Q4 2022 FTAI Aviation Ltd Earnings Call
Part of the $110 million EBITDA for leasing came from gains on asset sales, which also performed well we sold $102 6 million book value of assets for a gain of $25 7 million.
And we remain comfortable assuming gains on asset sales continuing at approximately $25 million per quarter or 100 million for all of 2023.
Aerospace products had another good quarter with $22 million of EBITDA.
Started these activities a little over a year ago and in the last five quarters have booked approximately $91 million of EBITDA.
Out any contribution from PMA.
We see tremendous potential and continue to feel good about generating 20% to $30 million in quarterly EBITDA and think 100 million plus in 2023 EBITDA remains very doable.
We feel confident about this number because we are seeing a rapidly expanding backlog of aerospace products business with other leasing companies mro's or maintenance and repair organizations and airlines.
With that let me turn the call back over to Alan.
Thank you Joe Michelle you May now open the call to Q&A.
As a reminder to ask a question. Please press star one on your telephone.
Wait for your name to be announced.
First of all your question. Please press star one again.
Please standby, while I'll compile the Q&A roster.
Our first question comes from Josh Sullivan with benchmark. Your line is now open.
Hey, good morning, Thanks for taking the questions here.
Good morning.
Good morning.
Just a question on edit availability correct me on that.
Congrats on the quarter perfect great team what was the mix there.
Doug.
56 market look like.
On a comparable comparable or no engine supply.
Yes.
It looks very good.
The mix on the buy is mostly where we're buying the CFM 56, and a lot of what we're selling is perhaps four thousands.
So you have <unk> and <unk> 11, so we've really been.
<unk> consciously.
Shifting the mix towards CFM 56 engines over the last couple of years and we have a little chart in the supplement which I think.
It shows how much we've grown that to over three.
About 330, CFM 56 engines between.
Between Standalone engines and aircraft engines so.
And we continue I think going forward to see very good activity on being able to buy engines, even in a pretty strong and hot market for aircraft and aircraft engines. So.
We now have a portfolio or we have negotiations ongoing.
For our various acquisitions that total over 50 engines some of them are coming from.
Aircrafts that were parked or it had been.
With an airline that went bankrupt some are coming out of an airline that just had surplus.
Spare engines.
So it's a wide mix and as I've always said that you have.
The largest fleet of engines in the World you have to over 20000 of these engines.
We continue to believe will we will see.
Numerous good opportunities to grow that number.
Certainly I think will definitely grow that number this year a pretty materially.
Please standby for next question.
Our next question comes from Kristine <unk> with Morgan Stanley . Your line is now open.
Hey, good morning, Joe I, just want to follow up on PMA parts can you give us an update regarding certification progress.
Any feedback from the FAA you've received so far.
Sure so.
Nothing really new since the last time, we spoke but.
The first part.
Has that was approved.
We've installed in over 10 engines now and Theres another airline that's put it in.
Their fleet and operating so it's performing performing extremely well so we'll continue to do that and grow that.
The next four parts are made.
<unk> made substantial progress in terms of.
Finalization of <unk>.
Manufacturing design production and testing and so we expect all four of those parts will be submitted.
For final approval this year around the middle of the year. So they are all sort of.
Are progressing on.
Individual timelines, but theyre all targeting that same goal and so if history is a guide we should have a full portfolio of products available.
For 2024, which is very exciting.
Yes that is and then Joe can you just remind us once you get all these five PMA parts fully certified how much and dollar savings do you think.
You could extract from doing that versus buying from the OEM catalogs in aftermarket.
It's over 2 million per shop visit.
Our cost for those parts versus OEM less than.
OEM list prices as Youre, probably aware went up significantly last year.
November one.
That's today without further increases if you look forward over the next few years, you could very well.
OEM list prices go up.
<unk> go up high single digits are our inflation escalators capped at 3%. So the gap will get bigger and bigger and if you look out four or five years, it's over $3 million per shop visit.
Great. Thanks for the update Joe and looking forward to see the announcements when we get them certified.
We are too.
Please standby for our next question.
Okay.
Okay.
Our next question comes from Giuliano Alagna with Compass point. Your line is now open.
Good morning, Thanks for taking my question.
Yeah.
Great good to see some great performance on the operating side one thing I was curious about.
And to the module factory.
I was curious if there's a rough sense of how many modules youre able to spell in 'twenty, two and then again.
No sense of how much that could grow in 2023.
Yes, that's a great question so.
Last year in all of 2022, we sold 100 modules approximately and it was it was divided amongst 25 different customers unique customers. It was a mix of asset owners and airlines and MRO. So it's a nice.
Balancing sort of touches the entire ecosystem of users of that engine, which is what we'd always like so so if you think about it it's four four modules per customer.
Not a big number and it really represents a lot of.
A lot of these users were basically testing the product and trying it out and see if they like it and so every everyone. That's been a customer of the module factory is.
Becoming a repeat customers. So we haven't lost any but any any customers and were picking up new ones. All the time. So if you think we can grow 25, we're just rough math, if we could grow to 25 customers to 50, and we can increase the number of modules per customer.
The growth opportunity is right in line with what we've been talking about in that.
Could see upwards of 200 400 modules in a year.
Coming in the next few years for 2023, I would expect to see meaningful percentage growth.
Exactly as I would speculate somewhere in the probably 150 plus range of.
Modules this year.
And it could go higher than that and we're seeing very strong volumes and activity right now.
That's great.
Then youre looking at.
Some of them are not broken out perfectly but.
Aerospace products segment kind of implies.
We're all done right now somewhere in the range of about 500000 per module and EBITDA.
It seems like that could probably double it because there are a million with PMI.
I'd be curious to know obviously think about 150 plus.
If I can imply that you're going to see if we get too.
$75 million on the current run rate in Jamaica Hope you double that number.
Definitely the following year without any volume improvement from our Mod number of module.
We're thinking about.
The economics, and how that's contributing right and then beyond.
Yes, yes.
Hey, good way of thinking about it without you.
Even without <unk>.
Meaning full growth in volume, we will see big growth in income and EBITDA.
That's great and then.
<unk>.
Question around.
The quarterly EBITDA and <unk>.
Run rate you have obviously you know we're close on a lot of acquisitions during the quarter.
I'm sorry.
A lot of contribution from those assets.
I think in the past.
I've got one they're trying to get to a run rate of $90 million to $100 million per quarter for the.
Quarterly EBITDA I am curious.
Where you were exiting the quarter with of acquisitions.
Where the run rate was including the new acquisition.
Well, we're continuing on some of the assets we bought were off lease so they don't necessarily contribute immediately.
And we'll continue to do that because we see the best value in terms of purchase prices and off leased assets. So you can you have to build in a little bit of time to get those up and running in the market I would say the market in general as you know.
Really good Fordham for leasing so airlines are.
<unk> everyday there they're looking for additional.
Old generation are not new generation assets of <unk>.
770.
And <unk> and the <unk> hundred 20, <unk> fleets are in tremendous demand so because of the delays with new manufacturing. So so we're seeing very strong.
Demand that is really targeting the second and third quarters of this year I think thats when youll see the biggest growth is.
People will be people and lining up assets now to put be able to put in their fleet in the second quarter and runs run very.
A significant schedules in the third quarter. So I think it's it's shaping up very nicely.
That's great. Thank you.
And I'll jump back in the queue.
Thanks.
Please standby for our next question.
Our next question comes from Hillary <unk> with Deutsche Bank. Your line is now open.
Hi, Thanks, Joe and thank you for the call your acquisition of IR with Russell really well timed given the current environment.
Hi.
Jay.
<unk> has the integration process with <unk> and <unk>.
Longer term strategic benefits of the acquisition.
Okay.
Yes, so it's going great. It was very timely we were fortunate to find the facility in Miami that had maintenance capability for hospital shop visits and a test cell in the test cell as I've mentioned, there's only four of them.
Independent test cells in North American market and one of them is at Lockheed Martin, which we also.
I have a little bit of.
Knowledge of as well so so the test cell.
Tremendous asset for us and.
The businesses.
There's probably one major customer in that facility that has.
Over 30 engines there so that's a big opportunity for the business to ramp that up and grow that and also for us to do additional module swaps, which we are.
Fully engaged on.
As we speak.
<unk> also made some management changes and hires that.
Our terrific, we've got some great people and I think having having a physical location for us that we can showcase our ability to store two quick repairs and <unk>.
Module swaps is a terrific marketing tools, so we couldnt be any more excited about it.
Thank you and then I guess just regarding the supply chain.
When you listen to conference calls from Boeing, but they're all talking about it with wanted to get like a high level view like north you as well.
Sure.
What is the problem of how long has this been that loss I think you can see the supply chain is with lasting like well into next year with a company that could be resolved.
Yes, I know that there are labor shortages.
There's a whole bunch of onetime issues that have been contributing to it but.
Or does it really take on when do you think this could and then and any and if that does when it does and.
What.
Got it.
Obviously this is a fantastic environment, but one thing.
Thanks Scott.
For the other guy.
Yeah.
There'll be kind of a strategic plan for ethanol.
Yes.
Great question.
Suddenly, we think about and talk about all the time and it's I think it has.
Tremendous benefits for us, but it's a complex problem and I don't think its going to be solved very quickly and every week, we seem to hear about a new problem that no one thought about the prior week. So it's not it's not slowing down is actually increasing.
Potential many people are looking out to the summer when you have a lot of activity.
There could be some significant.
Challenges with people to get airplanes in here because they are waiting on one or two parts and that's a real issue.
I think it's.
You hear about it from every every participant in the spaces.
We've seen it also in our used serviceable material business, where we sell used parts in there.
Particular parts that people just can't get or the lead time is eight weeks and so that one single part could keep an engine in the shop for eight weeks or keep it from flying so in that event part prices have doubled in some cases or tripled.
Just as a matter of weeks because it doesn't matter the price. If you have an engine tied up for two months the price of a part is irrelevant you have to pay whatever whatever it takes.
So I think it's I think it's getting potentially worse and it could be a critical it could be.
A meaningful challenge for people this.
This summer but.
With us I mean, thats, our whole pitch really as we can get engines up.
Quickly.
Repaired the quick turn concept is instead of sending a whole engineering waiting for repairs and parts, we could actually swap out a module and have that engine back in service in two weeks and so having repaired inventory on the shelf.
As our whole.
Part of our whole strategy and I think it's you know it's perfect timing for that.
I think the longer term consequence of this is that we hear a lot of airlines.
Realizing that they cannot rely on a single supplier for <unk>.
And be dependent upon a single supplier for anything so again our business model is like you don't you don't have to go back you up.
The offering in some cases with where we have.
Perpetual power deals where we lease.
Aircraft and engines will put us there.
On the ground and the airlines.
Hanger. So they can they can have access to a spare in case anything goes wrong and have it immediately so.
So all of these all of these challenges and all these things that are they're popping up we have we have solutions and is.
It's it's.
So really we've gone from an environment, where it is.
Felt like everything was.
Working against Us where it feels now like everything is working for us.
Okay.
Thanks, Joe.
That's helpful.
Please standby for our next question.
Our next question comes from Frank Galanti with Stifel. Your line is now open.
Yes, great Ah Hi, Joe.
I wanted to start on the leasing side. So when I look just sort of on a.
On a macro level.
Based on IATA data right domestic available seat kilometers are down.
<unk>, 16% from 2019 level.
And so to that point there is still a large area under the curve of engines or cycle that just weren't used due to the pandemic doesn't that imply that there is a significant number of engine sitting on the sidelines that can sort of be used.
Incremental planes are flying again.
Ultimately push utilization in.
Down in yields down.
In the near term.
No I mean first of all I think that domestic narrow body flying is globally at or above 2019 levels right. Now so I think that with China reopening that is China was a big negative on that number globally, but now that they've reopened their back too.
They are back to 2019 levels and actually I saw something that said February schedules in China were up 10% from 2019. So so that market is snapback and globally. The U S. As you know above.
I think you know you just said this week.
Lenny to be above.
On the.
Domestic business is up 30% in <unk>.
Corporate or leisure business is up 30% and corporate is 100% of what it was pre COVID-19. So so that's the first thing that there is still a surplus.
Aircrafts that have been.
Out of service and I think that the.
Number of I always look at the number of parked airplanes spike by type and so if you look at the 770 <unk> hundred <unk>, it's still a little bit above 10%. So it's probably.
And that's always been a.
Key level when you go below 10%.
And I think the lowest it's ever been and it's probably three or 4% as it starts to get very tight. So we're still working through some of that and most of that has been <unk> hundred twenty's, which.
It was caused by Europe , I think being a little bit slower to recover in the travel market and being a heavy <unk> hundred 20 fleet user.
On the engine side, it's a very different dynamic because what when COVID-19 started people stopped putting engines through.
Shop visits and so what when you have engines.
That have green time airline grabs those puts them on an airplane and fly them until they need a shop visit and then they park it.
So you don't have in particular.
If you look at the CFM $56 seven <unk> market, which is the engine that flies on the 737 fleets, there's virtually no availability right now for that engine.
So all of the Green time was used up so even though theres engines parts. Those engines are the aircraft park those those parked aircrafts might've had their engines remove months ago and flown so it's a very.
That's one of the things I like about the engine market as it's self correcting on supplies very quickly and that people. Once you stop doing shop visits you stopped you you use up a lot of capacity in the supply drops roughly.
Roughly 15% to 20% a year.
Okay. That's.
That's really helpful.
Moving over to aerospace.
You've been out there talking about a two to four year plan on the aerospace business, reaching $500 million of EBITDA. I think first can you sort of lay that out what that plan in a.
But sir.
My question is let's say, we get to the end of that four year plan, we get to 2027, why wouldn't you hit that $500 million target why wouldn't you get there.
I think it's just execution, we have to execute.
Otherwise the market is there and it's the market environment is very <unk>.
Helpful for what we've as I mentioned, what our products are and what we can do for airlines to save them money, we basically provide airlines with cost savings and flexibility and so that to me is a good product. It's a differentiated product no one else can offer it. So so really it's just can we execute.
In terms of the composition of the 500 million of EBITDA, what have we talked about recently with you is that if we.
If we had 25 module factory users last year, each doing four modules per customer and were able to double the number of.
Customers to 50 and double the number of modules per customer to eight that's 400.
Modules per year.
And we're currently at 100, we expect substantial growth. This year. So we're on a path that would.
<unk>.
Get there.
If we continue that and then profitability currently worried about a half a million dollars per module and we expect that to double with PMA availability next year.
So that gets you 400 million of EBITDA from the module factory.
We expect 50, or so tear downs, a year with <unk> and we generated about $1 million a profit per aircraft. So that that's 50 and then we expect the JV with Chromalloy to generate 50, so that would be the.
As you know that's an aspiration, it's not a forecast, but it's something we think about a lot and we keep refining and we feel good about the ability to get there.
Great. Thanks very much.
Thanks.
Please standby for next question.
Our next question comes from Brian Mckenna with JMP Securities. Your line is now open.
Thanks, Good morning, everyone. So it's great to see the strong quarter of asset purchases within leasing, but can you give us an update on where LOI stand today, and then related how should we think about the baseline level of gross asset purchases annually within this segment moving forward.
Yes, so on the second I think we acquired over 600 million last year of new assets is that right.
We sold.
$2 5300 about yes.
So that's in line with what we've been doing.
The asset sales are a little bit higher and as we've talked we've we intend to recycle capital more than we probably did in years ago, but I think $500 million to $600 million of new acquisitions in two to three call. It 300 million of asset sales as it is a reasonable.
Expectation.
And we're starting off the year pretty strong.
I don't have it we have a number of deals right now that we have verbal awards and handshakes and.
They're not fully documented but that number totals a couple of hundred million dollars and it's a very it's very much CFM 56.
Focused it's a matter of fact I think in total that's over 50, CFM 56 engine. So so we could see a meaningful meaningful growth in the.
The CFM 56 engine count in the first half of this year, which is great.
Got it helpful.
And then congrats on a quick turn acquisition I know, it's small in the absolute but there seems to be some pretty meaningful strategic benefits. There I'm curious, though how are you thinking about incremental strategic M&A from here is there any white space across your business that you would look to fill the acquisitions or any M&A from here would really just be to expand into other adjacent businesses.
We look at the whole ecosystem with the engine and I think that the one area where we are.
Our currently focused as repairs, so when we tear down and engine.
A lot of the parts before they can be put on a new airplane has to be repaired and our spend last year was roughly $50 million. So it's a pretty pretty good amount of money and so we're looking at the repair space and what repairs, we do what repairs other people do and.
What.
Opportunities there might be for either.
M&A or.
Organic development or just using our buying.
Buying power to get better deals.
That's the current focus but.
We are trying to be vertically integrated.
And every way we can on this engine.
And there's you know the.
I think the size of the engine. The fact that it's a modular engine.
Fact that the Oems keep raising prices. So you know so nicely.
It gives us it's just a huge opportunity.
Got it thanks, Joe.
Please standby for our next question.
Our next question comes from David Xu luck with Barclays. Your line is now open.
Hey, good morning, Thanks for taking my questions, let's start off with quicker I was hoping you could provide an update on where you are with insurance recovery, what you've recovered so far in what parts are still outstanding.
Yes.
So.
Couple of things.
The assets, we had it in Ukraine.
For four aircraft and engine, we're starting to move the engines out by truck. So we've.
We've begun the recovery on those assets and I expect that roughly will get about $30 million of assets out this year.
And we haven't decided fully whether we're going to lease those or sell those so I think thats.
Partial solution I think our book value on those was about $30 million.
Our insured value was $70 million.
And on that front.
<unk> have as you probably are aware of continued to be very uncooperative. So virtually everybody every asset owner has filed lawsuits and we are you're not going to be different in that way. We're filing we have filed one suite already and we're preparing the papers on the second.
So we'll see what the judges say it just it's been a bit frustrating that the there was a lack of engagement by the insurers but.
But we believe that the assets were.
Wrongfully taken and that's that's what insurance is meant to cover and will ultimately.
Collect a meaningful amount of that I think the total total claim we filed is $270 million.
That's helpful and then Joe earlier, you talked I think about it.
Increased velocity of capital through bear, hoping post a quick term facility.
Talk about a little bit.
Talk about how that acquisition Mike.
Impacted a little more detail.
You have to have the capital velocity and in Pennsylvania.
Well there is there is two two areas for that one is in the leasing segment, we've we've talked about.
Selling more assets and recycling the capital in particular.
We've got two deals one of which is fully closed and other which is in the process of closing where we're selling the asset the leased asset.
And again in retaining the engine management services contract will make about $1 million per aircraft per year for the maintenance of those engines and so that's.
That's something we want to do more of and we have some other deals in the pipeline. So in terms of the leasing portfolio as I said, we typically bought $5 to $600 million of new assets, a year and we expect to sell two to 300 of those each year, so that generates gains and it also.
It allows us in those some cases to keep the maintenance contract, which is which is a great outcome is is.
Is to keep the best part of the deal and make a game.
So that's on the leasing side.
That will continue and I think we've got to get a good sense of how to create value how to buy things off lease put them on lease and then sell them.
The module factory.
I think we're currently operating with about $150 million of.
Inventory and.
As we grow that business that was doing 100 modules last year.
We expect that that will turn.
Significantly faster so so as we grow from 100 to 400, it's not going to it's not going to go out four times. It should go it should go up very modestly because we expect we can turn inventory as we get.
As we get larger and create more options, we'll turn that inventory a lot faster. So I expect that if we were to do 400 modules a year. Our expectation is that we would need $200 million to $250 million.
Of inventory to do that to support that.
And it is facilitated by quick to are having.
Having the ability to deliver.
Our swap and a low pressure turbine or swap a fan in under two weeks is a product that no. One has in the market today no one can do that.
Great. Thanks, So that's a very helpful color.
Please standby for our next question.
Our next question comes from Sharif Al Mcgratty with <unk>. Your line is now open.
Hi, good morning, Thanks for taking my question.
Could you talk a little bit about the different nature of shop visit that quick turn compared to the Montreal facility and more broadly could you talk about why wire hospital business, becoming more popular.
Sure Good question so.
So what we do and in Montreal is.
Lockheed Martin is performance restoration and so if you think about an engine.
That engine.
Is taken to rebuild that engine if it has say only a few.
1000 cycles left to fly our 100 cycles after hours to fly.
Need to rebuild that to north of 10000 cycles in order to do that you literally have to take the entire engine apart.
Every piece is inspected either visually or by machine.
And summer replaced some are repaired and then the whole engine gets reassembled and it takes months and it cost millions of dollars.
The current Oems on the CFM 56 is $6 million for that for that engine and it was just in many cases more than we paid for it in the first place. So that's been that goes up every year because they raised the parts prices.
10% or than last year. They raised all the life limited part prices 13%.
So that that's what you do in Montreal in it.
It has to be done every so often because you you have regulations in <unk>.
Limits on on how long an engine can go before it needs to be that to be done to it.
The second.
Shop visit as is and I recommend you go to our website quick turn engines dot com and it lays out the.
Hospital shop visit some of the things, we do and Thats, often case, just something needs to be repaired a fan blade needs to be repaired bearings need to be replaced the low pressure turbine.
Gearbox has to be replaced and those repairs can be done.
Very quickly and you can also do it with a module swap if you had to replace suggest a fan you could swap a new.
Fine on and take the old fan off and do that in.
And five to 10 days.
So that's it.
And a lot of airlines have if they have the largest fleet of CFM 56 engines. They are expressly trying to avoid that first shop visit that I'd describe it takes millions.
Next months and cost millions of dollars and in many cases, you can do that with hospital shop visits.
<unk> only repairing one section of the engine or bringing one section of the engine up too.
To a higher number of hours and cycles available and keep that engine flying longer and so the hospital shop visit market today is about 40% of all shop visits.
It's projected over the next six years to become about 60% of all shop visits it's partially happens as you get there.
As the fleet ages people are more cannibalizing, what they have in and less risk doing full restorations in any event. So so that's that's really the difference and that's what quick churn as his focus on is that hospitals composite market.
The other reason why it's helpful to have it in a separate facility is that.
If you run a big MRO shop, and an engine comes in your motivation or your your inclination is defying lots of things to fix so.
If you have an engine that goes into an MRO oftentimes.
Youll end up with a bill that's multiples of what you thought it was going to be because people find things just like if you took your car and you didn't sell the mechanics to inspect the brakes, but they did anyway.
You need a new pair of race.
And who could say now you know so.
So it's it's better to have hospitals shop in a separate facility, where the the orientation of the motivation is to do what the customer wanted to have done and get it back in service quickly, obviously safely but quickly.
Okay. That's helpful and great analogy. Thank you.
Please standby for our next question.
Our next question comes from Robert Dodd with Raymond James Your line is now open.
Good morning, everyone.
Uh huh.
If I can obviously in the presentation I mean, you pointed out.
Adjusted EBITDA was up for the you want to get into.
It might be into that range by maybe Q1 could be at the low end of that range towards the end of the year.
As you have said you don't need a lot of.
Extra capacity for module and you've got a lot of cash flow even after the dividend after maintenance capex.
What are the other options for you I mean do you explicitly go to pay down debt invest even more in an asset right.
<unk> gave us some guidance on what you plan to do on that front.
What's the what's the thoughts on utilization of the cash flow that you're going to be generating this year given leverage is coming down on that.
Yes, so we've.
<unk> talked we do want to get.
The leverage to the point, where we're strong double D and I think if we achieve those numbers. This year. We will we will achieve that goal so that would accomplish that which I think is great.
We are always looking for good assets to buy and CFM 50 six's are.
As you can tell her passion, so that could present opportunities for additional capital beyond that I think we would look to.
Dividends share repurchases and.
Those they're all in the mix.
Got it.
Thanks on that one I mean on the.
Sure.
The prospect of a dividend versus buyback how would you allocate what would your thoughts be on on the relative value.
Chip.
More than that that the allocation pilot.
To having that much yet.
Capital.
Well, obviously it will be a function of the share price and what we think the prospects are for the business going forward I think that that will drive the dividend you know what you get.
The share buyback as a function of the price.
Got it thank you.
Yes.
At this time I show no further questions I would now like to turn the conference back over to Alan Andreini for closing remarks.
Thank you Michelle.
Thank you all for participating in today's conference call. We look forward to updating you after Q1.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.