Q2 2024 FTAI Aviation Ltd Earnings Call

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Okay.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2024 FTIE Aviation Earnings Conference Call.

Speaker Change: Ladies and gentlemen, thank you for standing by welcome to the second quarter 'twenty 'twenty four after I Aviation's earnings conference call. At this time, all participants are in a listen only mode.

Operator: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you would need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised.

Speaker Change: After the speaker's presentation, there will be a question and answer session to ask a question. During this session you would need to press star one on your child looked down you would didn't hear an automated message of bites in your hands right.

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn your conference over to Alan Andreini, Investor Relations. Please go ahead. Thank you.

Speaker Change: Your question. Please press Star one one again please be advised that today's conference is being recorded I would like now to turn your call.

Speaker Change: So Richard Allen and Greening Investor Relations. Please go ahead.

Alan John Andreini: Thank you, Michelle. I would like to welcome you all to the FTIE Aviation second quarter 2024 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; Angela Nam, our Chief Financial Officer; and David Moreno, our Chief Operating Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast.

Richard Allen: Thank you Michelle I would like to welcome you all to the FY Aviation second quarter 2024 earnings call. Joining me here today are Joe Adams, Our Chief Executive Officer, Angela Our Chief Financial Officer, David Marino, Our Chief operating officer.

Speaker Change: 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 this call is that we had the public in listen only mode and is being webcast.

Speaker Change: In addition, we will be discussing some non-GAAP financial measures during the call today.

Speaker Change: Including EBITDA and a reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.

Alan John Andreini: 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 gap measures can be found in the earnings supplement. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including statements regarding future earnings. These statements, by their nature, are uncertain and may differ materially from actual results.

Speaker Change: 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 stay.

Speaker Change: By their nature are uncertain and may differ materially.

Speaker Change: From actual results.

Alan John Andreini: We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and to review the risk factors contained in our quarterly report filed with the SEC. Now, I would like to turn the call over to Joe.

Speaker Change: We encourage you to review the disclaimers in our press release and Investor presentation regarding non-GAAP financial measures and forward looking statements and to review the risk factors contained in our quarterly report filed with the SEC now I would like to turn the call over to Joe.

Joseph P. Adams: Thank you Alan.

Joseph P. Adams: To start today, I'm pleased to announce our 37th dividend as a public company and our 52nd consecutive dividend since inception. The dividend of 30 cents per share will be paid on August 20th based on a shareholder record date of August 12th. Now, let's turn to the numbers.

Joseph P. Adams: Start today I am pleased to announce our 37th dividend as a public company and our 52nd consecutive dividend since inception.

Joseph P. Adams: The dividend of <unk> 30 per share will be paid on August 20th based on a shareholder record date of August 12.

Joseph P. Adams: The key metric for us is adjusted EBITDA. We continue the year strongly with adjusted EBITDA of $213.9 million in Q2 2024, which is up 30% compared to $164.1 million in Q1 of this year and up 40% compared to $153.1 million in Q2 of 2023. During the second quarter, the $213.9 million EBITDA number was comprised of $125 million from our leasing segment, $91.2 million from our aerospace product segment, and negative $2.3 million from corporate and other.

Speaker Change: Now, let's turn to the numbers the key metric for US is adjusted EBITDA.

Speaker Change: We continued the year strongly with adjusted EBITDA of $213 9 million in Q2 2024.

Speaker Change: Which is up 30% compared to $164 1 million in Q1 of this year and up 40% compared to $153 1 million.

Speaker Change: In Q2 of 2023.

During the second quarter, the $213 9 million EBITDA number was comprised of $125 million from our leasing segment $91 2 million from our aerospace products segment and negative $2 three from corporate and other.

Joseph P. Adams: Turning now to leasing, leasing had a great quarter posting approximately $125 million of EBITDA. The pure leasing component of $125 million came in at $112 million for Q1, and for Q2 versus 98 million in Q1 of 2024. Additionally, we sold 59 million book value of assets for a gain of $13.5 million.

Speaker Change: Turning now to leasing leasing had a great quarter, posting approximately $125 million of EBITDA.

Speaker Change: Your leasing component of the $125 million came in at $112 million for Q1.

Speaker Change: For Q2 versus 98 million in Q1 of 2024. Additionally.

Speaker Change: Additionally, we sold 59 million book value of assets for a gain of $13 5 million.

Joseph P. Adams: With exceptionally strong demand for assets and the continuation of a robust Northern Hemisphere summer travel season, we now expect to generate $500 million in EBITDA in 2024, which includes $50 million in gains on asset sales versus our prior estimate of $475 million. Aerospace Products had yet another excellent quarter with 91.2 million in EBITDA and an overall EBITDA margin of 37%. We're seeing tremendous growth in the aerospace products business in general and feel good about raising our estimates for 2024 EBITDA in aerospace products from our prior estimate of $250 million up to $325 to $350 million.

Speaker Change: With exceptionally strong demand for assets and the continuation of a robust northern hemisphere summer travel season, we now expect to generate $500 million in EBITDA in 2024.

Speaker Change: Which includes $50 million in gains on asset sales versus our prior estimate of $475 million.

Speaker Change: Aerospace products had yet another excellent quarter with $91 2 million of EBITDA at an overall EBITDA margin of 37%.

Speaker Change: We're seeing tremendous growth in the aerospace products business in general and feel good about raising our estimates for 2020 for EBITDA and aerospace products from our prior estimate of $250 million up to $325 million to $350 million.

Joseph P. Adams: We are also experiencing expansion in aerospace products margins as demand for refurbished modules and engines remains very high, while increasing efficiencies at our two CFM56 maintenance facilities in Montreal and Miami are controlling, or in some cases, lowering our costs. Overall, looking ahead, we now expect annual aviation EBITDA for 2024 to be between $825 to $850 million, not counting corporate and other, versus our original estimate of $675 to $725 million. And finally, about two years ago, we first outlined our corporate financial goal of generating $1 billion of EBITDA in 2026, comprised of $500 million from leasing and $500 million from aerospace products.

Speaker Change: We also are experienced an expansion in aerospace products margins as demand for refurbished nodules and engines remains very high while increasing efficiencies at our two to CFM 56 maintenance facilities in Montreal in Miami is controlling or in some cases lowering our costs.

Speaker Change: Yes.

Speaker Change: Overall looking ahead, we now expect annual aviation EBITDA for 2024 to be between $825 million to $850 million not counting corporate and other.

Speaker Change: Our original estimate of $675 million to $725 million.

Speaker Change: And finally about two years ago.

Speaker Change: We first outlined our corporate financial goal of generating in 2026 1 billion of EBITDA comprised of 500 million for leasing and $500 million from aerospace products.

Joseph P. Adams: So now that we're halfway through this time period and ahead of plan, we're resetting the target. Our new goal is $1.25 billion of EBITDA in 2026, comprised of $550 million of leasing EBITDA and $700 million of aerospace products EBITDA.

Speaker Change: So now that we're halfway through this time period and ahead of plan, we're resetting the target or.

Our new goal is $1 billion to $5 billion of EBITDA in 2026 comprised of $550 million of leasing EBITDA and $700 million of aerospace products EBITDA.

Alan John Andreini: With that, I'll turn the call back to Alan. Thank you, Joe. Michelle, you may now open the call to Q&A.

Speaker Change: With that I'll turn the call back to Allen.

Joseph P. Adams: Thanks Joe. Michelle, you may now open the call for Q&A.

Joe Michelle you May now open the call to Q&A.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Hello.

Operator: The first question comes from Jason Holcomb with Morgan Stanley. Your line is now open.

Speaker Change: The first question comes from Jason how come with Morgan Stanley. Your line is now open.

Jason Holcomb: Good morning, Joe, Angela, and David. Within aerospace products, you've historically mentioned that you target an EBITDA margin of around 35%. The last couple of quarters, we've seen you surpass that target. It would be great if you could talk about where you see margins going from here as you continue to grow and develop the business. Also, it would be great if you could speak to how that margin path may differ between both the CFM56 and the B2500 engines. Thank you.

Jason: Good morning, Joe and John and David.

Joseph P. Adams: Good morning.

Joseph P. Adams: Okay.

Speaker Change: Within aerospace products.

Speaker Change: You mentioned that your target EBITDA margin of around 35%.

Speaker Change: And the last couple of quarters at least and even surpass that target it would be.

Speaker Change: Be great. If you could talk about where you see margins going from here as you continue to grow and develop it does that at all.

Speaker Change: Also it would be great. If you could speak to how that margin path may differ between both the CFM 56, and the B 2500 engines. Thank you.

Joseph P. Adams: Great, thanks for the question. Yes, we are, as I mentioned in the remarks, we are seeing margins trending up. And it's fairly basic, our revenues are going up, and our expenses are either flat or down. And so the revenue side is really demand-based, where, as you can see, equipment is in short supply, and turn times at maintenance shops are getting longer. So that means it puts a premium on having a pre-built engine or module available.

Great. Thanks for the question, Yes, we are as I mentioned in the remarks, we are seeing margins trending up and it's.

Speaker Change: It's fairly basic it's our revenues are going up and our expenses are either flat or down and so the revenue side is really demand base where.

Speaker Change: As you can realize that equipment is in short supply.

Speaker Change: Turn times at maintenance shops are getting longer so that means it puts a premium on having a prebuilt engine or module available. So we can actually get higher slightly higher prices and still generate significant savings for the customers at.

Joseph P. Adams: So we can actually, you know, get higher, slightly higher prices and still generate significant savings for the customers. At the same time, you know, by controlling costs through our own facilities, we do that with controlling the labor costs in that we have more specialization in the facilities. We're basically running, you know, one engine, and we're teaching people to do it in a high volume manner. So it's a learning curve process where you get better and better at it as you do it more and more frequently.

Speaker Change: At the same time by controlling costs through our own facilities.

Speaker Change: We do that with controlling our labor cost and that we have more specialization in the facilities. We're basically running one engine and we're teaching people to do it in a high volume manner. So it's a learning curve process, we get better and better at it as you do it more and more frequently so that's part of it.

Joseph P. Adams: So that's part of it, and we're also getting smarter about used serviceable material, forecasting the demand, where it is going to be needed, when we are going to need it, getting our repairs done in advance. So we use, you know, we're smarter and more efficient about using used material. So it's really on both sides of the equation, revenues up, expenses down, that we see growing margins. We will also see increased savings when we close on Lockheed Martin.

Speaker Change: Also getting smarter about.

Speaker Change: Used serviceable material.

Speaker Change: We're casting a demand where is it going to be needed. When are we going to have when are we going to need it getting our repairs done in advance so we're using.

Speaker Change: We are smarter and more efficient about using use materials. So it's early on.

Speaker Change: Both sides of the equation revenues up expenses down and we see growing margins.

Speaker Change: We'll also see increased.

Speaker Change: Savings when we close on Lockheed Martin and so we do see the.

Joseph P. Adams: And so we do see the margins trending towards 40%, and we think that that will continue to grow as we get better and more experience with that facility as well, and we generate more volume. So, you know, a pretty positive outlook for today and also for the near future for the coming year. I would say on your other question on Pratt versus CFM, we've said that the Pratt & Whitney V2500 deal will not be dilutive to margins.

Speaker Change: Margins trending towards 40% and we think that that will continue to grow as we get better and more experience with that facility as well and we generate more volume so.

Speaker Change: Pretty positive outlook for.

Speaker Change: Today and also for the for the near future for the coming years.

Speaker Change: I would say on your other question on track versus CFM.

Speaker Change: We have said that the Pratt and Whitney.

Speaker Change: <unk> thousand 500 deal.

Joseph P. Adams: And I would continue to say that we're seeing very good demand for those engines, extremely high. And we're also, you know, seeing good turnaround times on getting engines through the shop. So, we continue to expect that that will be the same or as good as or better than the CFM.

Speaker Change: We will not be dilutive to margins and I would continue to say that we're seeing very good.

Speaker Change: Demand for those engines extremely high end.

Speaker Change: We're also.

Speaker Change: Youre seeing a turnaround times on getting engines through the shop. So so we continue to expect that that will be.

The same or as good as or better than the CFM side.

Jason Holcomb: Thank you for that, Joe; I'll leave it at one.

Speaker Change: Okay. Thank you for that you all I'll leave it at one.

Operator: One moment for the next question. The next question comes from Sheila Colico with Jeffries. Your line is open.

One moment for the next question.

Speaker Change: The next question comes from Sheila <unk>.

Sheila: Jefferies. Your line is open.

Operator: Hi team. This is Kyle and Chloe. I'm on behalf of Sheila.

Sheila: Hi team. This is Kyle in cardiac on for Sheila.

Operator: Hello. Hey guys, very nice quarter here and first half really in Arrow Products. It's not just the EBITDA growth, but the margins, like you just said, kind of trending towards 40% is now kind of the watermark. So maybe just drilling in on your comments, Joe, about the Lockheed facility. How are you thinking about the margin opportunity within that facility as that deal is going to close in the second half? And kind of what does it mean for productivity, the throughput, and the part-time opportunity there for them?

Sheila: Hello.

Speaker Change: Hey, guys very nice quarter here and first half really in Aero products.

Speaker Change: So if the EBITDA growth, but the margins kind of trending towards 40% is now kind of the watermark. So.

Joseph P. Adams: Maybe just drilling in on your comments, Joe about the Lockheed facility.

Speaker Change: How are you thinking about the margin opportunity within that facility is that deal's going to close in the second half and kind of what it means for the productivity the throughput and the piece part opportunity there for the module.

Joseph P. Adams: Yes, good question. I think that we've indicated we expect about $30 million of savings per annum once we close on initially just the CFM56 overhaul operation. So that should add, you know, three to four percentage points to the margins just from that closing. Then I think efficiency. We haven't really baked that in yet, but we did see quite an improvement when we took control of the Miami facility. We've seen a pretty significant increase in throughput per person.

Joseph P. Adams: Yes. So good question I think that we've indicated we expect about $30 million of savings.

Joseph P. Adams: Per annum once we close on initially on just on the CFM 56 overhaul operation So that should add three to four percentage points to the margins just just from that.

Joseph P. Adams: Closing.

Speaker Change: And then I think the efficiency, we haven't really baked that in yet, but we did see quite an improvement.

Joseph P. Adams: So we expect a similar trend in that facility, although we don't yet have our hands on it. So it's something we think we'll be able to accomplish, and we don't see any reason why we can't do it before. And then lastly, incremental to that is the P-SPART repair business, which we've talked about for quite some time. And there's a lot of capability in the Lockheed Martin facility that is not really fully developed.

Speaker Change: Took control of the Miami facility, we've seen.

Speaker Change: Pretty significant increase in throughput per person. So we expect a similar trend in that.

Speaker Change: Facility, although we don't yet.

Speaker Change: Our hands on it so it's something we think we will be able to accomplish and we.

Speaker Change: We don't see any reason because we've done it before.

Speaker Change: And then lastly incremental of that is the piece of our repair business, which we've talked about this for quite some time and there's a lot of capability in the Lockheed Martin facility that was not really been fully developed so we are going to accelerate the development of the piece of art repair business, where you do.

Joseph P. Adams: So we're going to accelerate the development of the P-SPART repair business. We're going to do more repairs for our own engines, repairs for third parties, and then we'll develop new repairs. And so, as I've indicated, we expect to generate probably an incremental 10 to 15 million of EBITDA from that over the next few years, but not really starting until probably 2025. And then potentially growing from there. We'll update you on that

Speaker Change: More repairs for our own engines repairs for third parties and then we will develop new repairs and so that I've indicated we expect to generate probably an incremental 10 to 15 million of EBITDA from that over.

Speaker Change: But not really starting until probably 2025 and then.

Speaker Change: Then potentially growing from there will we will update you on that but we see this.

Operator: But we see, you know, every time we look at the engine and we look at, you know, something new, we find, you know, millions of dollars lying on the floor. So it's – there are so many opportunities that we can pursue that are big dollars. So we're very optimistic that we're going to – we'll keep – this continuous improvement is continuous improvement is what we've always said over the last, you know, five, six years. And we're nowhere near the end of our list of opportunities.

Speaker Change: Every time, we look at the engine and we looked at something new we find millions of dollars lying on the floor. So it's.

Speaker Change: There's there's so many opportunities that we can pursue.

Speaker Change: That are big dollars. So we're very optimistic that we're going to we will keep this is continuous improvement is what we've always said over the last five six years.

Speaker Change: And we're nowhere near the end of our list of opportunities.

Operator: Great. Super helpful. I'll leave it at that one. Thanks, guys.

Speaker Change: Great Super helpful. I'll leave it at one thanks guys.

Operator: One moment for the next question. The next question comes from Josh Sullivan with the Benchmark Company.

Speaker Change: One moment for the next question.

Speaker Change: The next question comes from Josh Sullivan with the Benchmark Company. Your line is open.

Operator: Your line is open. Hey, good morning. Congratulations on the quarter here. What is the turnaround?

Joshua Ward Sullivan: Hey, good morning, congratulations on the quarter here.

What is the turnaround time for an airline or lease or using the module factory versus the open market at this point.

David Moreno: Yeah, I can take that. This is David.

Joshua Ward Sullivan: Yes, I can take that this is David so the typical industry turn time, what we're seeing is anything from 120 days to 180 days, our turn time on modules is about 30 to 60 days to do.

Joshua Ward Sullivan: Module to actually build the module and then you actually execute said module depends on the module.

Joshua Ward Sullivan: Anywhere from 5% to 25 days so for our customers perspective, they are doing the module swap in 5% to 25 days versus 120 to 180 days.

David Moreno: So the typical industry turn time we're seeing is anything from 120 days to 180 days. Our turn time on modules is about 30 to 60 days to do a module, to actually build a module, right, and then to actually execute said module, depends on the module, is anywhere from five to 25 days. So from a customer's perspective, they're doing the module swap in five to 25 days versus 120 to 180 days.

David Moreno: And again, we're seeing industry turn times that are long and getting longer, and I think we're in a much better position, predominantly for four reasons, right? Number one is that we have capacity up in Montreal and in Miami, so we have the capacity in the workforce. Number two is we have access to used service material via our AAR program. Number three, as Joe mentioned, is we have access to repairs at Lockheed where we can repair parts.

Joshua Ward Sullivan: And again, we're seeing industry turn times that are long and getting longer and I think we're in a much better positions.

Joshua Ward Sullivan: Predominantly for four reasons right number one is we have capacity up in Montreal and in Miami. So we have the capacity and a workforce number two is we have access to use surface material.

Joshua Ward Sullivan: Our program number three is what Joe mentioned as we have access to repairs at Lockheed where we can repair parts and number four we have.

David Moreno: And number four, we have the flexibility, since it's our fleet, of mixing and matching modules as well as planning. So as we see turn times go down industry-wide, I think it is accelerating more and more demand for modules, because one of the key attributes of modules is that it's a faster product than a traditional MRO.

Joseph P. Adams: The flexibility.

Joseph P. Adams: Since it's our fleet.

Mixing maxing modules as well as planning.

Speaker Change: So as we see turn times go down in the slide I think it is accelerating more and more demand for modules because one of the key attributes of modules.

Speaker Change: As a faster product.

Speaker Change: In a traditional MRO.

Speaker Change: Got it and then just as a follow up on the piece part repair business expansion is that an organic effort or do you see opportunities to bolt on inorganically at Montreal.

David Moreno: Both. I think that our base case is organic, but we have had a lot of conversations that we've been engaging with different parties in that business for the last two years, looking at different alternatives. And there might be some combination of the two, which is organic plus working with another player in the industry. We are always open-minded and flexible, and whatever the math and the operations with support, we'll take a look at it.

Speaker Change: Both I think that our base cases organic but we have a lot of conversations that we've been engaging with different parties in that business for the last two years looking at different alternatives and there might be some combination of the two witches organic plus working with another player in the industry.

Speaker Change: So we.

Speaker Change: We are always open minded and flexible.

Speaker Change: However, whatever the math.

Speaker Change: And the operations would support will.

Speaker Change: We'll take a look at it.

Speaker Change: There's not enough capacity in that piece of our repair business globally, and we realize that last year I think we spent $50 million on.

David Moreno: There is not enough capacity in the piece part repair business globally. We realized that last year, I think we spent $50 million with third parties where we are a pretty big buyer of repair services, and no one had ever called on us and marketed a product to us. It is amazing. The industry is all order takers. There are a lot of things that we think we can do to grow and increase that business.

Speaker Change: With third parties, where we were.

Speaker Change: Any big buyer for care services and no one had ever called on us and marketed as a product to us it's amazing the industries.

Speaker Change: All order takers, so theres a lot of.

Speaker Change: Things that we think we can do two to.

Speaker Change: To grow and increase that that business that are.

David Moreno: We are just at the very, very beginning of that.

Speaker Change: We're just at the very very beginning of that.

Speaker Change: Great. Thank you for the time.

Operator: Yep. One moment for the next question. The next question comes from Hillary Cacanando with Dorche Bank. Your line is open.

Speaker Change: Yes, one moment for the next question.

Hillary Cacanando: The next question comes from Hillary <unk> with Deutsche Bank. Your line is open.

Hillary Cacanando: Thank you. Good morning.

Hillary Cacanando: Thank you good morning, what previously mentioned that the.

Speaker Change: The CFM internalization would be about $30 million.

Paul: This isn't that you're raising guidance does that number Paul.

Speaker Change: The analysis of more stable from internal goals for 2024.

Speaker Change: And how should we think about that number FY 'twenty.

Speaker Change: Okay.

Speaker Change: Yes, It will go up as we've increased our expectations of.

Speaker Change: For this year and for the out year 2026, so we.

Joseph P. Adams: You had previously mentioned that savings this year from internalization would be about $30 million. So given that you're raising guidance, does that number change? And, you know, do you now expect more savings from internalization for 2024? And, you know, what should we think about that number for 2025?

Speaker Change: We had indicated at the time of the internalization that we can save.

Speaker Change: $30 million annually.

Joseph P. Adams: Yes, it will go up as we've increased our expectations for this year and for the far-off year of 2026. So we had indicated at the time of the internalization that we would save $30 million annually, which we think, you know, we'll do at least that this year, and that number will grow to $40 or $50 million in the next couple of years and then potentially higher than that. So it's a – I mean, we're very confident that the numbers that we'll save are better than what we had thought – what we expected, you know, a couple months ago.

Speaker Change: Should we think well do at least that this year and that number.

Speaker Change: We will grow to 40 or $50 million in the next couple of years and potentially higher than that so I'd say.

Speaker Change: I mean, we're very confident that the numbers they will save or are better than what we had.

Speaker Change: Thought of what we expected a couple of months ago.

Hillary Cacanando: Okay, so we should probably assume for modeling purposes and probably assume like 30 million this year, and then maybe like 40 to 50 next year, and then maybe even higher in 2026. Kind of an upward trend in terms of saving.

Speaker Change: Okay.

Speaker Change: Probably assume for modeling purposes, it will probably have something like $30 million.

Speaker Change: Yeah.

Speaker Change: Higher in 2012.

Doug: Hi, Doug.

Doug: Quick Sunday Okay.

Operator: Okay, perfect. And then on slide number eight in the leasing segment, it says that you have performed 10 engine exchanges for aircraft leases year-to-date. I think this is the first time we've discussed engine exchanges with your lessees. Could you just go over exactly what that is? And if those 10 engine exchanges are included in the 82, you know, module sold number and, you know, all these engine exchanges with your lessees are one-offs, or do you have contracts with them to do so?

Doug: Yes.

Okay, perfect and then.

Doug: Slide number seven.

Doug: It does.

Doug: Two quick ones.

Doug: Goldman for aircraft with the goal I think this is the.

Doug: The first time.

Doug: Scott.

Speaker Change: So with that.

Speaker Change: Could you just go over exactly what that is.

Speaker Change: Thank you.

Speaker Change: 82 module number.

Speaker Change: Or does that move.

Speaker Change: Why not.

Speaker Change: Do you have contracts with them.

David Moreno: I'll let David walk you through that.

Speaker Change: Yes, I'll, let David work through that.

Speaker Change: So the answer is.

David Moreno: In addition to the AD2, and across our entire aircraft portfolio, we manage the shop visits via exchanges. So we're manufacturing engines ahead of removals and providing exchanges instead of lessees doing shop visits, which is typically how these contracts are written. So it's a value add. The reason why we like it is because we're able to charge OEM rates per the contract for every hour and cycle flown. And then we're able to manufacture those engines for a lot less.

Speaker Change: In addition to the 82, so on our entire aircraft portfolio, we manage the shop visit via exchanges. So we're manufacturing engines ahead of removals and providing exchanges instead of less cease doing shop visits which is typically how these.

Speaker Change: These contracts are written so it is a value add the reason why we like it is because we're able to charge OEM rates per the contract for every hour and cycle.

Speaker Change: Loan.

Speaker Change: And then we're able to manufacture those engines for a lot less so that margin is going to show up through the maintenance revenue on our financial statements. The reason why airlines like it is because they are able to avoid the major shop visits.

David Moreno: So that margin is going to show up through the maintenance revenue on our financial statements. The reason why airlines like it is because they're able to avoid major shop visits, so they don't, and they have zero turn time. Typically, they'd have to lease an engine during that interim period, which can be very expensive, as well as being responsible, for the most part, for all negative surprises. So if the shop visit overruns, typically, the airline would be in charge of that over and above. So they really like that service, and it's a value added as part of our aircraft leasing.

So they don't.

Speaker Change: Zero turn time typically they'd have to lease an engine during that interim period, which can be very expensive as well as they are responsible for most part on all negative surprises. So at the shop visit overruns typically the airline would be in charge of that over and above so they really like that service.

Speaker Change: It's value added as part of our aircraft leasing business.

Operator: Well, thank you so much, David. Thank you. Thank you, Joe.

Speaker Change: Okay.

Joseph P. Adams: Yeah, it goes to the, you know, when we talk about our business model, basically, we are in the engine maintenance business. Most lessors are in the maintenance avoidance business, and they force it onto the airline, and we're the opposite. So we want to do the maintenance, and we want the airlines to get out of the maintenance business because we're better at it. So it's, it's really the, we're providing an outsourced opportunity for airlines to not have to manage shop visits, which for the most part, most airlines are not particularly good at.

Joseph P. Adams: Thank you Joe.

Speaker Change: Yes, it goes to the when we talk about our business model is basically.

Speaker Change: We are in the engine maintenance business, most lessors or and then maintenance avoidance business.

Speaker Change: Of course, it onto the airline and we're the opposite so we want to do the maintenance and we want the airlines to get out of the maintenance business because we're better at it so it's really the.

Speaker Change: We're providing an outsource opportunity for airlines to not have to manage shop visits which for the most part most airlines are not particularly good at.

Operator: And I'm sure when you're talking to potential, like, potential lessees, this is something that you pitch as well, right? Like if we could do exchanges as well. And that's probably a selling point. Thank you for your time.

Speaker Change: And then sort of when you when you talk to your potential.

Speaker Change: This is something that in your portfolio.

Speaker Change: Thank you.

Speaker Change: Yes.

Speaker Change: That's probably a selling point.

Joseph P. Adams: Yes, we're saving them time and money and eliminating a major, you know, possible negative surprise in a way.

Speaker Change: Thank you.

Speaker Change: Yes.

Speaker Change: We're saving them time, and money and eliminating a major possible negative surprise in Leds.

Operator: Thank you very much.

Speaker Change: Okay, great. Thank you very much.

Operator: One moment for the next question. The next question comes from Giuliano Bologna with Compass Point. Your line is open.

Yes.

Speaker Change: One moment for the next question.

Speaker Change: The next question.

Speaker Change: Comes from Giuliano Bologna with Qantas point your line is open.

Giuliano Jude Anderes Bologna: Good morning, and congratulations on another incredible quarter, especially on the product side of the business. As a first question, I'd be curious, looking at the leasing side of the business, you outperform pretty strongly, especially on core leasing. I'm curious, you know, what drove the leasing outperformance, and if you know, that's a trend that we should expect to continue going forward.

Giuliano Jude Anderes Bologna: Good morning, congratulations on another.

Giuliano Jude Anderes Bologna: Credible quarter, especially on the product side of the business.

Speaker Change: The first question I'd be curious looking.

Speaker Change: Looking at the leasing side of the business you.

Speaker Change: Outperforming here.

Speaker Change: Very strongly especially on even on core leasing I'm curious what drove the outperformance on our payout that's a trend that we should expect to continue going forward.

Joseph P. Adams: Yeah, the two big drivers are rent and hours flown. And so both of those are up.

Speaker Change: Yeah. The two big drivers are rent and hours flowing and so both of those are up.

Joseph P. Adams: It's very, you know, the rent market is, you're probably obviously aware, with the demand for equipment, particularly older equipment that we own, quite high, airlines around the world are extending leases and not giving those back given that they can't get, they can't fly a lot of GTF-powered engine aircraft and they can't get deliveries from Boeing on time. So, so the old; the demand for older equipment and engines related to those is very high.

Speaker Change: The rent market as you probably obviously aware.

Speaker Change: The demand for equipment, and particularly older equipment that we own is quite high airlines.

Speaker Change: Around the world are extending leases and not giving those back given that they can't get.

Speaker Change: They can't fly a lot of GTS powered engine aircrafts and they can't get deliveries from Boeing on time. So so the demand for all of our equipment and engines related to those is very high and then and then typically the second quarter and really the third quarter are.

Joseph P. Adams: And then, and then typically, the second quarter and really the third quarter are, you know, very high utilization quarters for airlines because the demand is there for flying. So we see it in the maintenance revenues as well. So both rent and maintenance reserves are up.

Speaker Change: Very high utilization quarters for airlines piece of the demand is there for flying so we see it in the maintenance revenues as well so it's both rent and maintenance reserves are up.

Joseph P. Adams: That's very helpful. And then, you know, thinking about the shortage of engines globally and, you know, a lot of the supply chain issues that are out there. You know, there are a few industry leaders that suggested that the industry will, you know, take, or won't normalize until somewhere between late 2026 and or 2030. I'm curious, you know, what that means for the opportunity for, for, Apti and also, you know, what normalization would mean or look like. On the other side of that, they realize it's pretty far out. So there's a pretty good chance later.

Speaker Change: That's very helpful and then.

Speaker Change: Yes thinking.

Speaker Change: Thinking about the.

Speaker Change: Urgent engines globally and narrow lobby.

Speaker Change: Supply chain issues that are out there there are a few industry leaders.

Speaker Change: The industry will take a normalized more normalized until somewhere between late 2026.

Speaker Change: In 2030.

I'm curious.

Speaker Change: How you think about what that means for the opportunity.

Speaker Change: For for <unk>, and also what normalization would mean or look like on the other side of that.

Speaker Change: Far outside of a pretty good runway here.

Giuliano Jude Anderes Bologna: Yeah, so we've always, you know, thought to run our business assuming normalization. This is just, you know, an unexpected gift that we got.

Speaker Change: Yes, so we've always thought of running our business assuming normalization. This was just to.

Speaker Change: An unexpected gift that we got so.

Joseph P. Adams: So we think we have a great business even in an environment where, you know, everything is smooth and running and functioning well. Having said that, it is difficult to project, but I also would point out that it's not going to be a cliff. You're not going to wake up in 2027, and all of a sudden, everything is good. So it'll be a gradual, you know, return to normality over some, you know, extended period of time. Because, as you see, fixing supply chains, and hiring people back is a very lengthy process, and it only takes one part of that supply chain to negatively affect the entire supply chain.

Speaker Change: We think we have a great business, even in a environment, where everything is smooth and running and functionally well.

<unk> said that.

Speaker Change: It is difficult to project, but I also would point out that it's not going to be a cliff youre not going to wake up in 2027, and all of a sudden everything is good so it'll be it'll be a gradual.

Speaker Change: Turn to normalization over some extended period of time, because as you see fixing supply chains hiring people back.

Speaker Change: As a very lengthy process and it only takes one part of that supply chain too to negatively affect the entire supply chain. So.

Joseph P. Adams: I think it'll be, you know, probably what everybody, generally the extremes are not right. It's somewhere in the middle. Somebody says 2030. Somebody says 2026. It's probably in the middle, but it's a gradual, you know, return to normal, not all of a sudden, a bright line event.

Speaker Change: I think it will be probably what everybody.

Speaker Change: Generally the extremes are not right its somewhere in the middle of somebody says 2000, <unk> 2026 is probably in the middle but it's a it's a gradual return to normal not a no.

Speaker Change: All of a sudden a bright line event.

Joseph P. Adams: That's very helpful. And then one last one. Thinking about the product segment and kind of the demand for CFM56s and V20 Longers, I'm curious what the pipeline or the order backlog looks like, you know, in the third quarter and fourth quarter relative to the second quarter. And you know, what we think about what that pipeline is already indicating or telling us?

Speaker Change: That's very helpful.

Speaker Change: One last one thinking about the product segment and kind of the.

Speaker Change: The demand for <unk>.

Speaker Change: Firstly I think there are some places.

Speaker Change: I'm curious, what the pipeline or the quarter backlog looks like.

Speaker Change: In the third quarter and fourth quarter relative to the second quarter and how we should think about what that pipeline is already.

Speaker Change: Again for China.

Joseph P. Adams: So we're getting, I mean, we have some long-term contracts, like if you talk about WestJet and LATAM or Avianca, where we have, you know, seven, six to eight-year deals locked in. So we have very good visibility on that type of business. The other, more transactional, you know, we probably have three to six-month visibility. We're getting people to give us forecasts of when they're going to need equipment earlier so that we can, as David said, order material, we can plan better, we can have the modules ready.

Speaker Change: So we are getting I mean, we have some long term contracts like if you're talking about west chatted, a tam or avianca, where we have seven.

Speaker Change: Seven six to eight year deals locked in so we have very good visibility on that type of business. The other more transactional.

Speaker Change: Is it is probably we have three to six month visibility, we're getting people to give us.

Speaker Change: Forecast of when Theyre going to need equipment earlier, so that we can say.

Speaker Change: As David said, we can order them to the material. We can plan better we can have the module strategy.

Joseph P. Adams: So I would say our visibility is getting longer than it was, you know, even a year ago, and we're encouraging airlines to really be, you know, once they've tasted, you know, and experienced the product, and they like it, and they say, well, okay, now give us your business, give us your program, and give us your profile when you're going to need it. So I think we're going to continue to push for more programs, more visibility, and longer, you know, time to get ready, and everybody benefits from that.

Speaker Change: So I would say, it's our visibility is getting longer than it was even a year ago and we're encouraging airlines to really be.

Speaker Change: Once they've tasted and experience the product and they like it.

Speaker Change: Well, Okay now give US you gave us all your business and give US your program you can give us your profile when youre going to need it so.

Speaker Change: We're going to continue to push for more programs more visibility longer.

Time to get ready and everybody benefits from that.

Giuliano Jude Anderes Bologna: That is very helpful. I appreciate it. And yeah, congrats on the quarter, and I will jump back in with you. Thanks.

Speaker Change: That is very helpful. I appreciate it congrats on the quarter and I will jump back in the queue.

Operator: One moment for the next question. The next question comes from Ken Herbert with RBC. Your line is open.

Speaker Change: Yes.

Speaker Change: One moment for the next question.

Speaker Change: The next question comes from Ken Herbert with RBC. Your line is open.

Kenneth George Herbert: Hey Joe, good morning. Hey, I just wanted to ask you, you know, you did 82 modular swaps this quarter. What percentage of the global sort of CFM56 operator universe are you currently working with and how how quickly is that expanding, and what sort of time frame, as you think about an airline today with everything going on, that may not have been a customer that comes to you and ultimately becomes a customer? How is that sales cycle compressing?

Ken Herbert: Yeah, Hey, Joe Good morning.

Ken Herbert: Good morning.

Ken Herbert: Hey, I just wanted to ask you.

You did 82 modular swaps this quarter, what percentage of the global sort of CFM 56.

Ken Herbert: Operator.

Speaker Change: Universe are you currently working with.

Speaker Change: And how how quickly is that expanding and what sort of timeframe. As you think about an airline today with everything going on that may not have been a customer that comes to you and ultimately becomes a customer sort of how is that sales cycle compressing.

Joseph P. Adams: Uh, lots of aspects to that question, but just if you start off and you say, we indicated that we have now 50 customers in our module factory. And if you think back in 2022, when we sort of rolled out our math for getting to a billion dollars, we were forecasting 50 by 2026. So we're now at 50 in 2024. So things are moving quickly. And part of, you know, what happens in a crisis is that when people need something, then they're more receptive to change.

Speaker Change: Lots of aspects to that question, but.

Speaker Change: If you start off and you say, we indicated that we have now 50 customers.

Speaker Change: Our module factory and then if you think back in 2022 and.

Speaker Change: We rolled out our math, we're getting to a $1 billion. We are forecasting 50 by 2026. So we're now at 50 in 2024, so things are moving quickly and part of what happens in a crisis is when people need something and they are more receptive to changing their business model and so we see that occur.

Joseph P. Adams: Changing their business model. And so we see that the current, um, environment is accelerating people's transitioning to outsourcing maintenance, engine maintenance, which is what we're offering the customer. Those 50 represent, what would you say? 300 total potential.

Speaker Change: Environment is it is accelerating people's transitioning to outsourcing maintenance engine maintenance, which is what we're offering.

Speaker Change: Customer.

Speaker Change: Those 50 represent what would you say 300 total.

Joseph P. Adams: So maybe we're, you know, one sixth of the operator base, and we're not getting, with a couple of exceptions, we're not getting a hundred percent of people's business yet. Uh, but we're aspiring to, uh, because we don't see any reason why we shouldn't. Once people realize they can, you know, save, they save money, they save time, and they eliminate negative surprises. It's like how hard, you know. What else do you need me to tell you?

Central So maybe were one.

<unk> six <unk>.

Speaker Change: Operator base and we're not getting with a couple of exceptions, we're not getting 100% of People's business yet but.

Speaker Change: We're aspiring to because we don't see any reason why we shouldnt once people realize they can save.

Speaker Change: Save money, they save time and may eliminate negative surprises just like how hard.

Speaker Change: What else do you need me to tell you so.

Joseph P. Adams: So, I think it's still growing. It's a huge market. The total universe, if you think about, you know, 3,000 shop visits a year, and you can argue whether it's 4,000 or 2,500 or something, but roughly 3,000, that's 9,000 modules moving through a maintenance facility somewhere in the world per year. And we're talking about doing, you know, 400, 500, it's still less than 10%. It's half of 10%. So we're not anywhere near, you know, where we think the penetration could get to.

Speaker Change: So I think it's.

Speaker Change: It's still growing it's a huge market and total universe. If you think about three.

Speaker Change: <unk> 3000 shop visits a year and you can argue whether it's 4000 or 2500 or something that roughly 3000.

Speaker Change: That's 9000 modules moving through a maintenance facility somewhere in the world per year, and we're talking about doing.

Speaker Change: 400, 500, its still less than 10% missed half of 10% so.

Speaker Change: We're not anywhere near.

Speaker Change: Where we think that penetration could get to and we have our own maintenance capacity. We can do 300 shop visits in Montreal, a year, which is 900 modules and 150 in Miami, which is 450 module. So we have.

Joseph P. Adams: And we have our own maintenance capacity. We can do 300 shop visits in Montreal a year, which is 900 modules, and 150 in Miami, which is 450 modules. So we do.

Joseph P. Adams: 1,350 module rebuild capacity that we own now. So if you think about 4 or 500 is what we're shooting for, that's 5% market penetration. We can handle 15% today based on what we own, and we're in a pretty good position to keep growing that. We haven't had anybody that used the product that didn't want to do it again.

Speaker Change: <unk> thousand 350 module rebuild capacity that we own now.

Speaker Change: So if you think about four or 500 is what we are.

Speaker Change: Shooting for 5% market penetration, we could we can handle 15% today based on what we own.

Speaker Change: We're in a pretty good position to keep growing that we haven't had anybody that use the product that didn't want to do it again. So that to me is one of the main litmus test is.

Joseph P. Adams: That, to me, is one of the main litmus tests: do people like it, and do they have a good experience? And that's what we're trying to foster so that word of mouth spreads. You know, testimonials up on their Instagram accounts, and they talk about how great this is. We have photos of people and maintenance facilities looking, saying, I just did a LPT swap in two weeks. And, you know, that engine would have been in the shop for, you know, six months if I hadn't done that.

Speaker Change: People like it and they have a good experience and that's what we're trying to foster said the word of mouth spreads people put.

Joseph P. Adams: So those are the kind of things we were, you know, the viral marketing that we're using to accelerate even more. So I might have missed some of the elements in your question, but I don't know if I got all of them.

Speaker Change: Testimonials up owning their Instagram accounts, they talk about how great decisions, we have photos of people and maintenance facilities. So I can say I just did a LPT swapped in two weeks and.

Speaker Change: And that engine would have been in the shop for six months, if I haven't done that so those are the kind of things were.

Speaker Change: <unk> marketing and we're using today to accelerate even more.

Speaker Change: So I might have missed that.

Speaker Change: Elements of your question, but I don't know if I got all of them.

Kenneth George Herbert: No that's that's great if I could just one follow-up I mean obviously you you know that you're benefiting from the supply chain disruptions and turnaround times and lead times on material but you obviously also buy a lot of material to fulfill demand while we're waiting for you know PMA parts and other stuff are you seeing an extension in the material you're looking to buy you know the new OEM material or even on the USM side and has that been maybe a headwind to some of the through

Speaker Change: No that's great if I could just one follow up.

See you.

Speaker Change: Youre benefiting from the supply chain disruptions and turnaround times and lead times on materials, but you. Obviously also by a lot of material.

Speaker Change: To fulfill demand, while we're waiting for PMA parts and other stuff are you seeing an extension and the material youre looking to buy the.

Speaker Change: The new OEM material or even on the U S. M side and is that maybe a headwind to some of the throughput.

Joseph P. Adams: I mean, there are two parts. There's the CFM part and the Pratt part. You talk about the CFM, and I'll talk about Pratt. Sure.

Speaker Change: I mean, there's two parts there's the CFM partnered in the Pratt part you're talking about the CFO I will talk about <unk> sure. So on the CFM side, Yes, we are seeing a delay for let's say repairing parts I think we're well positioned because we have the inventory ahead of time right. So we are carrying down 40 to 50.

David Moreno: So on the CFM side, yes, we are seeing a delay in, let's say, repairing parts. But I think we're well positioned because we have the inventory ahead of time, right? So we are carrying down, you know, 40 to 50 engines per year with AAR.

Speaker Change: Engines per year with AAR, we're able to recall those parts in use them ahead of time, so really it's having the U S. M available and then number two is planning so before module comes in the shop, we understand and we haven't kitting process ahead of time. So we produce the kit on what exactly is needed in that module so able.

David Moreno: We're able to recall those parts and use them ahead of time. So really, it's, you know, having the USM available, and then number two is planning, right? So before a module comes in the shop, we understand and have a kitting process ahead of time. So we produce the kit based on what exactly is needed in that module. So we're able to be one step ahead in that process, right? Typically, what would happen is if you're engaging in third-party work, an engine would show up, and you'd have a very limited amount of time to react and order parts, right? So that's all happening ahead of time.

Speaker Change: B one step.

Speaker Change: Go ahead in that process right typically what would happen is it.

Speaker Change: Engaging third party work and engine would show up and you have a very limited amount of time to react and order parts right. So that's all happening at a time.

David Moreno: So we feel like we're well positioned, and that's why our turn times have not been impacted. And on the V2500, I mean, we just spent time with Pratt last week, and we were talking about, you know, material availability and turn times, and they're very confident. I mean, earlier this year, they had some sort of delays in producing some of the V2500 parts and material, but they're on top of it now. They're very confident, and we are, I would say, a high-priority customer, so with an order of 100 shop visits, we get, you know, they're going to put us, you know, at the top of the list.

Speaker Change: So we feel like we're well positioned and that's why our turn times have not been impacted.

Speaker Change: And on the V 2500, I mean, we just recently spent time with Pratt last week, and we're talking about material availability and turn times and they are very confident I mean earlier this year they had some.

Speaker Change: Sort of delays in producing some of the V 2500 parts of material, but there. They are on top of it now they are very confident and we are.

Speaker Change: I would say a high priority customers, so with a with an order of 100 shop visits we get.

Speaker Change: They're going to they're going to put us at the top of the list. So they are very confident that what they've indicated to us. The 90 day turn times, they're going to deliver on that it's also.

David Moreno: So they're very confident that what they've indicated to us, the 90-day turn times, that they're going to deliver on that. It's also, you know, it's helpful from our point of view that we're very flexible, and they can put those engines into whatever shop in their network they want to, and that, they indicated, was very helpful because they can use, you know, our orders to fill shops that don't have enough visitors.

Speaker Change: It is helpful from our point of view that we.

Speaker Change: We're very flexible and they can put those engines into what.

Speaker Change: Net whatever shop in their network, they want to and that they indicated was very helpful. Because they can use our.

Speaker Change: Orders to fill in shops that don't have enough of the surface.

Speaker Change: Yes.

Yes.

Speaker Change #100: Great. Thank you very much.

Juan: Thanks Juan.

Juan: For the next question.

Kenneth George Herbert: Great. Thank you very much. Thank you. One moment for the next question. The next question comes from Brandon Oglenski with Barclays. Your line is open.

Speaker Change #101: The next question comes from Brandon <unk> with Barclays. Your line is open.

Brandon Robert Oglenski: Hey, good morning, everyone, and thanks for taking my question. Joe, I appreciate the updated guidance for this year and the longer-term outlook on the business. I guess though, with how tight the market is, I mean, I know you're generating better margins now, but... When we think of acquisition costs, especially for new engines, does this get more challenging looking ahead? Or is it the swap aspect that makes this so viable?

Brandon: Hey, good morning, everyone and thanks for taking my question.

Joseph P. Adams: Joe I appreciate.

<unk> guidance for this year and longer term outlook on the business.

Speaker Change #103: I guess that with how tight the market is I mean.

Speaker Change #104: I know you are generating better margins now but.

Speaker Change #105: When we think about acquisition cost, especially for new engines.

Speaker Change #105: Get more challenging looking ahead.

Speaker Change #106: Or is it the swap aspect that makes this so viable.

Joseph P. Adams: Yeah, that's a great question. And we've been pretty good at sourcing engines. And I think the main reason is we tend to excel when an engine is in need of a shop visit in the immediate or near future. So if you think about most buyers, when a portfolio or an aircraft comes up, and they do the, you know, they do their model, and they have to do a shop visit in the next, you know, 18, six to 24 months, it's a huge negative for them.

Speaker Change #107: Yes, great question.

Speaker Change #108: We've been pretty good at sourcing engines I think the main reason is we.

Speaker Change #108: We tend to excel when an engine is.

Speaker Change #108: In need of a shop visit in the immediate or near future.

Speaker Change #108: So if you think about most buyers when.

Speaker Change #108: Portfolio or an aircraft comes up and they.

Speaker Change #109: They do they do.

Speaker Change #109: Do their model and they have to do a shop visit in the next.

Joseph P. Adams: So we're one of the few buyers that actually when we see a shop visit in the near future, we're like, this is great. We love this because we know we're going to a we can do the shop visit generally for less than other people can and, B, we can also, you know, optimize by doing module swaps, we can sometimes do hospital shop repairs, we can generate more, you know, we can burn off some of the green time that other people can't value.

Speaker Change #109: 18, 6% to 24 months.

Speaker Change #109: A huge negative to them. So we are one of the few buyers that actually when we see a shop visit.

Speaker Change #109: The near future like this is great.

Speaker Change #109: All of this because we know we're going to continue to shop visit generally for less than other people can be.

Speaker Change #109: We can also.

Speaker Change #109: Optimized by doing module swaps, we can sometimes do hospital shop repairs, we can generate more we can burn off some of the green time that other people can't value. So we have so many ways to make that into a better deal.

Joseph P. Adams: So we have so many ways to make that into a better deal than virtually anybody else that we win a disproportionate amount of that business. And there are a lot of engines out there that during COVID, people didn't do any maintenance on. So we're seeing a lot of very good pipeline of acquisition opportunities. And, and that is one of our core strengths is sourcing, you know, run-out engines. That's the first part of, you know, our business model, which is to buy run-out engines, then we fix them up, and then we lease them and sell them or exchange them.

Speaker Change #109: Virtually anybody else that we win a disproportionate amount of that business and there's a lot of engines out there.

Speaker Change #109: During COVID-19 people didn't do any maintenance on so we're seeing a lot of a very good pipeline of acquisition opportunities.

Speaker Change #109: That is one of our core strengths is sourcing run out engines. So that's the first part of our business model, which is to buy run out engines, and we fix them up and then we lease them and sell them or exchanged in and.

Joseph P. Adams: And we love the exchange option, too, because then you're getting another engine back that's run out, generally at a very good price because you're solving somebody's problem, and you also then get to do it all over again. So it's a virtuous circle for us in sourcing.

Speaker Change #109: And we love the exchange option too because then youre getting another engine back that's run out.

Speaker Change #109: Generally at a very good price because youre solving some of these problems and you also then get to do it all over again.

Speaker Change #109: It's a virtuous circle for us.

Speaker Change #109: In sourcing.

Brandon Robert Oglenski: Okay, appreciate that, Joe. And then, I guess as you transition more earnings in the business space to aviation products, how should investors think about free cash flow in the business? And maybe, you know, on a longer term, where do you want to see leverage on the balance sheet too?

Speaker Change #109: Okay I appreciate that Joe.

Joseph P. Adams: Yes, as you transition more.

Speaker Change #110: Our earnings.

Speaker Change #111: With respect to Avs your products, how should investors think about free cash flow in the business.

Joseph P. Adams: Thank you, Joe.

Speaker Change #112: And maybe arent from where do you want the leverage on the balance sheet. Thank you Joe.

Joseph P. Adams: yeah so the second question we've we just did a 800 million dollar high yield deal and we indicated that our goal is to be strong double B by all agencies and and have debt to totally be done the three to three and a half times range and this this quarter we're at 3.4 times the bonds have traded up I think we're trading you know pretty much like a double B strong double B at the moment and that's that's something we think is you know achievable this year and in the near future so we're going to maintain that leverage and that rating In terms of free cash flow, what we do is we take the EBITDA, subtract corporate and interest, and then we use a number for maintenance capex, what we need to invest each year to maintain the engines so that they can fly forever ad infinitum. That number tends to be between 60 and 80 million a year of maintenance capex.

Joseph P. Adams: Yes, so the second question.

Speaker Change #113: $800 million high yield deal and we indicated that our goal is to gain strong double D by all agencies.

Speaker Change #114: Have debt to total EBITDA in the three to three five times range and this quarter. We're at three four times.

Speaker Change #114: The bonds have traded up I think we are trading pretty much like a double b strong double will be at the moment and.

Speaker Change #114: That's something we think is achievable this year in the near future. So we're going to maintain that leverage in that rating.

Speaker Change #114: In terms of free cash flow, what we do is we.

Speaker Change #114: We take the EBITDA subtract.

Speaker Change #114: Subtract corporate and interest and then we use a number for maintenance Capex, what we would use what we needed to invest each year to maintain the engines so that they can fly.

Speaker Change #114: Forever infant item in that number is tends to be between 60 and $80 million a year of maintenance capex. So when you get when you run the math will generate hundreds of millions of free cash flow.

Joseph P. Adams: When you run the math, we'll generate hundreds of millions of free cash flow in the near future. And that's been our goal since, as you remember, back in 2022 when we set those targets not to be in a perpetual cycle of always buying more equipment but just turning it faster and generating a lot of cash.

Speaker Change #114: In the near future and Thats been our goal since as you remember back from 'twenty to 'twenty two when we set those targets is not.

Speaker Change #114: Being a perpetual cycle are always buying more equipment, but just turning it faster and generating a lot of cash.

Brandon Robert Oglenski: Thank you for that. I appreciate it. Thanks.

Speaker Change #115: Thanks for that appreciate it.

Operator: One moment for the next question. The next question comes from Stephen Trent with Citi. Your line is now open.

Speaker Change #115: Thanks.

Speaker Change #116: One moment for the next question.

Speaker Change #116: The next question comes from Stephen Trent with Citi. Your line is now open.

Stephen Trent: Good morning, everybody. And thanks very much for taking my question. You know, the first time I recall you commented about your global footprint and opportunities you saw to expand, for example, and I believe you previously called out Southeast Asia geographically. And I was wondering, since that time, what sort of elements you've seen in the market that might be reinforcing your view on that being an attractive footprint. Thank you.

Stephen Trent: Hi, good morning, everybody and thanks very much for taking my question.

Stephen Trent: The first.

Speaker Change #118: I recall you had commented about.

Speaker Change #119: <unk> global footprint and opportunities you saw to expand for example in I believe you previously called out.

Speaker Change #120: Southeast Asia geographically and I was wondering since that time.

Speaker Change #121: What sort of element you have seen in the market that might be.

Speaker Change #122: Reinforcing your view on.

Speaker Change #123: That being an attractive footprint. Thank you.

Speaker Change #123: Thanks.

David Moreno: Hi Stephen, I can take that question. This is David.

Speaker Change #123: I can take that question this is David.

David Moreno: So yeah, Southeast Asia is a very important region for us. It has a high concentration of 737NGs and A320s. And typically, that fleet has been newer, and now with time, it's maturing, and the engines are due for shop visits. So it's an area that we're keenly focused on.

Yes, Southeast Asia is a very important region for us. It has a high concentration of 737, <unk> and <unk> hundred <unk> and typically that fleet has been has been newer and now with time, it's maturing and the engines are do shop visits. So it is an area that we're keenly focused on recently, we started working with an airline by <unk>.

David Moreno: Recently, we started working with an airline by doing all module swaps at their hangar facility. So they have a hangar where they do airframe work and light engine work as well. So we started doing module swaps on LPTs. Now we have a large program with that airline. And we've also recently started offering that as a third-party business. So now we have airlines coming in with aircraft that have engines that need module swaps.

Speaker Change #123: All module swaps at their hangar facility. So they have a hanger.

Speaker Change #123: When they do air framework and light engine work as well. So we started doing module swaps on lpt's. So we have a large program with that airline and then we've also been recently started offering that as a third party business. So now we have airlines coming in with aircraft that have engines that need.

David Moreno: We are performing those module swaps for that airline, and the aircraft is going back in the air in 15 to 20 days. So it's operating like a pit stop. So we've started with a few third-party customers, and we're very excited to grow that presence in Southeast Asia.

Speaker Change #123: Modular swaps were performing those module swaps for those for that airline in the aircraft is going back in the year and 15 to 20 days. So its operating like a pit stop so.

Speaker Change #123: So we started it started with a few third party customers and we're very excited to grow that.

Speaker Change #123: Our presence in southeast Asia.

Stephen Trent: I appreciate that, David. Very helpful.

Speaker Change #123: And I appreciate that David very helpful and just as a fall.

Speaker Change #124: A follow up.

Speaker Change #125: The M&A side.

Speaker Change #126: You guys.

Joseph P. Adams: And just as a follow-up, you know, on the M&A side, you guys seem to be really putting together a potent story on MRE. And I know you've done your own acquisitions like QuickTurn and what have you. Long-term, would you ever consider a larger competitor acquiring you?

Speaker Change #127: Seem to be.

Speaker Change #128: Really putting together a potent story on MRI E and I know you've done your own acquisitions like quick turn into what have your long term would you ever consider.

Speaker Change #129: A larger competitor acquiring you.

Joseph P. Adams: Well, that's, I mean, it's up to the shareholders. We're always, you know, we're very shareholder-oriented. So we all own a lot of stock. And, you know, if the right offer came in, and somebody was interested, we would certainly entertain it. That's also, that's a board-level call, not just an individual's.

Speaker Change #132: Well that's I.

Speaker Change #130: I mean, it's up to the shareholders were always.

Speaker Change #131: We are.

Speaker Change #131: Very shareholder oriented so we all want a lot of stock in <unk>.

Speaker Change #131: Right offer came in and somebody is interested we would certainly entertain it.

Speaker Change #131: But it's also that's an award.

Gordon: Gordon level call out.

Gordon: And individuals.

Stephen Trent: Fair enough, and I appreciate that, Joseph. Thank you for your time.

Speaker Change #134: Fair enough and I appreciate that.

Speaker Change #139: Thank you for your time.

Operator: One moment for the next question. The next question comes from Brian McKenna with Citizens JMP. Your line is open.

Gordon: Thanks.

Speaker Change #135: One moment for the next question.

Speaker Change #135: The next question comes from Brian Mckenna with citizens JMP. Your line is open.

Brian J. McKenna: All right, great. Thanks. Good morning, everyone. Most questions have been asked, but it would be great just to get an update on capital management. I'm assuming returns on new investments today are quite high, so I suspect your top priority for capital is investing back into the business for longer-term growth, but can you just walk through your capital priorities today as it relates to new investments, further deleveraging, strategic M&A, and then dividends and buyback?

Brian J. McKenna: Alright, great. Thanks, Good morning, everyone. Most questions have been asked but it wouldn't be great just to get an update on capital management I am assuming returns on new investments today are are quite high so I suspect your top priority for capital is investing back into the business for longer term growth, but can you just walk through your capital priorities today as it relates to.

Speaker Change #136: New investments further deleveraging and strategic M&A dividends or buybacks.

Joseph P. Adams: Yes, so our first priority is to achieve and maintain a strong BB rating, which I mentioned, and maintain debt at, you know, three to three and a half times debt-to-total EBITDA. So that we're on course, we've, you know, we're in that zone in Q2, and we expect by the end of the year to be solidly in that. So that's priority number one. Priority number two, as you mentioned, is investments.

Yes so.

Speaker Change #137: We first priority is to is to achieve and maintain a strong double b rating, which I mentioned and maintained at three to three and a half times debt to total EBITDA. So that we're on course.

Speaker Change #137: We're in that zone in Q2, and we expect by the end of the year to be solidly in that so thats priority number one priority number two is you mentioned these investments.

Joseph P. Adams: We do have a good pipeline of acquisitions. We also are increasing that by selling modules and engines quicker. So our goal is not to, you know, have a huge increase in net assets owned this year. Having said that, at the beginning of the year, we did indicate with the V2500 program that we expected to increase our engine count from roughly 60 V2500s at the beginning of this year to about 150 to 200 by the end of this year.

Speaker Change #137: We do have a good pipeline of acquisitions. We also we're turning that by selling modules and engines.

Speaker Change #137: Quicker. So our goal is not to have a huge increase in net.

Speaker Change #137: Assets owned this year, having said that at the beginning of the year we did.

Speaker Change #137: Indicate where the V 2500 program, we expect it to increase our engine count from roughly six TV $20. One hundreds of the beginning of this year to about 150 to 200 by the end of this year.

Joseph P. Adams: We're well on our way. We're at 130, now and so we expect to achieve that and that you know if you if you think of an average engine being five million or so adding 100 engines adds about 500 million capital so that's that's been a focus this year is to is to have the v2500 but once we achieve you know having 400 to 500 cfm56 engines and 150 to 200 v2500s we don't need to grow that number significantly so after that it then becomes a question for shareholder returns and dividends and stock 5x would be the third priority

We are well on our way were at 130.

Speaker Change #137: Now and so we expect to achieve that in that.

Speaker Change #137: If you think of an average engine being $5 million or so adding 100 engines adds about 500 million of capital. So that's that's been a focus this year is to is to have the <unk> vendor, but once we achieve.

Speaker Change #137: Having 400 to 500 CFM 56 engines in 150 to 225, hundreds we don't need to grow that number significantly so.

Speaker Change #137: After that it then becomes a question for shareholder returns and dividends and stock buybacks would be the third priority.

Brian J. McKenna: Okay, great, very helpful. And then just one more follow up for you, Joe. You know, given how much the business has grown over the past couple of years, how are you splitting your time between managing the two segments? And then, somewhat related, is there an opportunity to lean in on hiring here, just given the broader macro environment to further accelerate growth and some of the emerging opportunities within aerospace products?

Speaker Change #137: Okay great helpful.

Speaker Change #140: Then just one more follow up for you Joe.

Speaker Change #141: Just given how much the business has grown over the past couple of years. How are you splitting your time between managing the two segments and then somewhat related is there an opportunity arena not hiring here just given the broader macro environment to further accelerate growth in some of the emerging opportunities within the aerospace products.

Joseph P. Adams: Well, I spend 100% of my time on FTI, whatever's needed. So I don't think of it as like splitting.

Speaker Change #142: Well I spend 100% of my time on F tie whatever's needed. So I don't think of it as like splitting.

Speaker Change #142: I've said to people like my Dream is that one day people will not do a sum of the parts calculation and think of this as we do as an integrated <unk>.

Joseph P. Adams: You know, I said to people, my dream is that one day people will not do a sum of the parts calculation. And think of this as we do it as an integrated product, and we go to the airlines, and we say, look, we can provide you with your engine maintenance without you having to do it. You outsource it to us, and we'll always have an engine for you, and we'll save you time and money and give you a lot of flexibility.

Speaker Change #142: Product and we go to the airlines and we say look we can provide you.

Speaker Change #142: Your engine maintenance without you having to do it you outsource it to us and we will always have an engine for you and we will save you time and money and provide you a lot of flexibility and Thats our.

Joseph P. Adams: And that's our pitch, and so what we do is we buy run-out engines, we rebuild them, and then we can offer either a lease, a sale, or an exchange to an airline. And so the leasing is just one spoke, one arm of what we offer, but it's an important one because having that ability gives the airline the flexibility to say, well, you know what? I only want three years, I think is what I'm going to need, and somebody else doesn't want six years.

Speaker Change #142: That's our kitchen.

Speaker Change #142: So what we do is we go by run out engines, we rebuild them and then we can offer either a lease sale or an exchange to an airline and so the leasing is just one spoke one arm of what we offer but it is an important one because having that ability.

Speaker Change #142: Gives the airline the flexibility say well you know what I only want three years.

Speaker Change #142: I think as what I'm going to need and somebody else is around six years. So you have the ability to customize and say whatever you want we will deliver that for you and that integrated product is extremely.

Joseph P. Adams: And so you have the ability to customize and say whatever you want; we'll deliver that for you. And that integrated product is extremely powerful. So we don't think of it as two different businesses. We report it that way, but someday, hopefully, people will stop doing some of the parts, and they'll say, this is just a, you know, this is a great product. This is an outsourced engine maintenance business for the aftermarket for the most popular engines in the world.

Speaker Change #142: Powerful so we don't think of it as two different businesses, we reported that way but.

Speaker Change #142: Someday we will.

Speaker Change #142: Hopefully people will stop doing some of the parts and they will say this is just a this is a great product. This is an outsourced engine maintenance business for aftermarket for the most popular engines in the world.

Brian J. McKenna: Yeah, got it. Makes sense. I'll leave it there and congratulate you on another great quarter. Thanks.

Speaker Change #143: Yeah got it makes sense I'll leave it there and congrats on another great quarter.

Operator: One moment for the next question. The next question comes from Miles Walton with Wolf Research. Your line is open.

Thanks.

Speaker Change #144: One moment for the next question.

Speaker Change #145: The next question comes from Myles Walton with Wolfe Research Your line is open.

Myles Alexander Walton: Good morning. Hey, Joe, I was wondering if you could maybe decompose the $700 million of EBITDA in 2026. The $500 million previously, I think, had $50 million of PMA, third-party parts, and a couple hundred million of better drop-through in the module business. Is the PMA contribution to the $700 million about the same, and the remainder is better business elsewhere plus the $2,500?

Myles Alexander Walton: Thanks, Good morning.

Myles Alexander Walton: Hey, Joe I was wondering if you could maybe decompose the 700 million of EBITDA in 2006. The 500 previously I think had $50 million of PMA third party parts and a couple hundred million dollars of better drop through in the module business.

Speaker Change #147: Is the PMA contribution that $700 million about the same and the remainder is better business elsewhere plus the 2500.

Joseph P. Adams: So there are similar TMAs, USMs, each about 50, and then we've added probably between 100 and 150 for the V2500 program. And then the rest is just higher margins and more volume on CFM modules.

Speaker Change #148: Yes, so there.

Speaker Change #149: They are similar.

Speaker Change #150: TMA USA each about 50 and then we've added.

Speaker Change #151: Probably between 101 hundred $50 for the <unk> 2500 program and then the rest is just higher margins and more volume on CFM modules.

Joseph P. Adams: Does that higher margin volume on CFM require that PMA because that was sort of the selling point to get to that higher margin, or is the market now so robust that you don't need the PMA for that drop?

Speaker Change #152: Does that higher margin volume on CFM require that PMA, because that was sort of a selling point to get to that higher margin or is the market now so robust that you don't need the PMA for that drop there.

Joseph P. Adams: You know, we're going to get it, so I don't think of it as, you know, the PMA will come and that will increase the margins. I think we're going to increase the margins even without the PMA, but definitely we're planning on the PMA and increasing the margins.

Speaker Change #153: We're going to get it so I don't think of it as the PMA will come and that will increase the margins I think we are going to increase margins, even without PMA, but definitely we are planning on <unk>.

Speaker Change #153: And PMA increasing margins.

Joseph P. Adams: Okay, and there's been a lot of news about airlines, and clearly yields are working against them, and they're running more into cost questions about containment. Are you finding that this business that you have has more durability in a market where airlines are cost-cutting? Where are your weak points, and where are your strengths if we go into that cash conservation mode that sometimes cyclically happens with airlines?

Speaker Change #153: Okay.

Speaker Change #154: And there's been a lot of.

Speaker Change #155: News about airlines and clearly yields are working against them and they are running more into cost questions about containment.

Speaker Change #156: Are you finding.

Speaker Change #157: That this business that you have.

Speaker Change #157: Has more durability in a market where airlines are cost cutting.

Speaker Change #158: Where are your weak points, where your strengths. If we go into that cash conservation mode that sometimes cyclically happens with airlines.

Joseph P. Adams: Yes, it does help us. And we're providing, as I said, cost savings. So when everybody's told to look at every line item in the P&L, one of the line items that always pops up is engine maintenance as a big one, and one that they seem to never be able to get it to go down. So we can provide a flattening out of that and savings. And so when people do have an intense focus on cost savings, then outsourcing of these types of activities goes up, the demand for that goes up. So we're, you know, we're happy, you know, in any environment, but particularly when people are, you know, focusing on, that's what we're providing is expense management reduction.

Speaker Change #159: Yes, so it does help us and we're providing as I said cost savings. So when when everybody is told to look at every line item in the P&L line.

Speaker Change #159: The line items that always Pops up as engine maintenance is a big one and one that they seem to never be able to get it to go down so we can provide.

Speaker Change #159: A flattening out of that in savings and so when people do have intense.

Speaker Change #160: Intense focus on cost savings then outsourcing of these types of activities as a goes up the demand for that goes up so were.

Speaker Change #160: We're happy.

Speaker Change #160: In any environment, but particularly when people are focusing on that's what we're providing.

Speaker Change #160: <unk> expense management reduction.

Myles Alexander Walton: Okay. All right. Great. I'll leave it there. Thank you.

Speaker Change #161: Yes, Okay, all right great I'll leave it there thank you.

Operator: One moment for the next question. The next question comes from Sherif Elmaghrabi with BTIG. Your line is open.

Speaker Change #162: One moment for the next question.

Sherif: The next question comes from Sherif <unk> with <unk>. Your line is open.

Sherif Ehab Elmaghrabi: Hey, good morning. I want to start with an update on PMA. How is industry acceptance going for your first part? And can you talk through what the second PMA part does within the engine and timing for approval there, please?

Sherif: Hey, good morning, I want to start with an update on PMA.

Sherif: The industry acceptance going for your first part and can you talk through what the second PMA part does within the engine and timing for approval there. Please.

Joseph P. Adams: Yeah, the timing we've said is shortly, we've, you know, obviously, we're closer today than we were last quarter. We don't have any, we don't forecast specific timing, but very good progress made on all fronts on that.

Speaker Change #164: Yes, the timing we've said as shortly.

Speaker Change #164: Obviously, we're closer today than we were last quarter.

Speaker Change #164: We don't have any.

Speaker Change #165: Don't forecast specific timing, but.

Speaker Change #165: Very good progress made on all fronts on that so we're very confident.

Speaker Change #165: The first part we have installed in 15 engines, it's been fine.

Speaker Change #165: Another airline and no issues very.

Speaker Change #166: It's a high quality product as always with Chromalloy and.

Joseph P. Adams: So we're very confident. The first part we installed in 15 engines, it's been flying with another airline, and there have been no issues. Very high quality product, as always, with chromoly. And we think the industry acceptance is going to grow. There is a school of thought that for many airlines, if they're going to, if they're going to put PMA on, they want more than one part. So there are airlines that will wait till there are more parts approved.

Speaker Change #166: We think the industry acceptance is going to grow.

Speaker Change #166: There is a.

Speaker Change #166: School of thought on for many airlines that if theyre going to if they're going to put PMA. They want more than one part. So there are airlines that will wait until there's more.

Speaker Change #166: It's approved in but once those are available then we expect industry to take out to be true.

Speaker Change #166: To be quite robust. It is also in there is there is an.

Joseph P. Adams: And once those are, you know, available, then we expect industry take-up to be quite robust. It's also, you know, there's an additional element today and supply chain availability in that it's not just cost savings for PMA, it's availability, which is also important that you have another alternative if you can't get in a timely manner the OEM part.

Speaker Change #166: <unk> element today in supply chain avail.

Speaker Change #166: Availability in that.

Speaker Change #166: It's not just cost savings for PMA, its availability, which which is also important that you have another alternative.

Speaker Change #166: If you can't get in a timely manner.

Speaker Change #166: OEM parts.

Sherif Ehab Elmaghrabi: That's good color. And then on the corporate side, both of the well intervention vessels are now on charter, and it looks like the rate that they're earning has melted up nicely. So how are you progressing with the sale of these vessels? And are there any recent transactions you can point to, to give us a sense of how their value is going?

Speaker Change #167: That's good color and then on the corporate side both of the well intervention vessels are now on charter and it looks like the rate that they're earning has melted up nicely.

Speaker Change #168: How are you progressing on the sale of these vessels.

Speaker Change #169: Are there any recent transactions you can point to you to give us a sense of how they're how they're valued.

Joseph P. Adams: Yes, you're right, the market is improving nicely. We have a handshake deal on both vessels today, which we expect to close by the end of the year, subject to a couple of conditions that we think will be met, but the market has strengthened, and we expect for the next few years it's going to be a strong market. So the vessels are both on charter, doing well, generating EBITDA, and the values have gone up. We originally said we thought we would get approximately $150 million, and we're in that zip code, so we're very happy with, you know, that the end of that chapter is closed.

Speaker Change #170: Yes, so youre right the market is improving nicely.

Speaker Change #171: Have a handshake deal on both vessels today, which we expect to close by the end of the year subject to a couple of.

Speaker Change #171: Conditions that we think will be net but the market is has strengthened.

Speaker Change #171: We expect for the next few years, it's going to be a strong market. So the vessels are both on charter doing well generating EBITDA and the values of.

Speaker Change #171: Have gone up we originally said, we thought we would get approximately $150 million in.

Speaker Change #171: We're in that ZIP code. So we are very happy with.

Speaker Change #171: At the end of that chapter as is.

Speaker Change #171: It's close.

Sherif Ehab Elmaghrabi: Thanks for taking my questions, Joe.

Speaker Change #171: Thanks for taking my questions Joe.

Speaker Change #171: Thanks.

Alan John Andreini: I have no further questions at this time. I would now like to turn the call back over to Alan Andreini for closing remarks.

Speaker Change #171: I show no further questions at this time I would now like to turn the call back over to Alan Andreini for closing remarks.

Operator: Thank you all for participating in today's conference call. We look forward to updating you after Q3.

Alan John Andreini: Thank you all for participating in today's conference call. We look forward to updating you after Q3.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Speaker Change #173: This concludes today's conference call. Thank you for participating you may now disconnect.

Speaker Change #173: Okay.

Speaker Change #173: Okay.

Speaker Change #173: Yes.

Speaker Change #173: Okay.

Speaker Change #173: Okay.

Speaker Change #173: Yes.

Okay.

Speaker Change #173: Okay.

Speaker Change #173: Okay.

Speaker Change #173: Okay.

Speaker Change #173: Okay.