the SEC now I would like to turn the call over to Joe.
Thank you Alan.
To start the call I am pleased to announce our 28th dividend as a public company and our 40 <unk> consecutive dividend since inception.
The dividend of <unk> 33 per share will be paid on may 24th based on a shareholder record date of may 13th.
First a couple of highlights.
Yesterday, our board formally approved the spin of <unk> infrastructure from <unk>, and we expect the spend to be completed in the next four to eight weeks.
Secondly, as to Russia, Ukraine War in our assets lost in that conflict Youre, writing off a 195 million in Q1 for impairment bad debt and lost revenue.
We expect to recapture all of that $195 million over the coming year.
Now, let's turn to the numbers.
The key metrics for us are adjusted EBITDA, and fad or funds available for distribution.
Absent the impact to our assets in the Russia, and Ukraine War, which we estimate to be approximately $770 million in Q1, adjusted EBITDA would have been approximately $122 million down 2% compared to $124 8 million in Q4 of 2021 and up 150.
8% compared to $47 2 million in Q1 2021.
Including one time charges actual adjusted EBITDA was $51 6 million in Q1, 'twenty, two which is down 60% compared to Q4, 2021 and down 9% compared to Q1 2021.
Fad was $71 4 million in Q1, 2022 down 41% compared to 120, $120 1 million in Q4, 2021, and up 396% compared to $14 4 million in Q1 of 2021.
During the first quarter to $71 4 million Fad number was comprised of $117 1 million from our aviation leasing portfolio $7 1 million from our infrastructure businesses and negative $52 8 million from corporate and other.
Turning now to aviation, let's start with the impact of the rushes Russia's war in Ukraine.
We reported Q1, 2022 aviation EBITDA of $48 million.
Write offs of uncollectible debt or canceled leases with customers that ceased operations reduced EBITDA in the quarter by about $70 million. So.
So we estimate EBITDA without the war effect would have been approximately $120 million or an improvement from Q4 2021 of $104 million.
In addition, we are writing off a 100% of the book value of $125 million of the 12 aircraft and 20 engines that remain today in Russia or Ukraine.
Are those aircraft and engines, we have filed an insurance plans totaling $290 million, which we ultimately expect to recover most if not all of this amount.
So when we do recover all proceeds will be booked as income when received.
We also took back nine aircrafts from Russian and Ukrainian operators and are under LOI to sell four of these aircrafts Chicago operators at a gain of approximately $30 million. While the remaining five aircrafts are all 737, mgs for which there's very strong demand for both the aircrafts.
And the engines.
So we expect all nine of those aircraft to be on lease or sold by the end of Q2.
We will be taking further advantage of the strong cargo market and expect to sell other 747, and 767 aircraft and engines for significant additional gains in Q2.
Turning to our aerospace products, we posted Q1 'twenty two EBITDA of $16 million comprised mostly of income from CFM 56 module sales again this quarter.
And looking ahead, given the very visible and robust recovery in air travel demand worldwide, we're seeing a significant ramp in activity and backlog for our aerospace products. We currently have a backlog of approximately 180 modules contracted or on order and over $100 million.
Used serviceable material U S M sales on order through multiple programs with MRO is maintenance and repair organizations and airlines.
We continue seeing growing market acceptance of our CFM 56 product offerings with today over 20 active customers, including many of the world's largest airlines and independent maintenance shops, and our importantly, seeing a very high level of repeat usage.
We expect demand to accelerate as heavy volumes of CFM 56 shop visits are being scheduled now for the second half of this year.
Let me now turn the call over to Ken to discuss infrastructure.
Thank you very much Joe.
We're excited about the prospects for our infrastructure business into the next few slides I'm going to talk about our recent results at each of our assets and highlight several of the projects and plans we have for growth in the coming months and the remainder of the year. It is an incredibly dynamic time in the transportation of energy markets with high commodity prices extreme focus on energy security and the mounting forces pushing.
Energy transition and we are in a great position with each of our businesses ideally suited to act on these opportunities starting.
Starting on page nine with Transtar.
Transfer generated $34 $1 million in revenue and $14 $6 million in EBITDA for the quarter revenue was up $1 1 million or three 5% quarter over quarter at slightly lower carloads were more than offset by higher average pricing more specifically on carloads cold rolled steel shipments out of USDA rebounded in March.
I promise for continued improvements next quarter, while hot rolled coil shipments have remained steady.
Shouldnt cycle times that were delayed at customers for unloading in the fourth quarter and much of the first quarter are moving at a faster pace permitting train starts railcar fleets have turned more efficiently.
For the quarter was approximately.
It was impacted I apologize by $2 million nonrecurring items and the lag in fuel surcharge revenue.
We experienced higher fuel costs in the first quarter for which we will be reimbursed in the second quarter due to the mechanics of our fuel surcharge program with U S. Steel most importantly cash flow from operations for the quarter was $16 6 million in excess of adjusted EBITDA as cash realized from the optimization of train starts railcar fleet with $3 million for the quarter more.
Then offsetting capital expenditures of $1 1 million.
We're very excited about the future for transtar were accelerating our commercial focus on third party business, adding to our commercial staff and pursuing a number of revenue enhancement programs in total we estimate an opportunity for approximately $30 million of incremental revenue.
I'm, sorry incremental EBITDA over the next 12 months to 24 months through these programs with minimal incremental capital need transfer is also an ideal platform for accretive acquisitions, and we're experiencing a growing pipeline of acquisition opportunities that we believe if the.
Successful in acquiring would be highly accretive to the business.
Turning to Jefferson first quarter EBITDA of $3 8 million was up 35% compared to $2 8 million in Q1 of 'twenty, one and a 66% compared to $2 3 million in Q4 of 'twenty, one driven largely by strong ship dock utilization for inbound crude oil movements as well as the commencement of yellow wax for.
By rail from the Uinta Basin with recent disruptions in global trade flows Jefferson's multimodal infrastructure provides customers valuable optionality to handle volumes via marine pipeline and rail for the first quarter of 2022 crude oil and refinery intermediate revenues have grown 15% versus Q4 and 50.
<unk> percent year over year vol.
Volumes through the terminal and have more than tripled versus the first quarter of 2021 and have increased 32% versus last quarter.
From a project perspective, Jefferson Jefferson remains on schedule for the end of the year and on budget for the previously announced 10 year deal with Exxonmobil that project will bring substantial committed throughput volume and revenue. So the terminal via our cross channel pipeline system and provide a springboard for increased volumes.
With the dislocation in the energy markets and demand by our refineries for more secure sources of supply we are seeing growing activity at Jefferson one of the emerging markets for crude supplies in the Uinta basin of Utah, where volumes of yellow waxy crude had been rapidly growing to replace imported barrels at Jefferson. We moved an average of three trains per month through the terminal in Q1.
In the second quarter, we expect to move eight trains per month, and we have capacity of handling.
Up to 24 trains per month and that is our goal as we enter the second half of the year.
Jefferson is the only terminal in the Beaumont region capable trans loading large quantities of yellow waxy crude and process involves a significant amount of handling heating railcars to unload the product and blending with lighter crude so it's a particularly high margin business for us.
Turning to long ridge.
We're pleased to report that our new 485 megawatt power plant is up and running on a continuing basis and we expect to generate strong cash flows under our power sales agreements for years to come in.
In addition, we're taking advantage of our own natural gas assets to produce gas in excess of our power plants needs for sale into the merchant market, where gas pricing needless to say it continues to be extremely strong.
That's the first quarter financials demonstrate we took an unscheduled maintenance outage during the quarter to repair and complete commissioning of one of our steam turbines. The outage lasted approximately six weeks and represented an approximate $8 million adverse impact on EBITDA for the quarter due to lost revenues during the outage all costs to make the repairs were covered under warranty.
Far from ideal the outage did result in two positives first.
Performs maintenance that was originally scheduled to take place in April letting us avoid taking that outage and setting the stage for an uprate in power production to 505 megawatts at little to no cost.
We completed our hydrogen blending project.
In March we became the first utility scale power plant in the United States to run on hydrogen starting with a 5% blend. This is an important development of the national infrastructure, Bill, which was passed last year includes 8 billion of funding for the development of hydrogen hubs and we have applied.
The recipient.
As an early mover with multiple advantages long ridge is well positioned to secure funding from this program.
So with a power plant in good shape and are focused on driving incremental growth by securing new business from power intensive industries I've wanted to locate new facilities with long Ridge, we're seeing a robust pipeline of prospects and expect to announce our first major counterparty in the coming months.
Finally, we're ponto building on a successful first year of operation in 2021, we're kicking off the 2022 season in very good shape.
Our business today is somewhat seasonal with activity picking up in the month of April and continuing into the fourth quarter. So expect our partner to generate solid results in the second and third quarters in particular.
Newly expanded LPG truck rack has seen high utilization, providing both propane and butane to local heating and blending markets during a period of significant market volatility.
Our newly commissioned cavern chiller allows for fully refrigerated butane exports and we've executed on a base agreement with an international off taker for multiple cargoes beginning this month.
We expect to move over 175 million gallons of LPG in 2022 versus 130 million gallons in 2021 with upside to over 250 million gallons with spot movements, which are on the increase.
We continue to advance our build out plans for additional product storage increased rail access with the construction of a double unit trained loop 600000 barrels of new storage and pipeline connectivity to major production areas, we're finalizing permitting and construction contracting for new storage facility, which were more than double our throughput capacity and triple cash flow.
Once complete.
We expect to fund the capacity entirely low cost tax exempt debt, making the expansion highly accretive.
With that let me turn it back over to Joe.
Thanks, Ken.
It's hard to imagine a two year period, that's been more difficult and volatile in the last two between Covid and the war in Ukraine. Our business models have been stress tested in ways that we would never have expected.
The good news is <unk> has come through this period in good shape and in fact very good shape.
The aviation industry is once again in growth mode in our aerospace products are more in demand now than we had ever thought.
And with the worlds rediscovered desire for more energy independence, our infrastructure assets are more critical today and more valuable than they were just two months ago.
Putting it all together, it's a perfect time to separate the companies.
To that end, we filed this morning, our public form 10, which means that we should have two separate trading companies in the next four to eight weeks.
Heading <unk> infrastructure will be Ken Nicholson, who you just heard from Ken has been my partner for over 20 years, including the last 10 since we started <unk> and.
And I'm very excited to be working with him in his new role.
To sum it up after years of preparation and the separation of FY aviation and <unk> infrastructure is now in hand, and we're very excited by the prospects for both companies.
Turning back to Alan now. Thank you Joe Tonya you May now open the call to Q&A.
Certainly.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
And our first question comes from Justin Long of Stephens. Your line is open.
Thanks, and good morning.
I wanted to start with aviation last quarter, you talked about the run rate for EBITDA from aviation being around 550 million and that included 50 to 100 million from aerospace services. So at the midpoint. If you strip that out you know aviation leasing it was.
Did you do about $475 million of EBITDA, if you sat Russia, and Ukraine, aside and take that out of numbers, what does that pro forma number look like going forward.
Yes.
So I'll give you the answer first and then I'll sort of walk back through how I get there and the answer I think for the year would be 475 million of EBITDA for both leasing and aerospace products.
And I would I would.
Use 375 million of EBITDA for leasing and 100 million.
Now for aerospace products were more comfortable I think at the high end of that earlier range given the widespread acceptance in.
And the backlog that we see building. So if you take this.
475, and then you look at the $3 75 four for.
For the leasing as I mentioned.
We had about $35 million of leasing EBITDA in Q1.
And the war in Ukraine.
Cost us about 70, so call that roughly $105 million, if the warhead and happened for the leasing business.
And so that if you use that as a base.
The assets that came.
It came off lease that I mentioned that are either off lease or stuck in Russia Ukraine.
Figure that that's about a $20 million impact Q2 negative impact, but we added.
Business for the from the Avianca deal was about 10, so net net that's probably 95 million for Q2 from leasing.
And then on top of that we're going to have as I mentioned, the $30 million gain from our sale of <unk>.
For cargo claims that we were able to get back so called Q2, roughly $125 million and then if you'd like the balance of that to get to 375 or 380 is about $220 million for Q3 and Q4. So that's.
Kind of how how I get.
So that number and hopefully that's that's helpful. Because I I apologize for all the.
The variance citizen changes, but.
Our world was sort of interrupted unfortunately, as many people have been but.
That's the math.
That's extremely helpful. I know theres, a lot going on and so on that last point about the $220 million in the back half of the year does that assume any gains.
No okay.
And I guess, secondly, on Jefferson and any update on what you're expecting.
In terms of EBITDA over the remainder of the year and how things could ramp and it was helpful to get.
Some color on the trains per month that you're expecting in the back half, but curious if you could put a sensitivity around that in terms of what one trains per month means to EBITDA.
Yeah, Hey, Jonathan.
Happy to do that.
Maybe to answer your specific question one trains per month.
One train of yellow waxy crude can generate.
It depends but anywhere up to a $100000 of EBITDA to.
It's a significant this is one of the reasons, we're so bullish I'm so excited about it.
Unloading one trained can be a very high margin business between the heating involved the blending and what have you. So it could be very substantial for Jefferson and we're excited about the trends we're seeing here in the second quarter.
Big picture with Jefferson, obviously, we've a lot going on and we've got the big Exxon contracts kicking off in the early part of next year. Our ultimate goal is to get Jackson to $80 million to $100 million of EBITDA.
Precise trajectory.
For which we get there is no I can't provide that kind of precision quarter over quarter, but our goal is at the end of the year and as we kick off the new Exxon business in.
January of next year to be pretty close to that number on a run rate basis.
Okay. That's helpful. I appreciate the time.
And our next question comes from Chris Weatherby of Citi. Your line is open.
Hey, Thanks, good morning, guys.
Maybe just on the leasing side I think Joe you mentioned that you would recover I think you said all of the 195.
That you are writing down I guess I just could you help us sort of bridge that gap or are you talking specifically about the leasing business and is that just sort of new business opportunities that are out there is it a combination of that and insurance recoveries I just want to make sure I understand how youre thinking about that.
So yes.
Recovering as the 195 is really primarily would be from insurance and recovery of bad debt not from any additional activity around that so that's what we were referring to.
And that and I think the as I mentioned, we filed a $290 million of insurance claims.
75 million of that is for assets that are in Ukraine.
To us we don't have a.
Firsthand inspection, we had aerial photos of the area.
Look destroyed so that is pretty straightforward from our insurance point of view so.
The other ones in Russia are.
Ultimately you have to prove that you can't get your assets back, but every day that goes by that seems to be easier and easier to prove so I'll take that this is going to become fairly clear.
So a big chunk of it I think what we're referring to that 195 is the insurance.
Prevent recovery ultimately for those assets.
Okay. Okay. That's helpful. I appreciate that and then just on Jefferson I, just want to make sure I understood. The point there on the slide about the ramp up when you think about the eight trains I know we have 24 I think monthly.
Trains of capacity.
We're thinking about E. Train's I just want make sure is that the April run rate that we're on right now or are you expecting sort of a run rate to accelerate as we go into may and June to be able to hit that for the second quarter note that as the run rate we are on currently.
Okay, great. Thanks for the time guys I appreciate it.
Thanks.
And our next question comes from Giuliano Bologna of Compass point Your line is open.
Well good morning, and thanks for taking my question I guess to start off with any of them along.
A similar topic on the Jefferson terminal.
The details around the trains and the class is very helpful.
The first thing I would mention.
There's obviously been an increased focus on importing.
From Canada, and a large part of that would most.
Most likely be coming via rail.
Instead of a rail terminal I realize that you know a big part of what you're you're mapping out here is.
That's not going to say from Canada on the trains.
But I'm curious if there are opportunities.
Inside to get near long term agreements in place for a multiyear supplies or.
Could you argue both on the Canadian side for example.
Alright, and then.
These are add on to that is I'm curious if the capacity is any different it could bring in.
Crude from Canada versus others.
And the EBITDA contribution would be any different between the two.
Yes.
Thanks.
Look the general tone and atmospherics around Canadian crude by rail are are very positive the white house made some statements.
Weeks ago regarding increased imports from Canada.
By any mode other than pipe.
So that's a very interesting for crude by rail.
I would tell you the activity today is still relatively light compared to where the activity was pre COVID-19 about two to three trains a day get loaded in Canada, and Alberta, and Saskatchewan regions and that number was between 10 and 12 trains pre COVID-19 .
So we're still relatively reduced levels, but it is growing and with the white house sentiment. You know we are we are bullish that we're going to start seeing some crude trains coming in from Canada.
Short term.
Hard to specifically quantify that but.
But I do think we'll start to see a good uptick.
Specifically on your point the economics I described on the Uinta basin yellow waxy crude they're roughly the same for Canadian crude. It's also a very heavy barrel that requires heating when it comes in in tank cars and generally requires blending and so the economics are typically the same.
We'd love to see more Canadian crude coming in we have the capacity to handle that and we've got plenty of storage blending capability. So.
Or are you going to see that market pick up.
That's right.
And then moving up in a slightly different topic.
On the aviation side.
On the aerospace services.
On the aerospace services side.
Thank you guys for an outgrowth of the first PMA part I was curious if with any sense of timing for the second PMA apart.
And then.
Well doesn't that add on to that question.
And therefore.
Curious if you have a lot of orders for us in the first few parts combined.
The order book for parts.
Shaping up there.
Yes.
The parts in development is.
A number of parts that are in development are all progressing.
And there is.
Very active dialogue in terms of.
With the regulators so.
Those are all <unk>.
Making very good progress and we expect to see them.
<unk> points of approval over the next year. So those are those.
These are moving ahead and there is.
Until they are approved we have conditional orders, but it really doesn't.
Right It until you actually get the approval so.
Confident that there's demand there's demand certainly from us and our engines and we believe from the market. So.
Okay.
That's great. Thank you very much and I'll jump back in the queue.
Our next question comes from Greg Lewis of <unk>.
One moment.
Your line is open.
Alright, thanks, Thank you and good morning, everybody.
Hey, I just had a I had a question on aviation.
Clearly a couple of factors have driven the ability for.
The team to start monetizing or selling off some of some some aircraft into the cargo you mentioned that it doesn't sound like we're going to see.
Much more of that as the year plays out, but just kind of curious how should we think about that.
The monetization of those assets.
The recycling of that that that cash here as we look out over the next couple of quarters.
Well there is potential for more of that was just commenting in the base numbers it's not.
Is that built in so I think that.
We are thinking of the cargo market is at a.
Really really robust demand level, which maybe doesn't last forever.
Historically, that's been true.
So we will probably take more opportunity to monetize some of the cargo.
Aircrafts and engines in Q2 and Q3.
And then the other potential monetization as I talked about last quarter.
Some of the newer airplanes that we acquired in the Avianca deal and some of the other ones with long term leases can be easily sold to other leasing companies today at very good prices.
Close to doing a couple of deals where we would sell those at a gain and then retain the engine services contract for the next seven to eight years. So from our point of view, it's the ultimate best of all worlds you require something you sell it you.
You can take all your capital out and you retained.
Part of the business that we love, which is servicing the engines and so.
That is a model that I think we.
We think can be replicated. So we are we believe we can do more of that and that will allow us to recycle capital.
And then also simultaneously build the backlog for aerospace services products and lock that in so very excited about that I think the first couple of deals could happen.
The next quarter or two and.
We think we'll be doing more of that in an overall from a portfolio point of view were.
We're headed as we mentioned towards increasing the percentage of CFM 56 product in our portfolio is today, probably bad up from 50% about 60% and I would expect over time to see that grow even to 70 or 80% given the significant competitive advantage in the huge market opportunity there.
We have in that space.
Okay, that's great to hear Joe Thanks, and then I guess, maybe this one for Ken.
Congratulations on.
You know I guess taken over the infrastructure side.
I know it's been discussed that there's been there's a lot of money on the sidelines in terms of looking at investment in infrastructure and clearly the company over the years has shown an ability or willingness to kind of partner with other.
Investors to kind of build out the business and even do some asset monetization on your end just kind of curious.
You know how that what that's looking like is there any update or any color you can kind of give us around the potential to bring on.
Additional partners into the infrastructure business, maybe maybe post our prior to the spin.
Yes look I mean, it's a pretty robust environment out there there there is the <unk>.
You said, there's a lot of capital available, but there are a lot of assets a lot of infrastructure.
You know needs.
<unk>.
We're always looking for projects I would say generally we'd be partnering with folks on the strategic fronts.
Some of our customers.
Where it makes more sense for a terminal build outs, where we put capital in and customers.
We help make their supply chain more efficient and.
<unk>.
And what have you I think there's a huge opportunity out there in the rail space, We've got three or four different acquisitions. We're currently looking at.
Sure those are anything that we'd necessarily partner with folks on those are things that we would have the capacity to do on around more on the ports and terminal space, where we're building out capacity that's where.
Joint ventures, and partnerships like that could start to make a fair amount of sense.
Okay, great. Thank you very much.
Okay.
And our next question comes from David is that the era of Barclays. Your line is open.
Joe.
Hey, Joe Thanks for taking the questions I guess first one is on.
You serviceable material.
Airlines in general have been really ramping up and placing a premium on capacity.
And trying to use more aircrafts I guess I'm wondering what whether you think that will have a positive or negative effect.
On the surface of all material market in your business going forward. It seems like you are counting on some significant ramp going on this year.
Yes, it's a good point and we've mentioned that there hasn't been a lot of.
Transacting in the used serviceable material market until the shop visits start to really pick up which they are now and so we're looking at.
A meaningful growth I mentioned $100 million backlog of U S and it's one of the reasons I think we're comfortable with the high end of the range for 100 million for aerospace products as that business will start to meaningfully contribute now in Q2, starting in Q2 and for the rest of the year. So the demand is very real it's actually getting to be harder to find.
The parts now.
It is to sell them. So that's a very good sign and we have we have been building inventory in one of the constraints on used serviceable material is getting the parts repaired.
Because you take them out of an old engine you have to repair many of them have to be repaired. The repair shops are short SaaS. They don't have the supply chain constraints. So so we have built a fair amount of it.
Inventory that we have repaired so we're actually.
Pretty attractive partner for many of these airlines and also particularly the maintenance shops and so we're trying to do with the U S. M. Now is use that as a lever.
To get more module transactions as well so in other words, we can we can decide who to give our valuable U S. M. Two if they in turn do more business with us on the module side.
Thanks, That's helpful. And then just a follow on for Scott.
Scott maybe.
I guess, you would put out a potential number four.
Spot market activity at <unk>, I guess should we think about that.
Being kind of proportional run rate as far as how much it flows down on the <unk>.
The bottom line or is that something that maybe you'd see a higher margin on that incremental activity.
Yes, you got it right it is higher margin on the incremental activity.
On that slide we showed in phase one and phase two phase one is what is operating today and Thats representative of the total margin out of phase one operating at about 90% of capacity.
Phase two we need to build more storage in a loop track. That's underway. We are just completing the permitting that's going to take 12 months plus to actually put into place, but it was meant to be illustrative to give you a sense for the incremental margin that comes out of that it is a higher margin business.
Just had some more scale and so the actual contribution per gallon or per barrel is higher after phase two gets implemented.
Phase two will start construction in another month or two here and as I said that'll take 12 plus months two to implement but we wanted to make sure people understood how accretive that could be we've also applied for authorization to issue tax exempt debt to.
To build out the entirety of that project and so I think it can be incredibly accretive for upon them.
Great. Thanks very much.
And our next question comes from Brian Mckenna of JMP Securities. Your line is open.
Great. Thanks, I know the big focus in the near term is getting the spin completed and deleveraging the business, but for the Standalone Aviation company, how should we think about the capital management strategy longer term, given what will be a healthy cash flowing business and then can you just remind us what are the expected capex needs on a recurring go forward basis for the business.
Yes, so there is.
Put out a slide on our capital structure in the deck, which I think is very helpful. Because.
The spin itself will generate $800 million of capital for aviation or appetite aviation, which will reduce debt.
Roughly to about $1 9 billion pro forma for the spin and then in addition, as I mentioned, we have a potential asset sales of 300 million and another $200 million of insurance proceeds which could could bring.
Possibly bring that down to about $1 billion for an equity to about 1 billion. Three so we'd be almost one to one debt to total debt to equity and under three times debt to EBITDA. So very very strong pro forma financial profile profile coming out of the spin now that gives us the opportunity and I think we are.
Trying to get positioned.
So that we can be very opportunistic in what almost certainly there will be some.
More volatility and up and that creates opportunities for us to be able to use that firepower when.
Situations present themselves.
We're working to get ourselves set up to be able to really capitalize on that while aviation is in a very strong growth in recovery mode.
Got it.
And then just bigger picture question, you know given the geopolitical events that have taken place this year.
Does it make you rethink at all your global strategy and footprint within aviation and then can you just remind us how much of the leasing portfolio is tied to the U S. Europe and then the rest of the world.
Europe is the biggest for us it's 60% 60%.
And.
U S is probably 20, 25% so.
I I.
I don't think you could.
I think Russia is unique in a way I think there's there's not a.
The country in the world It just sort of analogous it was able to.
There was able to do what they did.
So I think that people have accepted that that's probably not something that's going to happen in any other place really I don't see that as it is.
Difficult risks so.
So obviously it's.
It was a shock I think the insurance market is going to pay.
And they will raise rates, but I think people are going to continue leasing airplanes, all around the world and I don't see it as a major <unk>.
Change other than I think Russia will be.
Off limits prior for maybe a long long time.
Thanks, Jeff.
Our next question comes from Josh Sullivan of benchmark cooperation your line's open.
Hey, good morning.
Well just as far as follow up on the financing question.
What are your thoughts on the timing and approach to the $800 million.
Thanks, Ken.
We're very close.
I would say, it's very well advanced and.
It is next few weeks I think things are pretty well organized and.
We should be.
Having that that financing all complete and committed literally in a few weeks.
I feel good about it.
Okay.
And then just one on aerospace.
Site by Airlines for additional sale leasebacks air traffic picking up airlines still have an eye on capacity here interest rates moving your aero parts offerings maturing a lot of moving parts here, but just curious on the signals you're getting from the sale leaseback market.
It's good I mean airlines are still they all lost money in Q1. They are all very positive, but there is still losing money. So they need capital they need capital partners. So I think the leasing as a percent of total fleet to 60% now as it's been increasing so.
If anything the airlines have proven that they are more volatile than people realize so it's yet again, so I think leasing has been a very critical part of their.
<unk> business model and sale leasebacks are definitely on the on the table.
We've been.
Pitching the airlines on a sale leaseback, where we manage the engines for them, which is another way of them getting out of the business of having to manage shop visits so its additional.
A reduction in capital for them, which they like and it's great for us so so thats been our pitch.
Pitch and were very flexible very.
Good to work with them. So we've converted I think quite a few airlines already over to that where they don't really want to manage shop visits again. So so we want to be the largest aftermarket engine shop provider power provider in the business.
So so.
I think we have a differentiated and better better model to a product that is really important for them.
So would those be kind of like power by the hour type relationships.
No I mean, it's still at least we're not gonna go power by the hour for <unk>.
But you'd have a minimum rent and then when the engine is due for its major overhaul, we do an exchange.
And so instead of the engine typically now if you if you have a 10 year lease or an eight year lease and the shop visit is required and therefore, the airline has to do the shop visits it has to go out and get a spare engine and it could take six months or nine months at a cost of $1 million just in getting a spare in transportation and all of the <unk>.
On time, so by giving an exchange. So we'll just instead of the airline having to manage that shop visit we just supply them with a new engine and they gave us the run out engine and so that then eliminates the downtime for them. They save money and then we manage the shop visit and all along the way we're collecting.
Maintenance reserves, so were actually compensated for the maintenance and then some.
Because we have a lower cost so it's a it's a win win.
Thank you for the time.
Yes.
Yeah.
And our last question comes from Robert Dodd of Raymond James Your line is open.
Hi, everyone. Good morning.
Just back to the aviation and kind of a light because it's been I mean.
What can you tell us about the expected dividend policy slash mix.
Aviation versus infrastructure going forward and particularly on the aviation side I mean, how should we think about it beyond just what it's going to be post spin but.
Conceptually it could be the driver of the weapons that increases stays flat, etc.
Yes, so the aviation business sure.
Should generate a lot of free cash flow going forward.
We will have as I mentioned, we'll have a strong balance sheet will have.
Sort of our ability to recycle capital and grow the earnings and so that's a perfect model to be able to increase dividends.
<unk>.
That's been our objective from the beginning we've been able to maintain the dividend in this even in this tumultuous period, and we think that the future will allow us to grow that for the aviation business.
Perfect. Thank you and one follow up if I can.
Post restructuring.
Spin and restructuring the balance sheet do you have a target allawi I mean pre Russia pre COVID-19 .
The aviation leasing businesses regularly in the call it the mid teens.
Is it do you think that's an achievable target going forward with the.
The.
Low leverage balance sheet.
Well.
So it didn't have any stoppage but.
Thanks Eddie.
And any any kind of target you think is achievable for that business on the leasing side.
On a combined leasing plus maintenance side.
I think it could be substantially higher than that.
Twenty's, even <unk> in terms of ROE.
So.
I believe that that's very doable.
Thank you.
Yes.
I would now like to turn the conference back over to Mr. Andrew <unk> for closing remarks.
Thank you operator, and thank you all for participating in today's conference call and we look forward to updating you after Q2.
This concludes today's conference call. Thank you for participating you may now disconnect.
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