FTAI Aviation Ltd. Q2 FY2024 earnings call

• Announced the 37th dividend as a public company and 52nd consecutive dividend, with a $0.30 per share dividend to be paid on August 20.
• Adjusted EBITDA in Q2 2024 was $213.9 million, up 30% from Q1 2024 and 40% from Q2 2023.
• Leasing Segment had $125 million EBITDA, with strong demand for assets and a robust Northern Hemisphere summer travel season, expecting to generate $500 million in EBITDA in 2024 including $50 million in gains on asset sales.
• Aerospace Products segment had $91.2 million EBITDA with 37% margin, seeing growth and margin expansion, with estimates for 2024 EBITDA raised.
• Reset the corporate financial goal for 2026 to $1.25 billion EBITDA, consisting of $550 million from Leasing and $700 million from Aerospace Products, resetting from the previous $1 billion goal.

In Q2 2024, adjusted EBITDA was $213.9 million. The Leasing Segment contributed $125 million, which was 58.4% of the total adjusted EBITDA. The Aerospace Products segment generated $91.2 million in EBITDA, accounting for 42.7% of the total, and Corporate and Other had a negative $2.3 million. For the Leasing Segment, it had a strong quarter with $125 million in EBITDA. The pure leasing component was $112 million in Q2 2024 compared to $98 million in Q1 2024. Additionally, $59 million book value of assets was sold for a gain of $13.5 million. The Aerospace Products segment saw $91.2 million in EBITDA with an overall EBITDA margin of 37%. It experienced growth, with the estimate for 2024 EBITDA in Aerospace Products raised from $250 million to $325 million to $350 million.

• Now expects annual aviation EBITDA for 2024 to be between $825 million to $850 million, up from the original estimate of $675 million to $725 million.
• Raised the estimate for Aerospace Products 2024 EBITDA from $250 million to $325 million to $350 million.
• Reset the 2026 EBITDA goal to $1.25 billion, with $550 million from Leasing and $700 million from Aerospace Products.

• Certain statements made are forward-looking statements, which are uncertain and may differ materially from actual results. Need to review disclaimers in the press release and investor presentation regarding non-GAAP financial measures and forward-looking statements, and risk factors in the quarterly report filed with the SEC.

Q: Within Aerospace Products, how are margins trending and how do they differ between CFM56 and V2500?

A: Joseph Adams said margins are trending up due to revenue increasing and expenses either flat or down. Revenue is demand-based with short supply of equipment. Turn times at maintenance shops are long, so pre-built engines/modules are in demand. Expenses are controlled through facilities. Regarding CFM56 and V2500, the Pratt & Whitney V2500 deal is not dilutive to margins, with good demand and turnaround times expected.

Q: How is the margin opportunity with the Lockheed facility?

A: Joseph Adams said initially, about $30 million of savings per annum are expected from CFM56 overhaul operations upon closing the deal. Expect efficiency improvements similar to what was seen when taking control of the Miami facility. There is also an incremental $10 million to $15 million expected from the piece part repair business, starting potentially in 2025.

Q: What is the relative turnaround time for modules versus the open market?

A: David Moreno said typical industry turn time is 120 to 180 days. Module turn time is about 30 to 60 days to build and 5 to 25 days to execute, providing a value add to customers as they avoid long shop visits.

Q: How does the savings from internalization change?

A: Joseph Adams said savings will increase. Originally expected $30 million annually, now expect at least that this year, and it will grow to $40 million to $50 million in the next couple of years and potentially higher.

Q: What drove the leasing outperformance?

A: Joseph Adams said the drivers are rents and hours increasing. There is high demand for older equipment, and the second quarter and third quarter are high utilization quarters for airlines, leading to higher rent and maintenance revenues.

Q: What about storage engines and normalization?

A: Joseph Adams said the business is strong even in a normalized environment. Normalization will be a gradual process, not a cliff, as fixing supply chains and hiring back people is a lengthy process.

Q: What is the pipeline of CFM56 and V2500 orders?

A: Joseph Adams said there are long-term contracts with airlines like WestJet, LATAM, and Avianca, and there is increasing visibility, with airlines being encouraged to provide more programs and longer time frames for needs.

Q: What percentage of the CFM56 operator universe are you working with and how is the sales cycle?

A: Joseph Adams said there are 50 customers out of 300 potential, growing quickly. The sales cycle is compressing as people are more receptive to changing business models in a crisis, with high market penetration potential.

Q: How is material buying and throughput?

A: David Moreno said they are well positioned with inventory and a kitting process. For CFM, they have inventory and plan ahead, and for V2500, Pratt & Whitney is confident in material availability and turn times, with FTAI being a high-priority customer.

Q: What about acquisition costs and sourcing?

A: Joseph Adams said core strength is in sourcing run-out engines. They win business due to the ability to optimize repairs and module swaps, having many ways to make deals better than others, with a good pipeline of acquisition opportunities.

Q: What is the capital management and free cash flow?

A: Joseph Adams said priority is to achieve and maintain a strong BB rating with debt to total EBITDA in the 3 to 3.5 times range. Free cash flow is generated by taking EBITDA, subtracting corporate and interest, and then accounting for maintenance CapEx.

Q: What about the Southeast Asia footprint and M&A?

A: David Moreno said they are focused on Southeast Asia with airline partnerships. Joseph Adams said they are open to M&A if the right offer comes in, as it's a board-level decision.

Q: What are the capital priorities and hiring?

A: Joseph Adams said priority is maintaining the strong BB rating and debt ratio. Then comes investments, with a focus on the V2500 program. Spends 100% of time on FTAI, with an integrated product approach.

Q: How is the 2026 EBITDA decomposed and durability in cost cutting?

A: Joseph Adams said decomposition includes TMA, USM, and V2500, with higher margins expected. The business is durable as it provides cost savings, which is important when airlines are focused on cost cutting.

Q: What about PMA acceptance and vessel sale?

A: Joseph Adams said PMA progress is good, with the first part installed in 15 engines and no issues. Vessels are on charter with handshake deals to close by the end of the year, with values in the expected range.