Q4 2024 FTAI Aviation Ltd Earnings Call
Saxaphone plays Peekaboo
Speaker Change: Hello and welcome to FTAI Aviation fourth quarter 2024 earnings conference call. At this time all participants are in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 11 again.
Speaker Change: I would now like to turn the conference over to Alan Andreini, Head of Investor Relations. You may begin.
Alan Andreini: Thank you, Towanda. I would like to welcome you all to the FTI Aviation fourth quarter and full year 2024 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer, Angela Nam, our Chief Financial Officer, and David Marino, our Chief Operating Officer.
Alan Andreini: 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.
Alan Andreini: In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA.
Alan Andreini: The reconciliation of those measures to the most directly comparable gap measures can be found in the earnings supplement.
Alan Andreini: Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements, by their nature, are uncertain and may differ materially from actual results.
Alan 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.
Thank you, Alan.
Joe Adams: I'm pleased today to announce our 39th dividend as a public company and our 54th consecutive dividend since inception.
Joe Adams: The dividend of 30 cents per share will be paid on March 24 based on a shareholder record date of March 14.
Joe Adams: I'd also like to start today by talking about the investor presentation posted to our website. While I'm not going to go slide by slide, we wanted to speak to our market opportunity, the value proposition, scalability, and durability of our aerospace products business.
Joe Adams: Starting with the market opportunity, if you look at the total number of operators, the majority of our target customers are small and medium-sized airlines, which have narrow-bodied fleets powered by CFM56 and V2500 engines, our focus engines.
which creates a large and fragmented addressable market.
Joe Adams: of $22 billion of annual maintenance spend where FDI focuses and can provide significant value to the customer.
Joe Adams: We offer these customers a lower fixed price with minimal downtime product compared to what our competitors do. This is made possible through our unique maintenance capabilities and expertise and a large owned engine fleet.
Joe Adams: Unlike traditional MROs, FTIDE leverages in-house engineering and maintenance capabilities to extract every available cycle from each module.
Joe Adams: Our scale enables us to optimize module deployment or combine modules to build right-sized engines for our customers.
Joe Adams: You can see a typical example that we detailed on slide 13 in the presentation.
Joe Adams: But let me take a moment now to explain the process in a little more detail.
Joe Adams: The CFM56 engine consists of three modules, the fan, the core, and the low-pressure turbine, or otherwise called the LPT.
Joe Adams: When this occurs, usually the other two modules still have remaining life.
Joe Adams: and the key to our green time optimization strategy is to acquire and dismantle unserviceable engines.
Joe Adams: refurbish the viable modules and sell them individually or reassemble them into right-sized engines for customers. And a right-sized engine is one where the various modules, three modules, all have a similar remaining use for life.
Joe Adams: Performing module maintenance at scale, in addition to owning the engine throughout the repair cycle, creates significant cost savings opportunities. This allows us to offer significant benefits to customers compared to a traditional shop visit, while also generating higher margins than typical MROs.
Joe Adams: We see a bright future ahead in our unique role in the aftermarket.
supported by significant investments we made.
in 2024.
as well as the announcements we made yesterday regarding...
Joe Adams: the new maintenance facility in Rome, and our strategic capital initiative, which we call SCI, to accelerate our market share and help sustainably support airlines in their long-term maintenance needs.
Joe Adams: Our new joint venture agreement with IAG Engine Center Europe, which will be rebranded as QuickTurn Europe.
Joe Adams: complements our existing facilities in Montreal and Miami and will help address the strong demand for FTIES, MRE or maintenance repair and exchange services from our global customer base in a critical geographic location.
Joe Adams: Secondly, we were excited to announce yesterday that the SCI has received $2.5 billion commitment for asset-level debt financing from Atlas, which is a majority-owned subsidiary of Apollo and Deutsche Bank.
Joe Adams: The SCI team is currently in the late stages of closing a second round of equity financing.
Joe Adams: And we believe the market opportunity to deploy capital raised in these SPVs in this way is in the region of more than $4 billion annually.
Joe Adams: Turning out suggested free cash flow in 2024 we generate approximately 670 million from business operations which included a hundred and forty million related to the sale of both of our offshore vessels.
Joe Adams: At the same time, we invested approximately $1.3 billion in major growth initiatives.
Joe Adams: which range from the purchase of the Montreal maintenance facility, the termination of the management agreement with Fortress, and investments in aviation assets, in particular engines and parts, to support our growth strategy in 2025 and beyond.
Joe Adams: Overall, we feel more confident in our annual business segment EBITDA for 2025 to be between 1.1 and 1.15 billion excluding corporate and other.
Joe Adams: We're also expecting adjusted free cash flow of approximately 650 million in 2025, which is broken out in more detail on slide 24.
Joe Adams: We will continue to make strategic reinvestments in the business, however, the launch of our strategic capital initiative will reduce our capital asset acquisition needs in 2025 and beyond.
Joe Adams: So while we will continue to prioritize growth opportunities, we will also consider capital redistribution to shareholders.
Joe Adams: Finally, as we look at our current pipeline, we now expect our annual aviation EBITDA to rise from our previously projected $1.25 billion to be approximately now $1.4 billion in 2026.
Joe Adams: With that, I'll hand it over to Angela to talk through the numbers in more detail. Thanks, Joe.
The key metric for us is adjusted EBITDA.
Joe Adams: We ended the year strongly with adjusted EBITDA of $252 million in Q4 2024, which is up 9% compared to $232 million in Q3 2024.
and up 55% compared to $162.3 million in Q4 2023.
Joe Adams: During the fourth quarter, the $252 million EBITDA number was comprised of $133.9 million
Joe Adams: from our leasing segment, $117.3 million from our aerospace product segment, and $0.8 million from corporate and other, which included $18.7 million related to the gate-on sale of both of our offshore vessels.
Joe Adams: Now, let's look at all of 2024 versus all of 2023.
Joe Adams: Adjusted EBITDA was $862.1 million in 2024, which is up 44% versus $597.3 million in 2023.
Turning now to leasing.
Joe Adams: Aviation leasing continued to deliver strong results, posting approximately $134 million of adjusted EBITDA. The pure leasing component of the $134 million came in at $128 million for Q4 versus $99 million in Q4 2023.
Joe Adams: Included in the $128 million was an $11 million settlement related to Russian assets written off in 2022.
Joe Adams: Additionally, we ended the year with a $40.4 million book value of assets sold for a 12% margin for a gain of $5.7 million.
Joe Adams: Overall, we generated $500 million of adjusted even stock for 2024 in aviation leasing.
and align them with our original estimates for the year.
Joe Adams: Looking ahead, we remain comfortable assuming leasing adjusted EBITDA through May at $500 million in 2025 as we pivot our focus towards an asset-light business model.
Joe Adams: which is up 15% compared to $101.8 million in Q3 of this year and up 115% compared to $54.6 million in Q4 2023.
Joe Adams: We continue to see tremendous growth in our adoption and usage of our aerospace products and remain focused on ramping up production in both of our facilities in Montreal, Miami as well as commencing operations in Rome.
Joe Adams: In 2025, we expect to generate $600 million to $650 million of EBITDA up from $381 million in 2024 and $160 million generated in 2023.
Joe Adams: With that, let me turn the call back over to Alan. Thank you, Angela. Tawanda, you may now open the call to Q&A.
Speaker Change: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone, then wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Christine Louag with Morgan Stanley. Your line is open.
Hey, good morning, everyone.
Good morning.
Speaker Change: You know, Joe, by the way, this investor presentation that you put out is very interesting and it clearly lays out the value proposition that the Aptide business model provides.
Speaker Change: But just taking a step back, you know, when you look at the competitive landscape, one of the key investor questions had been like, why isn't anybody else doing this?
Speaker Change: Right, I thought you had a pretty good layout of where others are, like third-party MRO, internal airlines, other aircraft leasing companies. But why is it that nobody else has this vertically integrated model?
Speaker Change: Because it really seems like you found a sweet spot. So why aren't others doing it? Well, what's their hurdle and What do you think do you think your true competitive moats are?
Speaker Change: Sure, there's a lot of different, you know, moats we've maybe...
Speaker Change: put in place over the years. It's taken us, you know, seven, eight years to get to this point, so it's not a simple process. It was a sequential number of steps that we took, but basically
Speaker Change: To do what we do is similar to what United, American, and Delta do, which is you have to own a large fleet of the same type of engine, and then have your own maintenance capability and facilities.
Speaker Change: And so there's nothing to stop other people from doing that. But what we did is we sort of copied the majors and then offered that to the 600 operators around the world that don't have a maintenance facility. So effectively, it's an outsourcing function for a single engine type.
Speaker Change: So when you look around the world like well who could do that? Well clearly people that own maintenance facilities could do that
Speaker Change: They'd have to reorganize their business, set up an asset management team, pick an engine, find a facility that doesn't have third-party work that they'd have to displace.
Speaker Change: and then try to assemble all the other parts. The other impediment, if you go back where we started, is we invested in PMAs six, seven years ago.
Speaker Change: and that'll be the only PMA product for this engine. So we have an exclusive on that. And many of the companies that I just mentioned that own maintenance facilities have very strong ties with OEMs.
Speaker Change: which will commercially likely prohibit them from using TMA to any significant degree.
Speaker Change: So, that advantage, you know, is something that nobody can copy. The other advantages, you know, that we built up, people could, but it takes a lot of time and a focus, and when we did it, you know, the outcome wasn't all that clear. I mean, it seems today clear, but...
Speaker Change: when we went down that path and decided not to diversify and own our own maintenance facilities.
Speaker Change: You know nobody nobody else is doing it. So we were like people look at us like what are you doing?
Speaker Change: We keep putting up other barriers, and I actually think that SCI
Speaker Change: is yet another barrier because now we've added, you know, institutional quality asset management to the mix.
Speaker Change: which, that's a hard, you know, that's a big hurdle for people to, you know, you can't just go raise the first fund easily.
Speaker Change: I know because we've done it a couple of times it takes a lot of work and so so if you put that on top of it it's it's you know we're going to try to add something every year to make it harder frankly.
Speaker Change: That's really helpful, Joe. And maybe a segue to SDI. I mean, your recent announcement, you're putting in $550 million in the form of 46 on-lease aircraft, and you've got the $2.5 billion in capital from Apollo to Deutsche Bank, and Deutsche Bank
Speaker Change: You're not at $3 billion, and you're now calling for $4 billion. I mean, what's driving the increase of the previous $3 billion? What's the appetite for further capital into your SDI? And lastly, what would you define as successful for you and your partners?
for this investment.
Speaker Change: And at the same time, we're seeing a very strong deal flow. It's now still February and we have, you know, over a billion dollars committed in investments, you know, already for SCI. So, and there's, there's, it's a huge market opportunity. If you look at just the leasing market itself.
Lessor's Own, if you think there's 14,000 CFM vetoes.
7 through 7 NGs and 8 through 20 COs.
Speaker Change: about half of those are owned by lessors, so 7,000, and roughly 20% of those trade.
in a given year.
Speaker Change: There's been a little bit less because people held on longer due to the pandemic and the strong market environment. But we see that ramping up as new deliveries start to pick up and lessors need to manage their average age of their fleet. So they have to sell older assets and buy newer assets.
and we've seen a number of airlines...
Speaker Change: opting for Saleespecs because they have a lot of shop visits on engines coming up. And that is a perfect fit for us because we love shop visits. We're one of one in that category. There's no one else that I've ever met that likes a shop visit.
Speaker Change: We actually believe we can deliver a higher return and a lower risk. When I always think about the investment business, that's the quadrant you're always trying to get to.
Speaker Change: and we have a product that no one else can offer that we believe generates higher returns and has lower risk for the investors. So there's really nothing not to like about it.
Speaker Change: Great, thank you Joe. I'll leave it at that and these are really helpful.
Thank you.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Sheila Cayoglu with Jeffries. Your line is open.
Speaker Change: Good morning and thank you team. Congrats on the great quarter. Joe, maybe two questions for you both on margins.
Sheila Cayoglu: First, if we could start off with, you know, your margins at 35%. If you could go through that a bit because I think there's some misunderstanding.
Sheila Cayoglu: on how you generate those margins and how sustainable they are. And then secondly, it seems like you've upped the bar once again with slide 14, and you're talking about 35 to 50% margin potential EBITDA margins versus the 40 you've talked about previously.
Sheila Cayoglu: Can you walk us through the profit drivers over the course of 25 and beyond, whether it's PMA adding, you know, 250 million, green time optimization, and just better productivity at your facilities as well. So if you could just touch on those two things.
Yes, sure.
you pay the parts. That's sort of the easy part.
Sheila Cayoglu: The second is green time optimization, which we've given an example in the slide deck, and David will walk through that in more detail.
Sheila Cayoglu: That's something unique to us that no one else does, and as I mentioned, it's really...
Sheila Cayoglu: It's been practiced by major airlines, but if you have to own your fleet and have a maintenance facility and we combine that just so that we don't waste any available cycles, hours and cycles.
Sheila Cayoglu: The third is a part strategy, which is, you know, use serviceable material, buying used LLPs, and ultimately TMA, which is the, you know, which is the.
Sheila Cayoglu: the top of the mountain and and we have all of those going we've been working on a part strategy for many years and We have a whole team of people and that's all they do because a big part of any shop is in its part. So
Sheila Cayoglu: and ultimately we're moving more into piece part repair, which will be further upside.
Sheila Cayoglu: on margins as we do more and more of our own repairs. And then lastly, in many cases, we provide a just-in-time product for the airline and we help them avoid inducting that engine into a shop. We can do field service work. So.
Sheila Cayoglu: We have a white glove just-in-time product. So when you break the, you know, margin down that way, none of those components seem, you know, out of line. We're the only, you know, party that combines all those activities though.
Sheila Cayoglu: And then when you think about the sustainability, we believe that this is sustainable in any market environment. The repair and the white glove service are value adds no matter what the economic climate is. And then numbers two and three, green time optimization in parts, we believe will grow.
Sheila Cayoglu: And the optimization model, we have a little chart in there, the more engines and the more modules you own, the better you get at optimization. It's just mathematical.
Sheila Cayoglu: So, we believe there's further upside in the optimization. You also mentioned, you know, the efficiency of your facility that we believe we can, by standardizing the approach to engines, having mechanics only working on one engine.
Sheila Cayoglu: running it like a factory, we've been able to demonstrate productivity improvements so we can drive that to higher margins. And then lastly is, you know, PMA, which is not really in the numbers.
Thank you very much.
David will walk you through the green time optimization.
David Marino: Hi, Sheila. Happy to walk everyone through page 13 of the presentation. So this example is meant to bring to life FTI secret sauce, which is green time optimization.
Sheila Cayoglu: So, our business is built to monetize every cycle in the engine through maintenance. So, generally, the starting point is a group of unserviceable engines. So, on the left, you'll see three engines that have become unserviceable. In this scenario, the engines are unserviceable because one of its modules has run out of life.
Sheila Cayoglu: These engines are either sourced through exchanging or leasing books, or we can acquire them unserviceable as well. In this example, the acquisition cost of these three engines is $6.5 million.
Sheila Cayoglu: Next the engines are then broken down into separate modules just to recap each engine is three modules so it's a total of nine modules.
Sheila Cayoglu: Maintenance is performed to address durability issues and ensure each of the modules can last until its limiter. In this scenario we're investing $3.5 million to bring the total investment of these engines to $10 million.
Sheila Cayoglu: Finally, on the right, you create, you assemble the modules to create two serviceable engines with consistent life across each of its modules. In this scenario, the third engine is not actually assembled. It's an engine for teardown that we can reuse for future builds via its parts.
Sheila Cayoglu: In total, the total value of these engines is now $16 million, so effectively we created $6 million of additional value.
Sheila Cayoglu: This example demonstrates the power of Green Time Optimization, where 1 plus 1 is a lot more than 2. This example demonstrates the power of Green Time Optimization, where 1 plus 1 is a lot
Sheila Cayoglu: And as the business continues to grow, the ability to optimize green time only increases. Our strategic capital initiative will further enhance our ability to optimize green time because we'll have a committed backlog and we'll be in higher volumes.
Speaker Change: and with insight on what that backlog looks like, will be more efficient into actually producing modules and engines more effectively. And I think we also illustrate on page 15, that exponential growth that Joe was talking about, which ties into scale of the business.
Great, thank you so much.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Josh Sullivan with the Benchmark Company. Your line is open.
Good morning.
Speaker Change: Good morning. Can we just dig into the new quick turn center Europe? You know, why was this the right joint venture in Rome? You know, how should we think of the ramp? Maybe what percentage of your customers are already in Europe and what having a local facility might do for turnaround times or politics or even new capabilities for FTIE?
Speaker Change: Sure, this is David. I'll take that question. So we're very excited to add Roam to our MRE network.
Speaker Change: And we're very excited because, as you pointed out, the first focus is geography. So, about 40% of our customers today
or in Europe.
Speaker Change: as well as Rome has great connectivity to the Middle East and this specific facility actually has the Chinese certification which then gives us access into China.
Speaker Change: The second reason is its capabilities. So this facility has a lot of similar capabilities to our Miami facility.
Speaker Change: where it is focused on CFM56. It has MRE maintenance capability as well as it has access to a test cell. So our plan is to reactivate that test cell in the next two years and bring that test cell online.
Speaker Change: Where it differs from the Miami facilities, it also has access to peaceful repair.
like all our maintenance facilities.
Speaker Change: They all have a deep history. This one in particular has a history with an airline, Alitalia.
Speaker Change: It has had investments with Buftanza, which at one point had a partnership, so they developed a lot of capabilities.
Speaker Change: and that facility has been underutilized. So we're very excited to bring our volume to that facility and grow that. We believe we can start the MRE process immediately after acquisition and then we can ramp up for the test cell and piece part capability over time.
Speaker Change: Thank you for that and then just as a second question I'm going to touch the lodestone here and just ask for if there's any updates on the PMA approvals but also maybe how has the PMA part approved late last year performed? Are lessors using that part or is there any resistance?
Speaker Change: I'll take the second part first. The part approved last year is being installed in engines.
Speaker Change: And the prior part, which has been in service now over two years, has flown almost 100,000 hours in our engines and is performing extremely well. And ultimately, I mean, that's what matters with PMA is that the part is high quality and durable.
Speaker Change: last a long time, and that's what operators are, that's what we're seeing, and that's what operators are experiencing. So that's great news.
In terms of
Speaker Change: Again, we don't forecast when actual part numbers will be issued. We did say that there's been a substantial amount of progress made, and we're very close on the next part. But that's pretty much the same thing we said the last time.
it still stands to be true.
Thank you for the time.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Juliana Villagno with Compass Point. Your line is open.
Speaker Change: Good morning and congratulations on another great quarter and the continued execution.
Speaker Change: Fundamentally, and also in expanding the runway for the business. One of the questions I was curious about asking you was, a bit more of a macro question in terms of the evolution of the industry, but as a lot of the legacy operators come out of their midlife legacy assets,
Speaker Change: What do you think the impact will be on the industry and will the industry become more fractured and fragmented as some of the larger legacy operators start to sell off some of those assets to smaller operators?
Speaker Change: and mid-size operators globally, and I'm curious how that impacts you and the MRE business and if it creates more opportunities over time for you to expand the MRE platform and even the SEI platform as well.
Speaker Change: Yeah, no, it's a great question and it is an important dynamic in the evolution of that aircraft and that
Speaker Change: Today you have probably about 20% of the engines are operated by those large, you know, very large carriers that have maintenance facilities in there.
Speaker Change: you know, harder for us to get at because they don't outsource that function.
Speaker Change: the way the others do, but over time, all of those...
Speaker Change: Aircraft are going to come out of those fleets and they're going to or not all of them, but almost all of them
Speaker Change: and they will go into small and medium-sized airlines around the world.
which will need our services.
Speaker Change: you can think of you probably have a 25% growth opportunity just on that phenomenon coming out of having those airplanes.
Speaker Change: cascade down into third-tier operators, cargo operators, charter airlines all around the world. So that's a very important industry dynamic which has happened in every other aircraft platform.
Speaker Change: The other thing is if you look at the macro on the industry spend, Aviation Week just put out new numbers on expected total spend on maintenance for V2500 and CFM56 engines.
Speaker Change: remaining relatively constant at $22 billion through 2030. And so you've got another five years where they're forecasting the maintenance spend, which is our, you know, addressable market.
Speaker Change: is going to be relatively constant for those engines. And as we said, we're at 5% of that right now. And so we don't see any reason why we couldn't, you know, increase that market penetration to 20, 25% over time.
That's very helpful, and maybe a slide now.
Speaker Change: follow up on that question, but yeah, I'd be curious when you think about that opportunity. Obviously, there's a lot of
mid-life aircrafts that need to transact.
Speaker Change: And I'm curious, now that you're scaling out the SEI programs,
Speaker Change: does that give you, you know, a very good opportunity to kind of intercept those assets that would normally, you know, maybe be sold to
Speaker Change: mid-tier operators and then maybe, you know, try to capture them and acquire them into the SCI vehicles and lease it out to the mid-tier operators and then recapture all the maintenance, you know, and I'm curious if there's an opportunity for you to kind of, you know, intercept that cycle that typically happens and also become, you know, the lessor and the maintenance provider as part of that, you know, conversion cycle.
Speaker Change: yes and the answer to that is yes and I think that's only
Speaker Change: accelerated through the strategic capital initiative where we're well capitalized and we're you know a fantastic buyer of these assets. Now we can do the entire service which is we can own the aircraft
Speaker Change: via this future capital initiative, we can offer leasing and then we can do the maintenance. So it's the entire program. So that really does accelerate our ability to penetrate aircraft more rapidly.
Speaker Change: which is the airline, they don't see any difference between FTIA Aviation and SCI.
Speaker Change: We are managing the entire relationship, and so from their point of view, they're dealing with FTI, and they're going to do, as many of them have said, they're going to do more engine business with us, because we're also becoming one of their biggest owners of their fleet.
Speaker Change: That's very helpful. Congratulations on all the success, raising the vehicles and making everything happen quickly. I'll jump back into the queue and move on from there. Thank you so much.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Brandon Oglinski with Barclays. Your line is open.
Brandon Oglinski: Hi good morning Joe and team and congrats on all the developments and obviously surviving the recent volatility here so onwards and upwards.
Brandon Oglinski: John, I wondered if you could talk to your customer base, the airlines, and how they're thinking about the NGs and the A320, you know, prior generation.
Brandon Oglinski: family, because I think you just quoted something from Aviation Week that, you know, the expectation is that the maintenance is going to remain flat for the next five years. But just given how long it's taken Boeing to get back up and running, is this going to be a platform that runs longer than people think?
Brandon Oglinski: that's our bet yes and you know it's the two points you mentioned there's
Brandon Oglinski: There's this lack of new deliveries, there's a hole in people's expected growth from that.
Brandon Oglinski: that means they're going to hold on to these current generation assets longer.
Brandon Oglinski: In some cases where airlines have to have more aircraft of the new type.
Brandon Oglinski: to fly the same schedule as the old type because the engine is coming off wing you know, earlier than they expected. So those are dynamics that I don't think are gonna change anytime soon. So David can speak to the operators but we think they're gonna hold on.
Speaker Change: Yeah, we're seeing a lot of airlines extend, let's say, 5 to 8 years, so we're seeing that.
Speaker Change: The longevity of this platform goes further and further. As Joe mentioned, the 737NG and A320CEOs are just a very durable product. So you know exactly what the costs are going to be. It's very predictable. So a lot of airlines are holding on to these aircraft as long as possible.
Speaker Change: Appreciate that response. And then can you talk to your customer base during the quarter? I know you guys are doing, I think, a lot of one-off transactions, but how successful have you been getting folks to contract, you know, for forward engine events in the future?
It's a combination of
Let's see.
Speaker Change: Spot transactions and then we have programs with a lot of large airlines and these programs we're seeing as far as let's say three years
Speaker Change: So, for example, we'll have an airline come in and say we want to do fan exchanges for the next three years. So those are effectively contracted in our backlog.
Speaker Change: As we mentioned, the Strategic Capital Initiative is going to give us a contractual backlog, so I think that's also going to give us greater access to the future, and those leases typically are anywhere from two to, let's say, seven years.
Speaker Change: with the average duration being around four years. So we're gonna have a four year duration backlog on those leases.
and as far as
Speaker Change: Again, I think we've said this in a few calls, but every customer who has
Speaker Change: bought the product, who's tried the product, has come back to buy more. So as I mentioned, it's a product that offers cost savings, time savings, and it's a predictable product versus shopping your engine.
Thank you.
Thank you. Please stand by for our next question.
Check the CPU on the heat allure.
Hilary, check to see if you're on mute.
Hilary: Oh, sorry. Sorry about that. I was on mute. I guess you can hear me now, right?
Speaker Change: So, could you go over the structure of the strategic capital initiative? You know, for example, who owns the assets, is it the special purpose vehicle, and who ultimately takes the residual value risk of those assets? Is it the LP investor of the special purpose vehicle that takes the residual value risk?
Speaker Change: and then if you could just talk, you know, about what type of returns the LP industry could expect from investing in those assets in the current market.
Sure, I can do everything except the last part, but...
Speaker Change: In terms of the structure, just to lay it out sort of simply, if we assume it's $4 billion of total capital, approximately 70% of that will be provided by the debt providers that we announced yesterday, so call that $2.8 billion.
Speaker Change: then $1.2 billion is the remaining number, which will be equity, and those are called a partnership. SCI is effectively a partnership, and there will be third-party investors.
Speaker Change: for 80% of that capital and EFTAI Aviation will put up 20% of that capital. So call it $240 million from EFTAI Aviation.
Speaker Change: and the owner of that asset is the partnership and the residual value risk of that asset lies with the partnership.
Speaker Change: FTIA Aviation is the general partner and will manage the partnership. So we'll make investment decisions and asset management decisions, and as I mentioned, we'll manage relationships with the airlines. But the legal owner of it will be the partnership.
And we're not allowed to talk about it.
Speaker Change: The returns, okay, gotcha. That makes sense. And then I guess staying on SDI, I guess you'll probably get new revenue items tied to SDI. I guess you'll get management fees and incentive fees as well as earnings from minority interest. Could you just go over like how these fees work? For example, what are the criteria to receive incentive fees? How much are you charging for management fees? And yeah, how they work. Thank you.
Sure, Hillary, I'll take that.
Speaker Change: On a high level, we expect to be a minority LP interest.
Holder in the FBI
Speaker Change: So on the balance sheet you'll see it presented as one line as our investment and then from earnings perspective from the partnership we'll get our pro rata equity earnings.
Speaker Change: that the partnership owns as a percentage, and in addition to that, based on the hurdle calculations, we'll also be able to earn incentives.
Speaker Change: So like what's the percentage you're charging for management fees and like what are, do you have to meet some sort of criteria to get incentive fees?
Speaker Change: yes but we're not disclosing the quantum at this point but I would just say it's you know in line with market for this type of investment partnership
Got it. Okay, great. Thank you very much.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from a line of Ken Herbert with RBC Capital Markets. Your line is open.
Yeah. Hi. Good morning, everybody.
Morning. Hey, Joe.
Speaker Change: Joe, maybe just to start, you know, the Montreal facility was a headwind to margins in the third quarter. Seems like you had some recovery there in the fourth quarter. What are you seeing with some of the legacy third-party contracts there? Have they completely rolled off? And how much of a headwind was that in the fourth quarter? And how do we think about that into 2025?
Speaker Change: Yeah, there was still some of it in the fourth quarter. I think it was, you know, it sort of impacted the margins by one to two percentage points. So, yeah, I think a little under 20 million of legacy business.
Speaker Change: and it was a below 10% margin. So it was a drag on margins in the fourth quarter. And as I said, without that, we would have been 35, 36% margins.
Speaker Change: It's the most, if not, you know, a lot of that is gone at the end of December. There still are a couple of tag ends, but it's, it's probably, you know, it's less of an impact in Q1 and it should be totally gone by the end of Q1.
Speaker Change: Okay, perfect. And last quarter you called out sort of the new customer additions. As you think about the sort of 600 fleet operators, can you comment on how many customers maybe you added in the fourth quarter or any assumptions sort of underlying penetration of obviously fleets you're not working with today from an MRE standpoint?
Speaker Change: Yeah, it was, we're not going to do that every quarter as I said. You can only be a new customer once, that's my fear of this. It gets harder, but it was double digits in terms of new customer ads and you know we're now more focused I think on market
Speaker Change: penetration and market share and looking at that you know with a 22 billion of spend.
Speaker Change: Our revenues are about $1 billion in 2024, so we're under 5%, and we're targeting ultimately over a period of much higher market penetration. And so we're going to be measuring more off of that on a go-forward basis.
But there are, you know, as I said, there's six...
Speaker Change: There's 600 operators out there, people don't realize how fragmented and virtually every airline in the world owns or operates an A320 or a 737.
Speaker Change: It's like it's the core of everyone's, you know, fleet and they're highly reliable, dependable. They're great cargo airplanes, so there's going to be a long, long tail on this fleet.
Yep, perfect. I agree. Thank you.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Miles Walton with Wolf. Your line is open.
Thanks, good morning.
Speaker Change: Hey Joe, I just wanted to clarify on the SCI, I think you said that you're moving on to your second partner in that relationship.
Speaker Change: And I'm just curious if you can clarify, is the first partner you have currently at a larger equity stake than you are, or just how far you are in closing that, you know, the 80% outside yourselves of the equity partnership?
Speaker Change: Yes, so it's not just a partner, it was the first closing that we had at the end of December. And what I've said is that was a substantial amount of the total equity that we're seeking.
Speaker Change: It is greater than what we're planning to invest. And we are in the process of organizing a second closing, which we expect to occur in the next couple of months.
Speaker Change: It's possible that there may not be a third closing, but we could also have a third closing probably in the third quarter with some smaller investors to fill out the group. But that's our plan and where we are in the capital race on the equity.
Speaker Change: Okay, perfect. And then you mentioned a billion dollars of investments that you're seeing now in one of your remarks. Is that in addition to the $550 million that you're seeding the portfolio with?
No, it includes that. Okay, okay.
Speaker Change: and I mean the other question I had is and thanks for the color on the cash flow that that you're presenting for 2025 in there is I guess replacement capex of 310
Speaker Change: and I know that the SCI part of it is to go to a more capital light approach. Is that replacement capex something you'd expect on a go for basis or is that more of a replacement capex relative to the seating of the aircraft you're putting in?
Speaker Change: It's meant to be that replacement so it's not a go-forward number and we looked at the same thing last year if you sell
Speaker Change: And we would expect to invest some of that money in engines, some of the same types of opportunistic purchases we've done historically. We could buy aircraft that have engines that we might scrap the airframe.
Speaker Change: and put the engines in our MRE. So there's a lot of deals that would not fit into SCI that we would continue to be eligible to do on, you know, at FTI Aviation.
Speaker Change: Okay, and then last one, if I could, the slide 13, David, you went through on the green time optimization. It didn't look like you were adding cycles in that exercise, but the margins were quite high. I'm just curious how often are you not adding cycles and getting that kind of margin return, which is obviously a lot larger than the margins implied on the next slide.
Speaker Change: Yes, that was an illustration where we were not adding cycles. We add cycles often, that's happening via performance restorations that we'll do on each of its modules.
Speaker Change: So every asset, every module is unique, and depending on what the build is, we're going to be doing different work on it, right? So we are adding cycles, and that's via performance restoration LLP replacements.
Speaker Change: We're also doing repairs on those modules to make sure that they last as long as the limiter lasts.
So there is work being done on it.
Okay, thank you.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Steven Trent with City. Your line is open.
Steven Trent: Yes, thank you everybody and good morning to you. I believe that Angela had mentioned earlier that you guys received I believe eleven some odd million dollars from insurance claims from your equipment that got stuck in the Russian Federation. Could you refresh my memory sort of
where the rest of your outstanding claims stand?
Steven Trent: Yes, good question and good positive developments on the insurance side of that.
Steven Trent: We did receive $11 million in the fourth quarter. We've also received over $22 million in the first quarter of this year.
Steven Trent: already with one of our major insurers, and insurers are moving to settle now, and I think it, you know, once that starts, it typically accelerates because whoever's left that doesn't settle ends up with a big legal bill.
Steven Trent: So, we expect the remaining claims to settle out fairly quickly. We wrote off, in total, back in 2022, about $88 million in assets that were lost in Russia.
Steven Trent: I think we've recovered $38 million today, and we expect to recover more than the $88 million in total. And it should all be this year, I expect, I hope.
Okay, that's great color. I really appreciate that.
Speaker Change: And just one other thing, you know, thinking about the industry. I know there's
very little detail at this point, what might happen with
Speaker Change: import tariffs here and what have you. But I asked one of your competitors a couple of weeks ago, do you think if tariffs do get enacted that it could actually push airlines to do more aircraft and engine leasing rather than direct purchases? So sort of pushing the tariffs into
Speaker Change: whatever, a few more basis points of our long-term leads versus, you know, the one-time impact of paying a tariff at the point of purchase. Maybe I'm oversimplifying this, but would just love to hear your thoughts. Thank you.
Speaker Change: No, well, there's so many theories about what tariffs actually are going to do that that's one I hadn't even heard, but we hope that happens, if it's good for leasing, it's good for us.
Speaker Change: It's really hard to know, you know, what impacts are going to hit yet and An aerospace industry is is going to be affected if on new delivery. So that to me is more
Speaker Change: immediate if it becomes more expensive to buy new aircraft and new parts you know we have an advantage there because we're not we're not buying new.
That's super helpful. Thanks so much.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Andre Medret with BTIG. Your line is open.
Hey everyone, good morning and thanks for the question.
Speaker Change: To address the elephant in the room, I guess, it's good to see the audit successfully concluded, but looking at the current accounting and the fact that leasing is becoming an increasingly smaller portion of the mix, are there any plans to pivot?
Speaker Change: the accounting model to more of a COGS format, I mean, you know, and away from the way you currently account for the, you know, acquisition of leasing equipment. Any color there, super helpful.
Speaker Change: Yes, I'll take that Andre. Yes, I definitely think that the move that we already have started making at the end of 2024 and will continue to make in 2025 as more of our business is shifting over to the industrial manufacturing, aerospace products business.
Speaker Change: I think that's absolutely fair. It's not something that will change overnight, but as you've seen with additional disclosures, we've added in our filings and color that we've added on our cash flow presentation. I do think that that's something that we're working through diligently and you should see more of.
operating outflow related to our purchases over the next year.
Speaker Change: Our goal is to convert the whole company to industrial accounting and hopefully we can do that once the aerospace products business is more than half the EBITDA of the company.
Got it, got it.
Speaker Change: super helpful. And then I guess, you know, another one for both of you. I mean,
Speaker Change: Looking at the EBITDA outlook for the coming year, I mean, how do we expect it to play out? What would the cadence look like? And maybe what are some of the moving pieces that might drive things upward or downward as we go through the balance of the year?
Speaker Change: well if you look back over the last what two years it's I mean you can
You can kind of use a ruler
Speaker Change: but it's not, you know, there's no, we don't see any change in the cadence.
Speaker Change: So the typical, you know, seasonality in the first quarter then kind of contributing to a step up and through the balance of the next three.
You know, we haven't detected any seasonality, really, in this.
Speaker Change: business. Historically, there was an argument that airlines tried to avoid doing maintenance in the third quarter of the year and they tried to do it in the first quarter, but we provide something that is an immediate, just-in-time solution.
Speaker Change: And if an airline needs an engine in August, we'll have an engine in August for them. So they don't have any downtime if they use our product.
Speaker Change: So far we haven't you know, and obviously we've been on a pretty rapid growth rate We've we're up, you know, EBITDA is up a hundred percent year-over-year so We don't see you know an effect of seasonality in the business at this point
and God and God.
Speaker Change: I think we're more focused on overall production, right? So I think we outlined in 2025 for targets.
Speaker Change: an average of 100 modules per quarter in the Montreal facility.
So we're extremely focused on ramping up Montreal
I think we finished the
Speaker Change: The Year at Q4 at 75 modules, I think that's in the earnings supplement.
where we have the workforce that touches.
Speaker Change: A specific module, let's say an LPT module, they're gonna do that all day, every day. That's gonna bring up a lot of efficiency. The second is Standardization, which means that we have a doctrine on work scopes, meaning when we get modules, we know exactly what to do, depending on what we find.
Speaker Change: And then number three is we've launched, since we've acquired in September, we've launched an incentive program for employees that's based on quality production.
Speaker Change: So, for us, we're very focused on production at that facility, as well as Miami, and I think Rome is going to increase the capacity that we have overall in the facility, in our MRE network.
Speaker Change: Excellent, awesome. Thanks all for the comments. I'll jump back in the queue.
Thank you.
Speaker Change: Ladies and gentlemen, at this time I would now like to turn the call back over to Alan for closing remarks.
Alan Andreini: Thank you, Tawanda, and thank you all for participating in today's conference call. We look forward to updating you after Q1.
Alan Andreini: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.