Good day, and welcome to the Q4 2023 FTAI Aviation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would like to hand the call over to Alan Andreini, Investor Relations. You may begin.

Thank you, Michelle. I would like to welcome you all to the FTAI fourth quarter and full year 2023 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. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the 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 regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and to review the risk factors contained in our annual report filed with the SEC. Now I would like to turn the call over to Joe.

Thank you, Alan. To start today, I'm pleased to announce our 35th dividend as a public company and our 50th consecutive dividend since inception. The dividend of $0.30 per share will be paid on March 20 based on a shareholder record date of March 8. Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We ended the year strongly with adjusted EBITDA of $162.3 million in Q4 2023, which is up just over 5% compared to $154.2 million in Q3 2023 and up 31% compared to $123.5 million in Q4 2022. During the fourth quarter, the $162.3 million EBITDA number was comprised of $121.8 million from our Leasing segment, $54.6 million from our Aerospace Products segment, a negative $14.1 million from Corporate and Other. Now let's look at all of 2023 versus all of 2022. Adjusted EBITDA was $597.3 million in 2023, up 40% versus $428.1 million in 2022. Turning now to Leasing. Leasing had another good quarter, posting approximately $122 million of EBITDA. The pure leasing component of $122 million of EBITDA came in at $99 million for Q4, versus $102 million in Q3. Additionally, on the acquisition side, we acquired at attractive prices, $229 million in new equipment, comprised of 10 aircrafts and 33 engines, which will contribute to further growth in future Leasing EBITDA. We're very comfortable in producing approximately $425 million of Leasing EBITDA for 2024, excluding projected gains on asset sales of approximately $50 million. Part of the $122 million in EBITDA for Leasing came from gains on asset sales. We sold $33.5 million book value of assets at a 40% margin for a gain of $22.7 million in the quarter, benefiting from exceptionally strong demand globally for our portfolio of assets. And we remain comfortable assuming gains on asset sales continuing at approximately $12.5 million per quarter or $50 million for all of 2024. Aerospace Products had yet another excellent quarter with $54.6 million of EBITDA and an overall EBITDA margin of 34%. We sold 61 modules in Q4 to 17 unique customers comprised of six new customers and 11 repeat customers. We see tremendous potential in Aerospace Products and feel good about generating EBITDA for 2024 towards the middle or higher end of the $200 million to $250 million range. We continue to expect strong growth in Aerospace Products as customers experience the clear benefits of our MRE products and programs. We are both expanding the number of customers and the usage per customer at an accelerating pace. Additionally, we are very pleased with the introduction, acceptance of and demand for our second focus engine, the V2500. With this, we have the ability to become the leading full-service aftermarket power provider for all 737NG and A320neo aircraft globally. Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be between $675 million to $725 million, not including corporate and other. With that, I will turn the call back to Alan.

Thank you, Joe. Michelle, you may now open the call to questions and answers.

[Operator Instructions] Our first question comes from Kristine Liwag with Morgan Stanley. Your line is open.

Hey, good morning, everyone.

Good morning.

Hey, Joe. On the leasing portion, we saw a sequential decline in revenue. Can you talk about what drove this slight stepdown?

Yes. The biggest driver was we had four aircraft A320s on lease to Bamboo Airlines, which we terminated in the third quarter last year. So they were taken back, they were off leased for Q4. And there'll be off leased for Q1. That revenue is about $5 million per quarter of EBITDA. And the reason we did that is the credit wasn't great. And we had other opportunities to put those out on lease at higher rates and better terms. And so ultimately, it's a very NPV positive for us, but it had a negative impact on revenues and EBITDA in Q4 and will also affect Q1 of 2024.

Thanks. And you know, Joe, saying that you were able to release these assets at a higher monthly lease rates and better terms, can you talk about the overall environment that suggests that it seems like demand continues to outpace supply? So is there a general view when you've got assets up for re-lease, like how much of a step-up in the monthly lease rate are you seeing for those assets?

Well, it depends on when the lease was originally done. But in general, lease rates for aircraft are up anywhere from 20% to 40%. So if the operator is either not a great operator or the operator isn't willing to pay market rates, then you move the assets. It's always more expensive to move than to keep it where it is, so you favor extensions over new leases. But in this case, we just didn't have confidence in the Company, so we decided it was better -- much better to move them.

Great. Thanks. And if I could squeeze one last question. In the quarter, you were able to acquire 33 engines and 10 aircrafts. Can you talk about the availability of assets in the market? I guess to some degree you guys are very unique because you're the asset owner and you also have an MRO capability. Does this give you an edge in being able to buy assets that maybe other just pure leasing assets or operators may not be interested in?

Yes, absolutely. We -- particularly on the engine side, if an engine is tagged unserviceable, it’s very -- there are very, very few buyers for that engine other than pure part-out companies, which typically pay very low prices. And so we're uniquely positioned because we can take an engine that's tagged unserviceable and repair it. And it could be -- the best situation is that it's unserviceable because of only one module, in which case we get the other two modules at a discount when it's really not. They shouldn't be trading at a discount, but they do because it's coupled with an unserviceable module. So we are -- we can buy anything. And so when people put up packages and some buyers like to nitpick, and they'll say, I want that one, I want that one, but I don't want that one. The seller is like, I don't want to deal with that. I want one buyer. And so we're able to acquire, I think, much more effectively than other people for that reason. There's nothing we can't digest.

Great. Thank you for the color.

Thanks.

Thank you. Our next question comes from Josh Sullivan with The Benchmark Company. Your line is open.

Hey, good morning.

Good morning.

So I just wanted to get some color on the market response for lease rents after the FAA put in the production cap on the MAX earlier this year. And I guess maybe it would be helpful to also understand just how lease rents have walked from pre-COVID levels to today?

Sure. David Moreno will take that.

Hi, Josh. So lease rates typically are $60,000 plus maintenance reserves. During COVID, there were special arrangements made, let's say power by the hour or rates that were $45,000 to $50,000 plus maintenance reserves. Those days are now long gone. Today...

[That’s for one] (ph) CFM56 engine.

Yes, that's per engine. Yes. Today those days are long gone. Lease rates are up $75,000 plus maintenance reserves and those continue to rise as there's a shortage of CFM and V2500s today in the market.

And the cap, as you mentioned, the cap on the MAX production means that people are going to keep their NGs and CLs longer because they can't meet their growth projections with the new aircraft. So that cap is likely to extend the imbalance between supply and demand for at least a couple of years.

And then secondly, I just -- I know you've talked about the parts business averaging around 35% EBITDA margins. Obviously, 50-plus is a good result this quarter in EBITDA. But what are the moving parts around, maybe EBITDA per module?

So it's a function of mix, certain modules we have higher margins on, particularly the core. It'll be a function on the size of the customer, and it'll be a function on the timing and the urgency with which they need the module. So it sort of all goes into the mix on a quarterly basis. And we've been averaging about $500,000 per module in each of the quarters. We've had a couple of times where we've had some positive surprises because another reason is we often can buy things really cheaply. As I mentioned, when we buy a package of engines, we might end up with a very low basis in a module that produces an outsized gain for that reason. So -- but I would say that the $500,000 has been pretty steady over the last couple of years and it's a good assumption going forward until we have more PMA.

Great. Thank you for the time.

Thank you.

Thank you. Our next question comes from Myles Walton with Wolfe Research. Your line is open.

Thanks. Joe, could you talk about the V2500 MRE program where it's being worked? How big could the contribution be? And then in respect to your comment that you -- your vision for FTAI is to be the leading full service aftermarket power provider globally for the NG and the -- or the CFM -- and the 56 and the V2500 engine, can you just give us a picture of what does that mean in terms of quantum, who is the leader today?

Sure. So maybe a bit of history. I mean, we have owned V2500 for several years, so it's not that we just discovered. We've had about 50 to 60 engines in the portfolio for a while. Starting about six months ago, we got particularly interested in it with the GTF powder metal issue coming on the scene, it was obvious that many of those V2500 operators who had thought they would be phasing those engines out over the next three years to four years, were going to end up keeping them much, much longer. And that's the main driver what peaked our interest in that engine. So about six months ago, we started hiring people, building up our engineering talent expertise, talking to MRO partners, lining up assets to buy. And it's been very, very successful. It's all in place, probably a lot better than I would have ever expected as the demand for shop visits is extremely high. And a lot of operators either don't have the capital or the ability to shop those engines today. So there's a tremendous opportunity for us to step in and do that. We have today about 15 engines in maintenance shops. We're using two different shops right now. There's multiple providers that we've discussed, and we're sort of -- it's a bit of a test drive right now where we're -- we've got some very attractive short term deals. And ultimately, we will select probably a long term partner on the MRO side or two to work with over the next few years, but we haven't done that fully. We also are very close on a large fleet deal where we would take over the management of engines on over 30 aircraft for an airline, V2500s, and we would then be responsible…

Thank you. Our next question comes from Giuliano Bologna with Compass Point. Your line is open.

All right, congratulations on another great quarter. For my first question, I'm curious why you think you're seeing accelerated acceptance in the aerospace area?

Well, I think people that have used it have experienced the fact that they've saved time and money and they have a great amount of flexibility and they often come back afterwards and say, I wish I had known about this before. I mean, why wouldn't I want to do this? And so that once people experience, the ease with which they can avoid a shop visit, which is usually very painful for people. No one I've talked to in the airline industry ever has told me after a shop visit, that was a great experience. So they all have scars, and I think what we provide is the easy button, and it's caught on. And then word of mouth also helps because once one airline does it and they go to conferences and they have people in their engineering departments of other airlines, they tell them, you should look at this and it worked really well. All of that just keeps building the momentum.

That's great. And then, an inevitable question. Can you give us an update on the PMA initiative and program?

Sure. So great progress continues. We're very happy with the development and what we've seen in the test results, which actually speaks to the performance of those underlying parts when they're in operation, which is critical and very important. So all good on that. Obviously, on the timing side, the FAA runs a very rigorous process. It's been an extremely successful program for them, PMA. They've never had any safety issues, but they are extremely careful and thorough. So it's inherently very difficult to predict when the actual completion of those approval processes are received. But we're very excited and we definitely are 100% sure it's worth the wait.

That's very helpful. And then one last one. Are you still seeing discounts for off-lease assets? It looks like you bought a lot of off-lease assets in the fourth quarter.

Yes. As I mentioned, if you have an asset that needs maintenance, you immediately -- if it's off lease and it needs maintenance, you've narrowed the field of buyers down to like a handful of people. And so that's -- that dynamic has not yet changed. And I'm not sure it will. I think people are still, most of the people we see in the marketplace with capital to invest are looking for assets that are on lease that don't need maintenance. So that's really where we -- and as I said, we can fix anything. And we relish fixing things because that's how you add value.

Okay. That's very helpful. Thank you so much and I will jump back into the queue.

Thank you. Our next question comes from Frank Galanti with Stifel. Your line is open.

Great. Thank you for taking my questions. I wanted to talk about sort of FTAI Aviation competitive positioning in the module swap business. So first on the V2500, do you see not having PMA -- first party PMA? If you sort of talk about that dynamic relative to the CFM56. And then from a broader perspective, it's my understanding that you can get module swaps from other people, other MROs, other airlines with MROs to do module swaps and that this is sort of not a new function. And so from my perspective, it feels like PMA is the sort of competitive advantage here. And I don't see that or the modularity on the V2500s relative to the CFM56. Sort of my perception of it, can you sort of talk about where I'm misunderstanding that or those dynamics?

Sure. Well, there's a couple of concepts in there that are mixed together, but there is PMA available for the V2500. So that's an option for us to be able to utilize PMA. We don't have the same arrangement where we develop the PMA, so we would be more of a consumer on a commercial basis with the manufacturers if we decided to use that. So that's an opportunity for cost savings on the V2500. There are other opportunities such as use serviceable material that we have a good line of sight to be able to utilize. There are some repairs that we are working on and our engineering team is working on. There are favorable agreements that we've struck with some of the maintenance shops. And so when you add it all up, and it's not the same playbook exactly as a CFM56, but it's the same process of going through the cost of shop visiting and figuring out where you can take out costs and where you can do things smarter and better. We think we can perform a full restoration of the V2500, which today has a full list price of about $10 million. We think we can do that for $7.5 million. So it's roughly about a $2.5 million savings available for to be either for us or for our customers or for both of us. If you compare that on the CFM56, the savings with full PMA, availability on our favorable terms, as shop visits say, is roughly about $6.8 million, and we think we can bring that in a little, about $3.25 million or so. So it's -- dollar amount-wise CFM is better, and it's percentage-wise better, but V2500 is still good. The second question was about module availability. And there are -- you can find modules on an ad hoc basis from an MRO. We actually buy some -- we bought modules from MROs and they buy from us and because you don't always have the module you're looking for in inventory. So that is one of the competitive advantages of our module factories. We have in our fleet over 400 CFM engines. That's 1,200 modules. There's no one that has anywhere near that availability that I'm aware of. So inventories of modules in a repaired state is a competitive advantage. And I say repaired state because we do repair them and restore them. And if they're not repaired, then they're pretty worthless from an airline's point of view. So It's a package. It's all of those things above. And when we say -- people say, what are you? And we say, well, we're an MRE. We maintain, repair, and exchange, which is very different than anybody else in the industry. And then we combine that with the ability to provide power, we have the ability to deliver what I think is our ultimate competitive advantage, which is flexibility and cost savings. That's our pitch.

Okay, that's helpful. Sort of thinking about the customer experience then a little further on the on the module side, in the last -- I guess in 4Q ‘22, the deck had said that you guys had sold over 100 modules to 26 customers. And based on this release, it said 178 modules to 30 customers. And if you sort of go through the press releases and look at each sort of quarter, you said there are new customers, there are five or two or six in this quarter. You sort of add those up to 26, you get to 40. So is that -- so from my understanding then, there were 30 customers, 26 customers in 2022, 30 customers in ‘23, but that sort of leaves 10 customers that didn't come back in ‘23. Is that the right way to think about those numbers? If you sort of talk about from their perspective why that would be, if you sort of saw that customers going away in a year?

No, I don't think the numbers are exactly right. But there are times where a customer to be a repeat customer has to have a need. So not every customer is a repeat customer every quarter. So in other words, if you don't have a shop visit, you don't need a module. So it's a timing issue. I think what we've said is we have a very, very high level of repeat customer business, but sometimes you might have a customer that goes out of business. So you can't have a 100% repeat customer in every quarter. It just doesn't happen that way. You have to have the need. But it's been very, very high. The customers that have used our modules have always said that was a great experience and I would like to do that again. And they will do it again when they have a need.

Okay, great. Thank you for taking my questions. Appreciate it.

Yep.

Thank you. Our next question comes from Brian Mckenna with Citizens JMP. Your line is open.

Okay, great. Thanks. Good morning everyone. So it's great to see another very strong quarter within aerospace products. So within the $55 million of adjusted EBITDA in the fourth quarter, was there any year-end seasonality or any one-off benefits? Or is it really just continued strength across the business given just increasing levels of demand for the products and services? And I'm just trying to get a sense of a good jumping off point for the segment to start 2024.

Yeah. So I think we mentioned to people there was a one-time $5 million write-up in the value of QuickTurn.

That's right. So we made an initial investment in QuickTurn in January and then bought -- consolidated and bought the remaining interest in December. But accounting requires you to revalue your initial investment to fair value at the time of consolidation. So that resulted in a one-time non-cash accounting gain of about $5 million.

I don't think we experienced any seasonality in the fourth quarter, and I don't think we have enough history and market penetration to actually to see what seasonality effects there will be on that business yet. It's still growing too fast.

Yeah, got it. Okay, great. And then, just broadly, the business clearly is reaching new levels of scale every quarter here. And so if I look out over the next couple of years, cash flow is really going to take another stair step higher. So how should we think about the CapEx needs of the business over time, the absolute level of cash needed for investment back into the business. And again, I'm just trying to get a sense of how you're thinking about the timing of maybe generating some excess cash flow, and then what some of the uses of that excess liquidity will be.

Sure. So from the cash flow availability, we think about it as, if you start with EBITDA and you strip out gain on sale and then you deduct maintenance CapEx for the engines, which is what you would need to do to keep the engines flying in repaired condition, we think that number is about between $60 million and $80 million per annum. So that leaves, $300-plus-million available capital to do whatever we want with. So therefore, our priorities have been to manage to a strong BB rating, and we think we should achieve that. And we're there with two agencies already, but we want to be upgraded, so we want to maintain the strong coverages. Second is to do new deals. And obviously, we have a new engine now, the V2500. So we'll be investing capital in more V2500s. Today, we own about 60. I would expect we will own probably 150 to 200 of those engines by the end of this year. So that's an opportunity for us to invest, but it's discretionary. And then thirdly, when we generate cash, we would look to either stock buybacks or dividends for excess capital. So those are the priorities. I think it's -- this year is still a pretty active investing opportunity. So I think we'll see some really good deals, which I think will be accretive and generate very good results for shareholders. So we don't see a lack of investment opportunities at this point.

Got it. Thanks, Joe.

Yep.

Thank you. Our next question comes from David Zazula with Barclays. Your line is open.

Hey, good morning, Joe. Thanks for taking my question. First one is cash position, a little bit stronger. Could you talk about the near-term kind of working capital needs and near-term working capital intensity, given that you're expanding the product's business out? Has that changed what you're thinking for working capital, the needs of cash, and the revolver capacity you have in the near term?

No, I mean, we had -- at year end, we had $90 million of cash, $300 million undrawn on the revolvers, so almost $400 million of available liquidity. I think we have $200 million of LOIs in the pipeline right now for deals. And so we're good. And we'll also -- we'll generate some more cash by selling assets throughout the year. So don't see any significant needs or issues at this point.

Great. And then with the FAA, you talked about PMA kind of broadly the process, but specifically the changes of leadership of the FAA and then with the FAA having kind of new focus around Boeing and having to shift some resources there, do you see either of those events kind of impacting your PMA process over the near medium term?

I think that the main issues that the FAA had from our perspective were during COVID. There was just long turnaround times and they lost -- they had high turnover of personnel, some experienced personnel. So those problems have been addressed and have been largely fixed from what we see. So the other issues that you mentioned, a new administrator and the [MAX have not had] (ph), we have no sign that there's any impact from either of those. But the main thing was the staffing and the people coming into the office thing, which has been addressed.

Great. Thanks very much.

Thank you. We have time for one last question, and that question comes from Sherif Elmaghrabi with BTIG. Your line is open.

Hey, good morning. Thanks for squeezing me in. So I want to start with the well intervention vessels. It looks like those didn't work during the quarter. How are you thinking about these assets, especially given the well interventions going through a bit of an upcycle and that's cash that could be recycled into the portfolio?

Yes, you're correct. It was a bit of a headwind for us in the fourth quarter that both vessels were off hire. The Pioneer, the smaller vessel, is now on hire. It started its charter in December, I think. And that should generate about $6 million a year in EBITDA. So that’s -- and that's now on a five-year charter, so it's in good shape. And we're actively marketing that vessel for sale. The other vessel, the Pride, they had a breakdown, a maintenance event on the crane. It's still in repair until March. And we expect that there's a charter in place for that to go on hire in April, which is actually a pretty good charter. So you will see continuing headwinds in the first quarter and then hopefully both vessels will be on higher in the second quarter and onward and we hope to sell both vessels hopefully this year.

That's helpful. And then just on the 2025 notes coming due early next year, are you planning to pay that down and reduce leverage or could we see those refinanced sooner?

It was actually late next year, I think.

October of next year.

Yes. So that -- we have a lot of time, we have over 18 months. And we evaluate the market from time to time and think about those, but there's not a real important deadline yet, so we're monitoring it.

Okay, thanks very much everyone.

Thanks.

Thank you. That concludes the question and answer session. I'd like to turn the call back over to Alan Andreini for any closing remarks.

Thank you, Michelle, and thank you all for participating in today's conference call. We look forward to updating you after Q1.

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.