Q2 2023 FTAI Aviation Ltd Earnings Call
<unk>, while the financial results reflect an adjusted EBITDA loss. This loss was largely a result of the startup of operations under our new multiyear tolling contract experienced in the early parts of the quarter and we're entering Q3 now generating positive adjusted EBITDA and finally at long Ridge normal operations continued and we reported $10 4 million.
Adjusted EBITDA all in a very strong quarter setting the stage for continued growth.
Briefly on the balance sheet, we ended the quarter with $42 $5 million of cash in the aggregate, we had $1 3 billion of debt shown on the balance sheet at June 30. Shortly after the quarter end in July we issued $100 million of additional debt through an add on to our existing senior secured notes proceeds from the issuance were used to repay approximately seven.
$5 million of existing debt, including our $50 million revolver at transtar, So pro forma for the issuance total debt on our balance sheet increased only slightly by $25 million from the June 30 balances that are reflected in the earnings supplement and in our 10-Q.
Accordingly, Transtar is now completely debt free meaning all cash generated at the business can be distributed up to <unk> with no limits or restrictions.
I'll spend a few minutes, providing more details on each of our segments and then plan to turn it over for questions I'll start with Transtar on slide seven of the supplement.
Transtar posted revenue of $42 5 million and adjusted EBITDA of $23 million in Q2 up from revenue of $41 million and adjusted EBITDA of $17 2 million in Q1, both carload volumes and average rate per carload were higher for the quarter as U S steel production at the Gary Indiana in Pittsburgh, Pennsylvania facilities continued at Nord.
Immel levels away from U S. Steel. We also continue to make very good progress on multiple initiatives that trend start to drive incremental third party revenue and EBITDA. We expect these programs to represent approximately $30 million of incremental EBITDA opportunities annually with no additional investment.
Now on to Jefferson Jefferson generated $17 $1 million of revenue and $7 1 million of adjusted EBITDA in Q2, compared to $19 1 million of revenue and $6 5 million of EBITDA in Q1, I'll take a minute to discuss the makeup of the P&L for the quarter, which showed a shift to increased volumes of refined products versus crude oil.
Oil trans loading rates for refined products are typically lower on a per barrel basis for Jefferson given that the process involves no heating were blending as crude often does from refined products can also generate a higher margin since the operating costs associated with refined products are quite low for Q2, Youll see we posted lower revenue due to this dynamic but continue.
The pace of EBITDA due to lower operating expenses.
More importantly at the end of the second quarter, we completed commissioning and started operations at our new ship dock, which doubles Jefferson's chip handling capacity and represents the final component of Jefferson's full build out at the main terminal.
The new ship cleared.
New ship docked clears the path for our refinery customers to now fully utilized Jefferson storage and trans loading capabilities and we expect substantial increases in volumes entering the second half of the year.
On the new business front, we recently secured two new contracts at Jefferson The first which is that the main terminal involves the handling and storage handling and storage of naphtha for large trading firm that commences immediately and should more than offset the reduced crude oil volumes. We saw during Q2.
The second contract, which is materially more meaningful is that our newly acquired Jefferson South site, where we secured a new 15 year contract for the trans loading and export of hydrogen based clean fuels commencing in 2025.
Together. These two contracts are expected to generate in excess of $10 million of annual EBITDA and potentially materially more.
Expect to enter into additional contracts for the handling of clean fuels in the coming months as new developments in the Beaumont market have been accelerating generating new demand in an environment, where supply of available logistics terminals is very scarce.
Moving to <unk>, we commenced our multi year contract to transport natural gas liquids using our phase one system in Q2, the contract with one of the world's leading trading companies has minimum volume commitments and does not exposed to commodity prices we.
We did experienced some initial startup costs that resulted in a small adjusted EBITDA loss in Q2, but as I mentioned those should be behind us and we're generating positive EBITDA going forward.
With phase one having commenced upon it is now focused on securing business for our larger phase III Trans loading system as detailed on slide nine of the supplement our phase II system is expected to materially increase our storage and throughput capacity when it comes online in two years in the aggregate, we expect phase II to cost approximately $200 million build and agenda.
Rate in excess of $40 million of annual EBITDA once complete.
We have demand for multiple international off takers and our goal is to enter into long term agreements with multiple parties in the coming months.
Finally, moving on to long ridge large generated $10 4 million in EBITDA in Q2 versus $11 3 million in Q1 power plant operations were steady while gas production was managed down during the quarter and the currently low lower gas pricing environment at gas prices of under a $1 50 per <unk> or profit.
On third party sales is less impactful. So we have deliberately limited production to volumes needed solely to fuel the power plant and opted to keep excess gas in the ground in anticipation of higher gas prices, which are typical as we enter the fall and early winter.
At long Ridge, we continue to progress a number of initiatives in the near term, we're expecting final approvals in the coming months for the upgrade of the power plant to 505 megawatts and.
An increase of 20 megawatts from our current generation capacity that will contribute incremental EBITDA in the range of $5 million to $10 million annually based upon current forward curves for the price of power.
Over the longer term, we are seeing increased interest from behind the meter customers, including data center developers and companies focused on energy transition opportunities to wrap up we're pleased with our first half of 2023 and excited about the things to come in the next half of the year with that let me turn the call back to Allen.
Thank you Ken Michelle you May now open the call to Q&A.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again, please standby lack compile the Q&A roster.
Our first question comes from Giuliano Bologna with Compass point your line is open.
Good morning, and thanks for taking my questions.
Starting off.
Can you hear it from a high level.
Sequentially.
On a quarter basis.
Consolidated EBITDA was up 26%.
Curious, if you're expecting similar increases in frequency or throughout the balance of 'twenty three.
Okay.
Yes, we are.
As our business has continued to ramp up.
And by the way.
We.
We do we are expecting to maintain 20% EBITDA growth from the segments in closer to 25% after corporate expense I think the only the only potential.
Potential blip and that is from time to time, we have scheduled maintenance at long Ridge power plant and so that may that may affect a month's worth of.
Cash flow out of long ridge in any in any particular quarter, depending upon when that month falls I do think we have a scheduled maintenance events.
Coming up later this year, whether that falls in the month of September the month of October will ultimately drive what long ridge ends up doing in that particular quarter, but outside of that yes. That's the pace of growth we are anticipating to continue.
That's great.
So starting off with <unk>.
I'm curious if there's any third party contribution in the $23 million that you reported in the second quarter.
Yes, I'd say about <unk>.
Directionally about 10% of that EBITDA.
<unk> attributable to third parties.
Obviously our goal is.
We continue to integrate that and diversify the revenue stream.
I think we've got a lot of things going on that are going to enable us to do that as we as we have been entering the second half of the year and turn into next year I'm excited about it I think.
There are a number of different initiatives that will that will drive EBITDA growth and also diversify the EBITDA.
That sounds good.
Excellent.
You'll get a little bit more detail around the $30 million of incremental EBITDA that transfer and the timing around when that could start with Walker.
Part of it starting to book for the balance of the $30 million.
Yes.
<unk>.
The vast majority is.
Attributable to third party business, we have a number of.
New developments coming online in the coming months, very large railcar repair and maintenance facility in Pittsburgh.
Which is which is progressing really nicely I was and I was in Pittsburgh.
Just about a month ago and saw the progress that's going to be a big deal.
For the Union Railroad transfers Union railroad in Pittsburgh, we have a new trans load facility. We're tripling the size of the trans load facility and the Detroit area and Thats coming along great I would.
And then thinking just on the product side in terms of the drivers that give you a little confidence there I'm curious if you're worried about how the backlog looks on the module factory side, if you're continuing to see that.
Module volume demand continuing to step up we've been saying it for the last few quarters.
Yes, as you know we've mentioned.
At a high level of repeat customers I don't think anybody that we've done business with hasn't indicated they're going to do more in and many of those customers are already put in orders for the balance of this year and indicated what they might do next year as they as they have no visibility on their shop visit so it's very good and.
We add new customers as well as you can see we've you know we continue to develop the repeat business, but we're also adding you know each quarter, we will add a handful of new customers, which which will also grow so.
So I think the backlog.
On modules is excellent and the visibility is increasing and people once they've used it you know you can say well now I'm going to use it.
No.
All my shop visits and that gives us a longer term view into what the.
What the pipeline will look like it allows us also helped.
<unk> to pre build.
Inventory so we've the more visibility we have dealt with the customer is going to do the easier. It is for us to to increase our throughput.
<unk> throughput and turn time, because we can preposition assets and in that way.
The other the other businesses the U S M used serviceable material business and we see that increasing.
We've been running as we indicated we were probably did approximately 30 tear downs last year, we've been running at that a little bit higher than that in the first half of this year, but we're going to increase the rate of tear downs and we've we've taken a number of engines in.
To inventory and started the process as it is.
You probably are aware it takes about three to six months before you get revenue because you have to tear down the engine label all the parts inspect and many many of those parts have to be repaired. So they have to be sent out and then brought back so so.
So we see that level.
Level of turnaround activity increasing to over 40 engines.
But in this year end and see very very strong demand is.
The original equipment manufacturers as you're probably aware put in a price increase on August one of this year, which was.
Quite a bit earlier than they have previously done it so I guess.
If you annualize that rate increase.
That's also well into the double digits. So a new part prices are going up rapidly so user services material.
<unk> is a very valuable and we have probably the biggest supply of used serviceable material in the world maybe other than the OEM, who doesn't like to sell U S M anyway, but.
That.
That gives us quite a good tool to get additional business and.
In cross sell modules and other maintenance services, so where are we.
We're gonna take the U S M activity level up in.
In the next two quarters.
That's great I really appreciate it.
All the color there.
I'll jump back in the queue.
Thank you.
Yeah.
And one moment our next question.
And our next question comes from Hillary in Canada.
Deutsche Bank. Your line is now open.
Oh, Hi, Derick on for a couple of my questions are.
Eric.
Total revenues declined sequentially, but the EBITDA margin.
<unk> strong over the last quarter at 44%.
Thank you, Chris My last quarter.
Give us some color on what's causing that.
I guess just related to that so we continue.
I'm going to go away.
Its primarily mix that it's hard to you know.
Control of that quarter to quarter, but it was.
Favorable this quarter, because we had slightly less used serviceable material sales and we also had more core modules that we sold which tend to be higher margin. So we had less of the lowest margin and more of the highest margin. We would continue to suggest that 35% is still a good place to.
Hold in the middle as it.
For modeling purposes, we think that's a sustainable number and not.
It will not always be above.
To the degree it was this quarter, which was really just driven by mix and then there's occasionally there's just an opportunistic sale that you happen to have the right. The right asset at the right time for somebody who desperately need. It. So you can also.
She sometimes we intentionally to make sure we have that asset so.
That's that's part of the business.
Got it okay.
Or I guess the thought on this.
If I read it the paint line.
Included in that.
Hum.
But that's just something included in backlog 3000 last months with any other kind of a thing for us.
Awesome.
Hum.
I'll provide more color on that.
Yeah.
Hi, This is Alan.
The next one that we're going to be.
Considered for as the S&P 600, and that could be at the end of it as early as the end of Q3.
And estimates are from the index folks is that that number could be another 12 to 15 million shares.
Great. That's very helpful. Thank you so much.
Thanks.
Thank you.
Both I mean, I think we've always.
Felt like you know, we're going to use it and we'll be in a quick adopter, so and that we believe will facilitate other people adopting it and as we saw with a C. F 680 engine previously.
We put PNA in those engines and lease them and.
No airline in the World had any issue with leasing an engine PMA at some airlines will say well you know, we wouldn't necessarily put PMA our own engines, but.
No one would not least an engine.
So similarly, we expect you know that you know.
To be this the similar in this market as it is and that's why I think the.
Yeah, the integration of our products and the ability to cross sell is very powerful and that we have a solution for everyone. There's nobody out there and we can offer something too.
Now you to help you know.
Save on maintenance expense, which is an increasingly.
Stands out on P&l's of airlines as you're well aware.
Chasm numbers are growing up in maintenance and particularly engine maintenance is one of the big drivers. So so we think that this our ability to offer you know a wide range of products.
To anybody that owns an engine or fly as an engine is really powerful.
Okay, I appreciate that [noise] and.
And then on the capital side I guess are you comfortable with where you are running a debt levels right now and do you think you need a little bit more cash. So is there a capital required going forward.
We've had access I mean, we have a revolver that we've always had access to that acts as our liquidity.
And we've had good access to the the debt markets and the preferred market. So.
We think that you know the.
The the credit metrics are improving as we've.
Told people expect to be you know in the mid Three's that the total EBITDA, which we achieved.
You look at the numbers, we achieved that this quarter, which were saying we were hoping to achieve that by the end of the year. So that's.
That's good and we think that that will position us to be strong that'll be.
And my experience as long as you're strong double B you pretty much always have access to capital. So we're we're.
We're very close to that and think we're gonna get position.
The the need for capital is really driven off of [noise].
Investment opportunities, which is a good thing and as I mentioned, we are seeing.
An increase in opportunities, which we didn't really expect but the world is funny and and you know things are always changing so we're well positioned if if opportunities present themselves to you know further.
Increase our positioning C F M 56 market.
Alright, I appreciate that response, thank you.
Bad thing do you.
And one moment by next question.
And our next question comes from Frank Galanti with Stifel. Your line is now open.
[noise] great. Thank you I appreciate you taking my question.
[noise] I wanted to ask asking about PMA approval.
Airlines in certain both believing in the module factory [noise].
So.
Has there been a change [noise].
In the past couple of months on further PMA, except in and if possible I'd be helpful and sort of no that'd be all P. T module sold what percentage of both have <unk>.
I don't think we've sold any modules with P. M. A N is that correct, we are flying in or at least fleet.
What 15 or so engines.
[noise] about 15 engines with PMA.
And the C F M 56 sleep.
We've had 100 per cent of our so you have 680 fleet and proud for now since we've had a P M a N.
Which always has been the.
The case so.
So we've.
C F M 56 sleep we have.
About 15 engines that were flying unleashing to other airlines that are flying with PMA.
Is there any particular reason why there wouldn't be P. M. A in the L. P T module.
From our customer or from a strategic.
<unk> market entry perspective.
No and as I said, if you look at the development as you have 680 engine Mark and we expect it to be similar so that ultimately it's purely a matter of timing is to run an engine needs a.
Restoration of the L. P. T then and when it does that's when there's an opportunity to use the piano you can't you just you wouldn't necessarily taken engine off winning that doesn't is not due for a shop visit and swap out.
Ah Good you know OEM parts for PMA, you just do it when it's ready in in the shop.
Okay, and then for such an it up just from a generally higher interest rate environment, how does that from your perspective affect the leaf business, particularly was right.
Well.
Had a I mean I would say are.
The lowest rate our cost of that was we didn't issue a 5.5%.
And estimates right now, we're trading and there's probably 75% range on cost of debt capital. So R.
Just to bring it to our personal.
Situation or cost of dead is up about 200 basis points, but but I would say our return on assets that we're looking at a deal wise is probably up four to 500 basis points. So from a investment point of view. It's it's fine we are you know.
We're more than covering the increased cost of debt.
The other side of his how does it affect the industry and I I alluded to that earlier and I think a lot of.
Sort of mid tier leasing companies that used to go out and raise with an equity fund and and assume they were gonna be able to leverage that with relatively cheap that are struggling that's hard.
It's hard to get the dead. The dead is way more expensive than it was before by orders of magnitude you know not.
Not 200 basis points, but multiples of that.
So the numbers don't work, which means.
That they're not competitive prices come down or.
And all of that you know is what sort of leads us to be in a pretty good position because our cost of you know.
Dad is up a little bit not a lot.
And we don't leverage each individual deal. So so we're in.
We're in an environment more like 2010, and 11, where.
He who has money or she who has money is you know in a good spot so.
That's kind of the.
That's the yeah the macro on you.
You know in the new aircraft side I don't we don't really dissipated in that market. So you'd be better to ask you know the people that have a big big New aircraft orders and then then us.
That's really helpful. Thanks very much.
Yep.
And thank you.
And one moment by next question.
And our next question comes from Brian Mckenna JMP Securities. Your line is now open.
Oh, great. Thanks, So Joe could you talk about the opportunity and the repair market I know you've spoken about this a little bit in the past and I'm curious how you're thinking about this opportunity today, mostly in the U S. And then in Europe , as well and would you like to potentially do an acquisition here to create some more scale initially versus trying to build it organically from scratch.
Yeah, Great correction, we since we last spoke up in Montreal, we have.
Made progress on the repair joint venture, we took a trip through Europe and met with quite a few.
Different you know.
Options and we've narrowed it down and so I think we are progressing.
Progressing with.
On that and and we had expected or hoped that we would have something by the end of this year.
That would be in place and I still believe that that seems doable.
[noise] doable and we're still very interested as I mentioned, we're increasing.
Our teardown activity fairly meaningfully which means our repair volume is gonna be up materially, which makes us an even better partner for people who have repair products. So I think it's only gotten better and the repair market is you know a lot of people are paying attention to it.
Now because OEM parts prices keep going up and up and up and so recycling or fixing or repairing.
Is pretty attractive as a pretty attractive business for for everyone. So.
Very excited about that would we.
By versus build and you know I think we're trying you know.
Building something from scratch is probably the best overall economics, but it takes a long long time, so I don't think we'd rather avoid that and you know if we can get in you know in.
Into something sooner that would be better.
It could involve investing some modest amount of capital, but it's I doubt that it's we're not gonna there's no one company out there that has the portfolio that we could you know sort of acquire and so it's it's probably more of a partnership structure.
Got it very helpful. And then maybe just a question on your external manage structure. So you clearly have had a long standing relationship with Fortran since you've since inception, but just given the girls trajectory of appetite and the Scott the size and scale the business today versus just a couple of years ago would you ever looked at and internalize the business.
And move out from under the fortress umbrella.
Well, we got a lot of benefits from being part of fortress and we also are in the process of being so fortunate is under contract to be sold to the bottle.
Which would likely not closed until around the end of the year. So it's.
It's really a decision the new owner, we would need to make on that front.
[noise] got it thanks, Joe and congrats on another great corner.
Thanks.
And thank you.
And one moment by next question.
And our next question comes from Robert Dot Com Raymond James Your line is now open.
Hi, guys.
Congratulations on the corner of need to talk about some question.
You Park began to that I think about capital allocation right. I mean, obviously, you know I, usually ask about the dividends the dividend is extremely well covered.
<unk>.
<unk> now.
In in the middle.
Target range for that swelling double B I mean, what's what's the appetite.
Is there any appetite for allocating capital to increasingly dividend or.
Is it just the opportunities for investment in an acquisition of assets I just much more attractive I mean can you give us you've given us the <unk> acquisition dividend kind of priority order before but you've already hates elaborate kind of cockpit. So can you can you rank where you you you.
The priorities on capital allocation now given the the the message [noise].
As in Kooks.
Yes, it's it's similar I mean, the number one priority has always been investment opportunities and as I mentioned previously there's there's an uptick in activity. There. So I think that that has got our attention at the moment.
So.
That's number one we've we've never not been able to buy assets that we wanted to buy it. So we want to keep that string unbroken. So that's number one and secondly is making sure that we have Ah the good credit metrics to maintain double D and and to be strong double D, which is you said.
Where where where there are probably a little ahead of schedule. So that's that's good and then after that we would then look at ER dividends in stock buybacks, but I think the priority is still acquisitions number one.
That level number two and then and then.
Equity activity.
Got it and if I can't have one one.
What would it take confidence wise, you've been bank, but you're you're very confident in the guidance what would it have taken.
For you to increase.
The indications together based products are basically 100 million plus it's still.
Give indication give it effectively 60 already for this year with a building pipelines. So so I mean.
Just being conservative or they they come away unless the market works against you are you're worried about a market square or is it just pure conservativism.
[laughter] well [laughter] I'm always worried about our markets wherever you said two of them, but I didn't predict yeah.
No, but I mean, it feels very good and you know as I mentioned and everything we went from having everything working against us having everything working in favor. So I'm happy about that and you know every day I wake up I said I hope this.
Continue so that.
So now we're not worried about it but you always have to be worried about it because it's the airline industry, but but no I think it really is just the passage of time. This is still a relatively new business. We've got a new customers and Ah feedback that is very positive and building orders, but you know I.
Take time was really just it's still in the early innings, it's actually really early earnings.
For for Us in the industry and I just think it's you know time is.
[noise] of.
Well, we really just need to continue to build a track record.
Gonna I appreciate that thank you and again congrats on the floor.
And thank you.
And I'm showing no further questions I would now like to turn the call back over to Alan named Dreaming for closing remarks.
Thank you Justin.
You all for participating in today's conference call. We look forward to updating you after Q3.
This concludes today's conference call. Thank you for participating you may now disconnect.
[noise].
[music].
[music].
Good day and thank you for standing by welcome to the Q2 2023 F. T E. I Aviation earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one.
On your telephone.
Then here an automated message advisor in your hand is raised.
Draw. Your question. Please press Star one again, please be advised that today's conference is being recorded I would now like to hand to introduce your host for today's call Alan Andreini head of Investor Relations. Please go ahead.
Thank you Justin I would like to welcome you all to the aviation second quarter 2023 earnings call. Joining me here today are Joe Adams, Our Chief Executive Officer, and Angela Our Chief Financial Officer, We have posted an investor presentation in our press release on our website, which we encourage you to download if you have not.
<unk> done. So also please note that this call has been public in listen only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earning supplement.
Before I turn the call over to Joe I would like to point out that certain statements made today will be forward looking statements, including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and Investor presentation regarding non-GAAP .
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.
We start today I am pleased to announce our 30 <unk> dividend as a public company and our 48 consecutive dividend since inception.
The dividend of <unk> 30 per share will be paid on August 29 based on a shareholder record date of August 14th.
Now, let's turn to the numbers.
The key metrics for US are adjusted EBITDA, we had another strong quarter with adjusted EBITDA of $153 1 million in Q2 of 2023, which is up 20% compared to $127 7 million in Q1 of 2023 and up 2% compared to.
$150 7 million in Q2 of 2022, where we had over $64 million of gains on sale in that quarter.
During the first quarter, the $153 1 million EBITDA number was comprised of $125 9 million from our leasing segment and $30 1 million from our aerospace product segment and negative $2 8 million from corporate and other.
Turning now to leasing.
Leasing had a great quarter, posting approximately $126 million of EBITDA.
The pure leasing component of the $126 million came in at 94 million for Q2 versus $91 million in Q1 of 2023.
With strong demand for assets in the northern Hemisphere Summer season, we expect Q3 will grow incrementally.
Additionally, on the acquisition side, we closed on 15 aircraft and 23 engines at very attractive prices, which will contribute to further growth and future leasing EBITDA.
We remain confident in leasing EBITDA of $350 million to $400 million for the year, excluding gains on asset sales.
Part of the $126 million in EBITDA for leasing came from gains on asset sales, we sold $69 6 million book value of assets at a 31% margin gain of $31 9 million benefiting from strong demand for assets globally.
We have more asset sales coming in the remainder of the year and continue to be comfortable assuming gains on asset sales of approximately $25 million per quarter or 100 million for all of 2023.
Aerospace products had yet another excellent quarter with 30 million of EBITDA at an overall EBITDA margin of 44%.
We sold 37 modules in Q2 to nine unique customers comprised of three new customers and repeat customers.
We see tremendous potential and continue to feel good about generating $20 million to $30 million in quarterly EBITDA and think 100 million plus in 2023 EBITDA remains very doable we.
We feel confident about this number because were seeing an expanding backlog of aerospace products business with leasing companies MRO, our maintenance repair and overhaul organizations and airlines.
With that I will turn it back to Alan.
Thank you Joe just and you may now open the call to Q&A.
And thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster and one moment for our first question.
And that first question comes from Josh Sullivan from the Benchmark Company. Your line is now open.
Hey, good morning, nice quarter here.
Given us given the strength in the aviation leasing side and the issues.
Generation of engines are facing now we have our TX geared turbofan engine looking at some accelerated shop visits cycles into Nora.
Already tight MRO market I know you don't have any GTS, but have you seen any of that ETF pressure is starting to play out for demand in your products and services.
Yes.
The airlines, we talk to are all holding onto their old Joe last generation equipment. So we've seen airlines decide to extend leases.
Theyre looking for more assets.
The <unk> hundred 20 family or 77 800 of those markets are very tight it's very hard to get additional capacity. This is going to put more pressure.
On the.
And those fleets because youre going to have with the GTS. It's estimated you'll have 1200 engine.
Shop visits over the next 12 months 200 in the next two to three months. So that's in the busy summer season, China has got a lot between now and September is going to be extremely challenging. So anybody that has existing flying assets is going to keep them.
And theyre looking for more and there'll be more demand for spare engine. So so I think as you pointed out it is already a very tight market and this is going to turn.
The stress up another couple of levels in terms of putting more demand for for the assets that we own.
Okay.
And then maybe what are you seeing as far as the sale leaseback market.
Large deals in the bidding process, maybe what does your pipeline look like or what really gets them market going again.
Yes.
Interesting is picking up.
I mean previously I think the last few calls we've been saying that the best buys for US had been assets that are off lease that have.
We can buy cheap input.
Cash flow attached to it and then create value that way.
We're now starting to see that.
We're very competitive again on assets that are either on lease or with sale leaseback transactions with airlines.
And we think it's primarily because the.
A lot of the mid tier leasing companies are relying on debt financing provided by the ABS market, which is really not available.
And it's very challenging for people to price out deals with no debt or or with much higher cost debt.
It's not that we've increased our pricing that the market seems to have come to us. So we're seeing.
Several portfolio deals that are <unk>.
Very attractive with cash flow attached and sale leasebacks.
Which never seem to go away totally because airlines always need money. So.
Those markets I think for the next at least for the next six to nine months.
We see very good investment opportunities.
That's a fairly recent development.
Thank you for the time.
Yes.
And thank you.
And one moment.
And one moment for our next question.
And our next question comes from Gian up alone yet from Compass point. Your line is now open.
Okay.
Good morning congratulations.
Great quarter here.
One question I'd be curious about obviously, we're seeing some very strong performance.
The module factory in surgical materials driving.
Product segment, Youre also seeing strong lease leasing EBITDA.
If I look at the first half of the year at the segment level before corporate your annualized.
$585 million to $186 million of EBITDA already and you've been talking about $5 50 to 600 at the segment level I'm, just curious how you're thinking about the confidence level around that range yes.
You are growing rapidly.
Are you running up closer to the high end of that range in the first half of the year.
Our confidence level is pretty high so every quarter you have the.
And it's easier to look.
<unk> hit the year. So I think we have a pretty good backlog at this point as you can tell from my comments, so I think that the.
<unk> doesn't.
Swerve in some fashion against us, which doesn't look at all likely we've got.
We're pretty confident in those numbers for the year. So that's.
Thats, good and generally you've got pretty decent visibility out three to six months on what activity is in the pipeline.
That's great maybe just.
For.
A little more context, obviously leasing we have a good sense of where that is and you probably have a good sense of the pipeline, but also on the M&A side.
And then just on the product side in terms of the drivers that give you.
Covenant there I'm curious if you can.
How the backlog looks on the module factory side, if youre continuing to see yes.
Module volume demand continuing to step up we have been saying for the last few quarters.
Yes.
You mentioned.
At a high level of repeat customers I don't think anybody that we've done business with has indicated they're going to do more in and many of those customers have already put in orders for the balance of this year and indicated what they might do next year as they as they have visibility on their shop visit so it's very good and.
We add new customers as well as you can see we continue to develop the repeat business, but we're also adding each quarter, we will add a handful of new customers, which which will also grow so so.
So I think the backlog.
On modules is excellent and visibility is increasing and people once they've used it can say well now I'm going to use it.
No.
All my shop visits and that gives us a longer term view into what the.
What the pipeline will look like it allows us also helpfully to pre build.
Inventory so the more visibility we have dealt with the customer is going to do the easier it is for us to.
To increase our <unk>.
Throughput and turn time, because we can preposition assets and in that way.
The other the other businesses the U S M new servicing material business.
We see that increasing.
We've been running as we indicated we were probably did approximately 30 teardowns last year, we've been running at that a little bit higher than that in the first half of this year, but we're going to increase the rate of tear downs.
We've taken a number of engines in.
Two inventory and started the processes.
As you probably are aware it takes about three months to six months before you get revenue because you have to tear down the engine label all the parts inspect and many many of those parts have to be repaired. So they have to be sent out and then brought back so so.
So we see that level.
Level teardown activity increasing to over 40 engines.
But in this year end and see very very strong demand is.
The original equipment manufacturers as you're probably aware put in a price increase on August one of this year, which was.
Quite a bit earlier than they have previously done it so I guess.
You annualize that rate increase.
That's also well into the double digits. So.
New part prices are going up rapidly so user services material.
Is.
Very valuable and we have probably the biggest supply of used serviceable material in the world maybe other than the OEM, who doesn't like to sell use them anyway, but that.
That gives us quite a good tool to get additional business and.
In cross sell modules and other maintenance services so were we.
We're going to take the USF.
Activity level up.
The next two quarters.
That's great I really appreciate it answering.
All the color and I will jump back in the queue.
Thank you.
And one moment our next question.
And our next question comes from Hillary can Canada from Deutsche Bank. Your line is now open.
Hi, Derik, Thanks for taking my question.
Our <unk> segment.
Total revenues declined sequentially, but the EBITDA margin.
The lack or the equity for that.
Okay. Thank you two quick one last quarter.
Can you give us some color on what's causing that.
I guess just related to that should we continue.
Going forward.
Its primarily mix.
It's hard to.
Control that quarter to quarter, but it was.
Favorable this quarter, because we had slightly less used serviceable material sales and we also had more core modules that we sold which tend to be higher margin. So we had less of the lowest margin and more of the highest margin.
Would continue to suggest that 35% is still a good place.
Hold in the middle.
For modeling purposes, we think that's a sustainable number.
Not it will not always be above it.
The degree it was this quarter, which was really just driven by mix and then there is occasionally there's just an opportunistic sale that you happen to have the right.
Right asset at the right time for somebody who desperately need it. So you can also.
Sometimes we intentionally to make sure we have that assets. So.
That's part of the business.
Got it thank you.
Or I guess the thought.
We ended the Taiwan and off price segment that we included in that number.
Thank you.
Good in bankruptcy.
Mike.
With any other they're looking for.
Yes.
Thank you Carlos.
Provide more color on that.
Okay.
Hi, This is Alan we think that the next one that we're going to be.
Considered for as the S&P 600, and that could be the end of it as early as the end of Q3.
And estimates are from the index folks is that that number could be another 12 to 15 million shares.
Great. That's very helpful. Thank you so much.
And our next question comes from Brandon <unk> from Barclays. Your line is now open.
Hey, good morning, and thanks for taking the question. So I was wondering if you could provide us an update on the product approval process with the FAA and where that stands.
Yes, everything is progressing and on the timeline that we've talked about previously which is we expect.
The additional four products to be available around the end of this year.
And other than that we're not providing it.
Any more detail about the process around that.
Okay, but still on track for end of year.
And strategically Joe I guess.
Both I mean, I think we've always felt.
Felt like.
We're going to use it and will be a quick adopter, so and that we believe will facilitate other people adopting it.
And as we saw with the <unk> hundred 80 engine previously.
We put PMA and those engines and lease them in.
No airline in the World had any issue with leasing and engine PMA and some airlines, who will say well, we wouldn't necessarily put PMA and our own engines.
No one would not lease an engine. So similarly, we expect that.
To be to be similar in this market as it is and Thats why I think the.
The integration of our products and the ability to cross sell is.
Is very powerful and that we have a solution for everyone. There is nobody out there that we can offer something to a van.
To help.
Save on maintenance expense, which is an increasingly.
Stands out on P&L of airlines as you're well aware.
The CASM numbers are going up in maintenance and particularly engine maintenance is one of the big drivers. So so we think that this our ability to offer.
Mid range of products.
So anybody that owns an engine or flies in engine is really powerful.
Okay I appreciate that.
And then on the capital side I guess are you comfortable with where you are running debt levels right now and do you think you need a little bit more cash so as their capital required going forward.
Yeah.
We've had access I mean, we have a revolver.
<unk>.
We've always had access to that acts as our liquidity.
And we've had good access to the debt markets in the preferred market. So.
We think that.
The credit metrics are improving as we've told people we expect to be.
The mid threes debt to total EBITDA, which we achieved if you look at the numbers, we achieved that this quarter, which we were saying we were hoping to achieve that by the end of the year. So that's.
That's good and we think that that will position us to be strong double D.
In my experience as long as Youre strong double D. You've pretty much always have access to capital. So we're.
We're very close to that and think we're in a good position.
The need for capital is really driven off of.
Investment opportunities, which is a good thing and as I mentioned, we are seeing.
An increase in opportunities, which we didn't really expect but.
The world is funny.
Things are always changing so we're well positioned.
If opportunities present themselves to further.
Increase our position.
Positioning the CFM 56 market.
Alright I appreciate the response thank you.
Thanks and thing do you.
And one moment our next question.
Okay.
And our next question comes from Frank Galanti with Stifel. Your line is now open.
Okay great.
Great. Thank you I appreciate you taking my question.
I wanted to ask on asking about PMA approval.
Airlines.
Both the leasing and the module factory.
So.
Has there been a change.
In the past couple of months on further PMA acceptance and if possible. It would be helpful to sort of know that would be.
<unk> module sold what percentage of those have a PMA in it.
I don't think we've sold any modules with PMA in is that correct. We are flying in our lease fleet what.
What 15, or so engines, sorry about 15 engines with PMA.
In the CFM 56 fleet.
We've had a 100% of our CFC.
<unk> hundred 80 fleet and Pratt 4000 fleet has PMA.
Always has been the case so so.
And the CFM 56 fleet, we have.
About 15 engines that were flying and leasing to other airlines that are flying with PMA.
Is there any particular reason why there wouldn't be PMA in the LPT module.
<unk>.
From a customer or from a strategic.
Our market entry perspective.
Wouldn't necessarily taken engine off wing that doesn't is not due for a shop visit and swap out.
Good OEM parts for PMA, you just do it when its ready and in the shop.
Okay.
And then switching it up.
Just from a generally higher interest rate environment.
How does that from your perspective in fact, the leaf business, particularly at lease rates.
Yeah.
Well.
I mean, I would say are.
At the lowest rate our cost of debt was we didn't issue a five 5%.
<unk> estimates right now we're trading and this is probably seven 5% range on cost of debt capital. So our.
Just to bring it to our personal.
Situation of our cost of debt is up about 200 basis points, but what I would say our return on assets that were looking at deal wise is probably up 4% to 500 basis points. So.
From a investment point of view.
It's fine.
Sure.
We're more than covering the increased cost of debt.
The other side or is it how does it affect the industry.
Luna said earlier and I think a lot of <unk>.
Sort of mid tier leasing companies that used to go out and raise an equity fund.
Assume they were going to be able to leverage that with relatively cheap debt are struggling that's hard.
It's hard to get the debt the debt is way more expensive than it was before by orders of magnitude.
Not not 200 basis points, but multiples of that.
So the numbers don't work, which means that they are not competitive or prices come down or.
And all of that is.
What sort of leads us should be in pretty.
Pretty good position because our cost of debt is up a little bit not a lot.
And we don't leverage each individual deal. So so we are in.
We're in an environment more like 2010 and 11 were.
T who has money or she who has money is in a good spot so.
That's kind of the.
The macro on.
On the new aircraft side I don't we don't really participate in that market, so you'd be better to ask.
The people have the big new aircraft orders.
And us.
That's really helpful. Thanks very much.
Yes and.
Thank you.
And one moment our next question.
And our next question comes from Brian Mckenna from JMP Securities. Your line is now open.
Great. Thanks, So Joe could you talk about the opportunity in the repair market I know you've spoken about this a little bit in the past and I'm curious how youre thinking about this opportunity today, both in the U S. And then in Europe , as well and would you look to potentially do an acquisition here to create some more scale initially versus trying to build it organically from scratch.
Yes, great question.
Since we last spoke up in Montreal, we have.
Made progress on the repair joint venture, we took a trip through Europe and met with quite a few.
Different.
Options and we've narrowed it down and so I think we are.
Progressing with.
On that and we had expected or hoped that we would have something by the end of this year.
That would be in place and I still believe that that seems.
Doable and we're still very interested as I mentioned, we are increasing.
<unk> teardown activity.
Fairly meaningfully which means our repair volume is going to be up materially, which makes us an even better partner.
For people, who have repair products. So I think it's only gotten better and the repair market is a lot of people are paying attention to it now because OEM parts prices keep going up and up and up and so recycling or fixing and repairing.
Is pretty attractive as a pretty attractive business for.
For everyone. So very.
Very excited about that would we.
Buy versus build and I think we're trying.
Building something from scratch.
Is probably the best overall economics, but it takes a long long time, so I don't think we'd rather avoid that and if we can get in.
Into something sooner.
That would be better.
Could involve investing some modest amount of capital.
But I doubt that it's we're not going to.
There's no one company out there that has the portfolio that we could.
Sort of acquire and so it's probably more of a partnership structure.
Got it very helpful. And then maybe just a question on your externally managed structure. So you clearly have had a long standing relationship with fortress since inception, but just given the growth trajectory of appetite and as Scott the size and scale of the business today versus just a couple of years ago would you ever look to internalize the business.
And move out from under the <unk> umbrella.
Well, we've got a lot of benefits from being part of fortress.
We also are in the process of being sold fortress is under contract to be sold to new bottler.
Which would likely not close until around the end of the year. So.
It's really a decision of the new owner, we would need to make.
On that front.
Got it thanks, Joe and congrats on another great quarter.
Thanks.
And thank you.
Yes.
And one moment our next question.
And our next question comes from Robert Dodd from Raymond James Your line is now open.
Hi, excuse me hi, guys.
Congratulations.
The quarter and EBITDA quite some question.
Beyond today.
Thinking about capital allocation I mean, obviously.
He asked about the dividend the dividend is extremely well covered.
Free cash flow.
Your leverage is now.
In the middle of your.
Target range for that strong double B I mean, what's the appetite for that.
And is there any appetite for allocating capital to increasing the dividend or is.
Is it just the opportunities for investment.
Acquisition of assets I just.
<unk> more attractive I mean can you give us your view.
Given as the <unk> acquisition dividend kind of priority order before.
But you've already hit your leverage target. So can you can you rank, where you view the priorities on capital allocation now given the level.
Rich.
There has improved significantly.
Yes.
Similar I mean, the number one priority has always been investment opportunities.
As I mentioned previously there is an uptick in activity there. So I think that it's got our attention at the moment so.
That's number one we've never not been able to buy assets that we wanted to buy and so we want to keep that string unbroken. So that's number one and secondly is making sure that we have.
The good credit metrics to maintain double D in and to be strong double D, which as you said.
They're probably a little ahead of schedule. So that's that's good and then after that we would then look at our dividend.
Dividends and stock buybacks, but I think the priority is still acquisitions number one.
Our debt level number two and then and then.
Equity activity.
Got it and then if I kind of one one.
What would it take confidence wise, you've been very clear you're very confident in that.
Guidance, what would have taken.
For you to increase.
The indications pediatric space products, obviously, a 100 million plus is still there.
<unk> indication.
You bet effectively 60 already for this year with a building pipeline. So so.
And can you just being conservative.
The comment where unless the markets works against you are you worried about a market swap or is it just pure conservatism.
[laughter] well.
I'm always worried about the markets, where we've had two of them.
Yes.
No, but I mean, it feels very good and as I mentioned everything we went from having everything working against us having everything working in favor. So I'm happy about that and every day I wake up saying I hope this <unk>.
Continues so that.
So no we're not worried about it but you always have to be worried about it because its the airline industry, but.
But I think it really is just the passage of time. This is still a relatively.
New business, we've got new customers in.
Feedback is very positive and building orders, but I think time is really just it's still in the early innings, it's actually really early innings.
Fourth for us in the industry and I just think it's.
Time is sort of.
Well, we really just need to continue to build the track record.
Got it I appreciate that thank you and again congrats on the Florida.
Thanks.
Thank you.
And I am showing no further questions I would now like to turn the call back over to Alan Andreini for closing remarks.
Thank you Justin and thank you all for participating in today's conference call. We look forward to updating you after Q3.
This concludes today's conference call. Thank you for participating you may now disconnect.