FTAI - NASDAQ

Good day, and thank you for standing by. Welcome to the Quarter 2 2025 FTAI Aviation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Andreini, Head of Investor Relations. Please go ahead.

Thank you, Brianna. I would like to welcome you all to the FTAI Aviation Second Quarter 2025 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 quarterly report filed with the SEC. Now I would like to turn the call over to Joe.

Thank you, Alan. I'm pleased today to announce our 41st dividend as a public company and our 56th consecutive dividend since inception. The dividend of $0.30 per share will be paid on August 19 based on a shareholder record date of August 12. Angela will provide a detailed overview of the numbers. But first, I'd like to highlight a few key updates. Aerospace Products delivered another excellent quarter, reporting $165 million in adjusted EBITDA at a margin of 34%. We now estimate we are at 9% market share, approximately double where we were this time last year, with a strong focus on reaching our long-term goal of 25% market share. We feel confident in this goal due to our large expanding backlog of purchase orders for 2025 and beyond, supplemented by our Maintenance, Repair and Exchange agreement, or MRE, agreement with the Strategic Capital Initiative, or SCI, to support the portfolio's engine maintenance events over the life of the partnership. Our scale, asset ownership and unique maintenance capabilities position FTAI as the long-term sustainable leader in engine aftermarket maintenance. Overall, market adoption of our unique MRE solution to engine maintenance continues to accelerate at pace in the CFM56 and V2500 engine markets. There is continued and growing global demand for prebuilt engines and modules for owners and operators of all sizes as a flexible, cost-effective alternative to complicated, time-consuming and expensive shop visits. To that end, in Q2, we had the opportunity to execute a sizable engine exchange program with a major U.S. airline, albeit at margins below our typical levels. We believe that offering attractive terms to showcase our capabilities with this customer will drive repeat business and higher volumes, ultimately leading to stronger margins. Furthermore, we're implementing several new programs, procurement programs, which we expect to contribute to margin expansion by the end of 2025. With these strategies and with the approval of PMA Part #3, we continue to expect Aerospace Products margins to expand to the 40% plus range in 2026. Turning to production. We refurbished 184 CFM56 modules this quarter between our 3 facilities in Montreal, Miami and Rome, an increase of 33% versus last quarter. In Montreal, our largest facility, we have been expanding operations by focusing on developing talent through our newly established training academy as well as the use of specialization and technology to improve efficiency and throughput. We anticipate these measures will contribute to drive significant production growth over the next several quarters. We're also delighted to close on our 50% joint venture in Rome, now operating under the name QuickTurn Europe. We've been impressed by how quickly the team have scaled operations to meet FTAI's production pipeline, and we're excited for the plans we have to grow the facility over the coming months to support our regional base in Europe and the Middle East. In addition, we're excited by the opportunity it provides to sell directly to the Chinese market due to the CAAC license, which QuickTurn Europe holds. Additionally, we're pleased to announce the acquisition of Pacific Aerodynamic, a piece part repair facility based in California, which focuses on highly specialized precision repairs of CFM56 compressor blades and vanes. Under FTAI ownership, this strategic purchase delivers an increase in cost savings, which will lead to further margin expansion. In addition, it will increase operational efficiencies, further expand our repair capabilities for CFM56 engines and further differentiate our offering. Over the past 3 years, we've now acquired 4 facilities across 3 countries in Europe and North America and have a proven track record of integrating each into our MRE ecosystem, creating significant value. We're actively reviewing other M&A opportunities in the global market and expect additional acquisitions in the near term are a strong possibility to once again further differentiate FTAI's offering. Next, let's talk about adjusted free cash flow. In the first half of the year, we generated $370 million in free cash flow, above our targeted $350 million. It was driven by over $1.4 billion in gross cash inflows. Included in this number was the sale of 37 of the 45 seed portfolio aircraft, which are being sold through the strategic capital initiative. The transition of these aircraft is almost complete with the sale of the remaining 8 expected to close during Q3. We also expect adjusted free cash flow to be in the range of $380 million in the second half of the year, which as a result, we are increasing our overall target from $650 million to now $750 million in adjusted free cash flow for all of 2025. With our pivot to an asset-light business model now nearly complete, we anticipate substantial growth in free cash flow in the coming years. For capital allocation, a first priority has been to manage debt in order to achieve a strong BB rating with the rating agencies, a goal we expect to reach by the end of this year, given our exceptional financial performance. Secondly, we will continue to invest in targeted growth opportunities in areas where we can expand our differentiated product offering and further widen our competitive advantage. However, it's very likely there will be a surplus above these 2 priorities, which means returning capital to shareholders will be part of our financial plan in the near term. As to our current estimates for EBITDA for all of 2025, we're raising our outlook for Aviation Leasing from $500 million to $600 million, which includes $54 million in insurance settlements received in the first half of the year. And based on the strength of our current pipeline, we are also increasing our estimated 2025 Aerospace Products EBITDA from the prior range of $600 million to $650 million to a new range of $650 million to $700 million. Overall, we're updating total estimated 2025 business segment EBITDA from $1.1 billion to $1.15 billion to the new numbers of $1.25 billion to $1.3 billion. For 2026, we're also seeing meaningful upside to our previous estimate of $1.4 billion and plan to provide an update later this year. For the SCI, we made great progress this quarter. We closed on additional equity partners and expect to have final closings completed by October this year. Our target is to invest $4 billion through the 2025 partnership, which will be approximately 250 on lease aircraft. Halfway through the year, we now have 145 aircraft either closed or in an LOI commitment and have good visibility from the SCI investments team on sourcing the remaining aircraft through a combination of lessor counterparties and direct sale-leaseback transactions with airlines. A key component to the SCI's investment strategy is the MRE agreement with FTAI. During the second quarter, we generated $70 million in Aerospace Products revenue by fulfilling orders to SCI, representing approximately 14% of our total sales in Aerospace Products or 20% for the entire first half of 2025. Fixed-price engine exchanges are a great source of enhanced return to our equity partners, providing greater predictable cash flows and lower residual risks compared to peer lessors, while also delivering meaningful value to airline customers who avoid the costs and risks of managing shop visits themselves. We continue to believe SCI will be a major additional driver of growth in aerospace products as well as providing a significant contribution to Aviation Leasing through management servicing fees, incentive fees and our 20% minority ownership. Overall, in the industry, we see a very long horizon ahead for the life cycle of current technology aircraft and engines. Many airlines today recognize that the economic useful life of 737NGs and A320ceo aircraft has been extended to 30 years versus the previous assumption of 25 years. While industry issues of multiyear delays in new aircraft deliveries and the durability of new technology of engines are well known, advancements in CFM56 and V2500 engine maintenance, such as the availability of module swaps, development of new PMA parts is allowing more airlines to economically reinvest in their existing fleets for longer than they originally planned. Programs like FTAI's MRE engine exchanges provide predictable cost and offer airlines a simple, easy way to keep their current aircraft flying profitably. Thus, an average useful life extension of 5 years means 20% more engine shop visits, which means greater maintenance spend and a larger opportunity for FTAI to expand our market share and help sustainably support airlines in their long-term maintenance needs. With that, I'll turn it over to Angela.

Thanks, Joe. The key metric for us is adjusted EBITDA. We continued the year positively with adjusted EBITDA of $347.8 million in Q2 of 2025, which is up 30% compared to $268.6 million in Q1 2025 and up 63% compared to $213.9 million in Q2 of 2024. During the first quarter, the $347.8 million EBITDA number was comprised of $199.3 million from our Leasing segment; $164.9 million from our Aerospace Products segment; and negative $16.4 million from Corporate & Other, including intersegment eliminations. Turning now to Leasing. Leasing continued to deliver strong results, posting approximately $199 million of EBITDA. The pure leasing component of the $199 million came in at $169 million for Q2 versus $152 million in Q1 2025. Included in the $169 million was a $24 million settlement related to assets in Russia written off in 2022, which is an additional settlement to the $30 million we announced we received last quarter and $11 million we received in Q4 2024. For gains on sales, we continue the year with $356.2 million of book value of assets sold or an 8% margin gain of $30.7 million as we closed on 33 additional aircraft of the seed portfolio to the SCI with 8 remaining, which we expect to close in Q3. Looking ahead, we're assuming Leasing EBITDA will be $600 million in 2025, including insurance settlements of $54 million as we pivot our focus towards an asset-light business model. Aerospace Products had yet another good quarter with $164.9 million of EBITDA at an overall EBITDA margin of 34%, which is up 26% compared to $130.9 million in Q1 of 2025 and up 81% compared to $91.2 million in Q2 of 2024. We continue to see accelerated growth in adoption and usage of our Aerospace Products and remain focused on ramping up production in each of our facilities in Montreal, Miami and Rome as well as expanding component repair operations at our new acquisition in California. In 2025, we expect to generate Aerospace Products EBITDA of $650 million to $700 million, which is up from $381 million in 2024 and $160 million generated in 2023. With that, let me turn the call back over to Alan.

Thank you, Angela. Brianna, you may now open the call to Q&A.

[Operator Instructions] Our first question comes from Sheila Kahyaoglu of Jefferies.

Joe or Angela, maybe first question for you guys on EBITDA for Aerospace Products. Just looking at the first half versus the second half, the second half module increase is about 85 units, in line with the EBITDA increase of $85 million at the midpoint. So it seems the business normalizes to $1 million of EBITDA per module. How do we think about the margin improvements into '26, both including an ex PMA to get to that 40% and as Montreal and Vroom ramp?

So I'll take it initially. I think the margin opportunity improvement is multifaceted. I mean I think we have repairs that we've been developing in Montreal, the acquisition of the Pacific Aerodynamic potentially adds 1 to 2 percentage points. We have new serviceable material that we've been acquiring over the last few months that will flow through in the P&L with core restorations. And then ultimately, we have PMA kicking in. And so we see 5 to 10 percentage points of improvement happening in 2026 from a result of really a lot of those activities. No one is -- PMA is clearly the biggest, but all will contribute positively to the improvement next year.

Okay. And maybe if I could ask more on that point, Joe, with Pacific Aerodynamics, that deal, $12 million purchase price for $50,000 of savings per shop visit suggests a return within half a year. So given it seems you're pushing more volumes through there, can you talk a little bit more about the business, how it further differentiates FTAI and how you're thinking about future inorganic opportunities?

Yes. So we've been looking at the repair space. We've developed a number of repairs internally in Montreal, but the compressor blades is a fairly specialized repair, and there's only a handful of companies that really have that capability. Pacific had a great technology, great product and probably just a limited marketing customer base. And so we saw that as an opportunity to combine our volume with their expertise. And if you think about the -- and we're unique in being able to really deliver that volume. So the company we're acquiring is the acquisition price is roughly about $15 million. And if we can ramp that operation up to, say, I think the physical capacity they have would be roughly handling about 300 shop visits. We can save $50,000 per shop visit. That's about $15 million a year in savings. So it's a 1-year payback. So because of our ability to deliver volume, we have, I think, really enhanced economics, and that's why the vertical integration into products like that is extremely accretive and attractive to us. There are others out there, similar nature that we could -- that we're also involved in looking at. And really it is completing the picture going line by line and looking at every item of the cost in a shop visit and trying to figure out if we could build that capability ourselves or acquire it, and we will look at both. So I think it's directionally the kind of thing we really like. It's -- obviously, it's a small first acquisition, but there's other parts that we could also develop in partnership with the Pacific Aerodynamic team on other engine parts as well. So we've got some R&D projects, and we can start working on to do that with this team on an organic basis.

Our next question comes from Kristine Liwag of Morgan Stanley.

Joe, you had 184 CFM56 modules in the quarter, so up 33% sequentially. You've talked about 750 for the full year, which implies that the second half would see another 33% growth versus the first half. So maybe taking a step back, can you talk about what the airline customer reception of the modules have been? I mean, clearly, you're seeing some growth. What's been their opinion of your service? And what are their options? Are you seeing more repeat customers? And can you expand more on the offering that you made for a major U.S. airline? What does that mean? And if that -- if they're happy with your service, what could that mean for growth in the long run?

Sure. I'll let David start on the production, and then we can take the other parts of the question as they come. So yes.

Kristine, this is David. So to start off with production, just kind of give you the story of Q2. So the majority of the increase in production were based on 2 things. Number one was the growth in Montreal. As we announced in previous quarters, we've focused that facility in specialization. So now we have specific lines focused on module production. So we're able to increase production from 77 in Q1 to 91 in Q2. What that means is turnaround times improved from 83 days in Q1 to 66 days in Q2. So we expect that to continue to improve. Our goal is to get to around 60 days turnaround time per module. The second catalyst was the introduction of our Rome facility. So we did close that transaction in the beginning of June. However, our transformation efforts started beginning of this year. So we had a deal signed up end of last year, and we started our transformation as we've done with our previous shops, which really focuses on 3 initiatives. Number one is focus, so focusing on CFM56 volume only. So in this case, there was CF6-80 work, and we prioritized the CFM over that. Number two is contributing our volume. So we started putting volume ahead of time before our actual acquisition and started turning engines. And then number three, we're going to copy the specialization that was done in Montreal at that facility in the back half of this year. So we see that ramp-up being significant. 29 modules is what we produced in Q2. We feel very good about 100 for the entire year. So you're going to see a lot of increase in production is going to be from Montreal continuing the specialization, and continuing production turnaround time improvements and then Rome coming online.

I think on the customer reception question, it's -- obviously, it's quite good. And what we present to the airline or the engine owner is an alternative to that party managing their own engine maintenance. And what we show them is that we can save them time and money and then we can deliver a lot of flexibility with how they want to have their power delivered to them. So when you go through the advantages, they're significant and most airlines realize that if they manage their own engine maintenance, that it is a very -- it's an exercise that has very little upside and potentially significantly -- significant downside in cost overruns. And every airline we've ever met has had that happen. So you're presenting something that say, here's a better idea that you save money and you eliminate all the risk of overruns and people nod their heads and say, wow, that's incredible. What am I missing? And the answer is nothing. And so we've pretty much been able to introduce that concept to everybody in the world. And people originally said, well, you're probably not going to do the big airlines, but we found that, yes, we can do the big airlines. And the same advantages can be delivered to any customer really. So as we continue to do that, and I don't think we've ever had a customer that was unhappy with the product or anything delivered has been done at the highest quality and it performs well and people have all come back for more. And so that's our job is to really just now -- now that we've introduced it, get people to try it now is to just keep growing with them to become a bigger and bigger source of their engine requirements as they grow. And in particular, as platforms age, as the 737NGs and A320s age, people are more and more likely to outsource more and more activity. So I've always said that market share is not a static number. It goes up as platforms age. So once you get into the system, and you are an alternative that's always available, we think we're the easy button and people will just keep using us more and more.

And look, in hindsight, looking at 2025, you'll get to 750 modules. I mean this is pretty impressive considering this is an initiative you've only started a few years ago. So I guess with the capacity that you've talked about of having 1,800 for the CFM56 module, can you talk about how quickly you could get there? What are the key bottlenecks? Is it labor? I saw you started out your university. How does this -- how quickly can you get there? And then also, once you get to that 1,800 capacity per year, what are the economics of that kind of business model?

Kristine, this is David. I'll take that. So we expect to get to around that 1,800 production in the next 2 years. The #1 constraint for us is technicians, specifically, let's say, the young technician. At each of the facilities, we have a really experienced workforce that has many, many years of experience. However, we do need to continue to hire young technicians. And what we've done proactively is really 2 things. Number one is we've developed a training academy in Montreal. What that is, is a partnership with the local schools where we take internships, and we have the students graduate and we teach alongside the schools. That provides us a high retention rate to be able to take the best students into offering them full time. The second piece is we've created a training center. And what that is, is effectively we're pulling folks before starting them on the production line, new hires, they go into an immersive learning experience. And with that, we've rolled out an augmented reality. So what technicians are able to do is through an augmented reality. So through an iPad or through an Oculus-type device, they're able to assemble and disassemble engines. The way that, that's done historically is through the manual. So it's text-based. It's very difficult to pick up the learning curve. Now being able to simulate that, you're able to learn a lot faster. So the curve of learning has improved significantly, and we believe that's a competitive advantage that we have versus anyone else in the world. So we feel very good about our -- having the ability to control our future by being able to hire based on the efforts that we're doing today.

And I think particularly the Montreal market and the Rome market are very good markets to hire talent. If you think about -- we've acquired 3 different maintenance facilities that were formerly airline engine shops that went -- basically went out of business. It was in Montreal, it was Air Canada. In Miami, it was once the Pan Am shop and then in Rome it was Alitalia. And they had full operations at the peak. They had tooling. They had a good workforce and then they just shut the facilities down. And so what we are unique in that we actually bring volume. So we were able to acquire those facilities at much less than replacement cost and bring our volume immediately, and we become a very attractive opportunity for mechanics in the area because we have the business and many people, for instance, want to rather live in Rome and live in Northern Europe. So there's a lot of advantages that we offer. I think acquiring additional maintenance capability on a similar basis is very doable. So if we get to the point where we think we need more another facility, I think there'll be good options to do that if we choose to.

Great. And if I could sneak in one last one. Joe, you already mentioned for the acquisition of the Pacific Aerodynamic, it sounds like the return period there is actually a year or maybe even less. So does this mean that you plan to expand out more repair capabilities? Can you expand more regarding your M&A strategy and how we should think about potential deals?

Yes. I think the answer is yes. And I think filling in some of the holes on piece part and component repairs is a further vertical integration of our strategy. If you think back in the early days, what we decided is our first investment was in PMA manufacturing, then we acquired maintenance facilities. And then we entered into a carve-out venture. So we sort of approached all the various elements of the shop visit. And the last that we've been talking about most recently is piece part repair because a lot of parts go back into an engine, but before they can go back into an engine, somebody has to do something to it. And usually, those are a lot of third-party vendors. And so that's our focus for M&A. And as I said, because we have a significant advantage that we can deliver, if our goal ultimately is to do 600, 700 shop visits a year, we are the largest user of services in the world for that engine by far. David, do you want to add any?

Yes. Just we've previously disclosed that in the Montreal facility, we have repair capability for 70% of the piece parts. So we're looking to fill the gap, right, the remainder of the 30%. So Pacific Aerodynamic is an example of that. And we think we can do targeted investments to continue to add capabilities, which increase margin and then give us control on the production side.

Our next question comes from Giuliano Bologna of Compass Point.

Congrats on just the continued incredible performance on the Aerospace Products side. One thing I wanted to kind of pick your brain about is the growth in the Aerospace Products segment is accelerating or reaccelerating at this point. I'm curious what you think is specifically driving that today and how durable those trends are? And then along the same lines, I'm curious if there's any kind of trigger events out there in the industry that would help accelerate the growth or at least and/or continue the accelerated growth rate, whether it's transitioning midlife aircraft from larger airline to smaller airlines or rolling out the SCI vehicles or anything along those lines?

Yes. So I would say the underlying dynamic to the adoption is really an airline or an owner avoiding a shop visit, having to manage a shop visit and invest in that maintenance activity when it can go very different than they think at the beginning. So it's -- that's what drives a lot of the customer activity in the front end. And then everything that happens after that is positive for us in that as platforms age, as big airlines start to sell off older -- the current generation tech to smaller airlines, the fleet gets more spread out, the availability of parts goes down, the interest in investing in full performance restorations decreases, all of those things, those trends that happen as the platform ages will keep driving growth for us because all those trends favor us doing the maintenance as compared to anyone else. And this is very much a scale business. I mean, as I've said many times, the bigger you get, the better you get. There's no question about it. And if you can establish the fact that you are the largest vendor, you're the largest supplier, you largest buyer, you're the largest owner, you win and you keep winning more every year because there's less and less in your way.

And if I could add, the strategic capital is an accelerant to capture market share. So the strategic capital, as we mentioned, represents 20% of our sales in aerospace. However, behind every single one of those sales is an airline. So ultimately, the airline needs to approve the module or the engine. So they're seeing the actual module exchange happen, and they're benefiting from that. So there's no better sales pitch than actually executing on that exchange. And what we're able to see is a lot of cross-selling that comes about after that. Today, the strategic capital is around 50 customers. As we mentioned, we're about halfway there. So let's say, that would represent -- each vehicle could represent around 100 customers. So we see that all as being an accelerant to growth in our aerospace.

And if you look across our entire business, you count Leasing and Aerospace Products and SCI, we have over 250 customers today, which is a pretty significant number because if you think about the ecosystem of current generation aircraft and engines, that's a significant touch point for us. And as David said, once you're doing business with one side of the airline, they look at us as the same entity no matter what pocket the money is in. So to us, it just gets better and better.

Our next question comes from Josh Sullivan of The Benchmark Company.

Congratulations on the quarter. Joe, just following up on a strategic capital question. Now that the first one is off and running, how should we be thinking about SCI 2 at this point? And then maybe beyond, what's your sense on how the SCI model is evolving into a repeatable relationship at this point?

I mean we couldn't be happier about where we are right now. It was -- obviously, when you start something new, there's a bit of an unknown. It felt like a big number and it felt like ambitious, but we're executing very well. We're -- as we mentioned, 145 aircraft owned or under LOI, 50 customers, a big pipeline of activity, returns in line with what we hoped, if not better. So it checks all the boxes. So we will most likely decide on SCI 2 in the third quarter or fourth quarter this year, we'll make a decision about going ahead on that. But as I said as it sits today, it looks sort of much higher probability that will happen given where we are today. So I think it just not there yet, but obviously, it's on a really, really good path. I think we laid out, we sort of said if -- just do the math, if you can do $4 billion a year, 250 aircraft a year, in 4 or 5 years, you're going to own over 1,000 airplanes. Now there's 14,000 of them out there in that universe. So it's not -- it doesn't seem like that's a huge percent, but that's a lot of airplanes, and that would make us the biggest owner of current generation aircraft in the world, including any airline that I can think of. So you then become the largest counterparty for all that activity, and it's going to direct a lot of business that we can control and other things around the airplane and the aircraft. So the concentric circles get bigger, and I think it just keeps giving you more and more sort of leverage in the marketplace. And so we're very excited. We see it as on track with that goal, and we're able to achieve that goal. It's phenomenal.

Got it. And then maybe another forward-looking perspective. I guess what's your view on when you might entertain starting to really earnestly look into assets either around the LEAP or GTF engine?

I think it's still 2028, 2029. Both engines have new parts that are -- have been -- either have been introduced or being introduced this year and next year. So obviously, you want to see those platforms stabilize before you start acquiring assets because you're changing parts, you'd rather not own the previous version. That's one. And then secondly, it's the number of engines that come off of the power by the hour programs is an important metric. So you want to have enough engines available to do what we do, which is to manage our own shop visits. And then thirdly, it's just going to be economics. You're going to look at where is the price, where can you enter. And usually, it happens around the time when a new engine -- another new engine is introduced or at least announced that tends to drive secondary market prices down. So those are the kind of the 3 things we would be looking at, but I think it's tight 2028, 2029.

Our next call is from Brandon Oglenski of Barclays.

Joe, I was wondering if you could give us an update on PMA because I feel we've been waiting for a while for the third and fourth and fifth parts to come out here. Is there anything you can talk about there?

Yes. So -- but I've always said it's worth the wait. I think Chromalloy has said publicly now that the third part, which is the most expensive part in the shop visit is the final application was submitted to the FAA by May 1. So they've disclosed that. And when asked what that means for their expectation of approval, they indicated that the previous hot section blade that they had approved was a V2500 T2 blade took 6 months from final application approval. So they've sort of guided people to think October. And so that's very specific. As we mentioned, the third part is the most significant contributor to savings for us. So that's kind of the bright line of that. The fourth and fifth parts will be 2026, no specific guidance on those yet, and they're -- I would say they're nice to have, but less important. The big one is the next is the blade.

Okay. And then I wanted to come back to the U.S. airline deal that you mentioned, Joe, because I think you commented that maybe it's a little bit lower margin, but is there like a recurring element to this and maybe a structure of a deal that you can replicate more globally?

We have several structures. This particular deal was probably full performance restorations, large ticket exchanges. So it was a little bit of one part of it. But we have other products, could be module swaps, could be engine programs powered by sort of perpetual power deals, all of which are in mix. I think this is probably -- it's a high dollar contributor, but it's a lower margin contributor. So I think that the -- to the extent that the mix becomes a more normal mix, the margins will revert to more normal margins.

Our next question comes from Myles Walton of Myles Walton (sic) [ Wolfe Research ].

Wolfe Research. Given the paydown of the revolver, the expectation for further positive free cash flow, Joe, you alluded to returning capital as something you'd look forward to. Can you maybe size how share repurchase fits in that scheme, where your leverage comfort levels are and what the quantum might be and timing?

Yes. So I think -- what we indicated is we expect to achieve our goal with the rating agencies this year given the financial performance. So we hope to check that box very soon. I think anything under 3x debt to total EBITDA is a perfectly comfortable acceptable level for us in terms of leverage and should sustain that kind of rating. And then you look to what's out there in terms of growth CapEx. As we've said before, we are first and foremost, have been a growth company. And to the extent that we can accelerate going from our goal of 25% market share with good acquisitions or good investments, we will prioritize that. So that will be the second thing we would look at. And then beyond that, I think share buybacks would be top of the list. And the question is how much cash and liquidity do you need to maintain in the company, and it's probably around the levels where we are right now. So anything incremental will become available for that for share buybacks.

Okay. So conceptually, the second half of the year's free cash flow is sort of unspoken for at this point and could be looked at in that regard?

Yes.

Okay. One other question, which alludes to it is it sounds like you're running a lighter capital portfolio. The SCI is working. The CFM56 engine target portfolio has been reduced to 350 to 400 engines. That's the same level of engine activity that -- or ownership you had when you were 1/4 the size you are today. Is this 350 to 400 CFM56 engines more of a multiyear look? Or is it a current year look that grows into '26?

I think it feels sustainable in that we also have the benefit of the engines that are in SCI, which are effectively under management. So we thought about how many engines do you need to have availability to show your customers that you can always deliver one. And we feel that because the SCI is managed by FTAI and those engines are under contract, once they run out to be turned, it effectively gives us more an extended inventory, one step removed from owned, but pretty close to own. So I think that's what's given us the opportunity to be even a little bit less capital intensive.

Our next question comes from Brian Mckenna of Citizens Bank.

Okay. Just a follow-up on SCI. I'm curious what the feedback has been over the last quarter or so from the alternative asset management industry, given the early success of the vehicle? I'm assuming some of these managers took a wait-and-see approach in terms of investing in the vehicle. But given that they're all focused on delivering excess return for their investors and that industry is really short high-quality assets. I'm curious what you're hearing from them in terms of FTAI's ability to drive excess returns for them, given your set of capabilities here and then what this could ultimately mean for demand for SCI longer term?

I mean it's very positive. And I think the -- every investor has a different time line for how long it takes to get things approved. So I don't feel like anybody is taking a wait-and-see approach. I think they were basically operating within the constraints of what their system allows. And there are vastly different time lines to get approvals for people. But we have a great group of investors, great names. All of them, to my knowledge, want to be repeat investors. And to the extent we deliver the returns that we've forecast, then they'll be in for SCI 2 and SCI 3 and SCI 4. So we feel like the backdrop is great. The demand for the supply of capital is significant. It's diversified, and it's exactly what we really hoped for.

Okay. That's helpful. And then with respect to your debt capital, I know you don't have any maturities until 2028, but a few of the tranches of your notes still have coupons at or above 7%. Given that these are trading north of 100 today, I mean, is there an opportunity to refinance these in the coming quarters and further reduce the cost of capital? And then what could this ultimately mean for your bond ratings over time?

Well, I think the bond raise, as we said, we want to get to BB, strong BB. I mean, we could argue or I have argued that it could be investment grade, but we don't really see doing anything operational that would compromise the way we run our business to get there. So I think we effectively will trade close to investment grade. There could be some opportunities to reduce debt. Right now, nothing is callable. So it would be an exercise in math. It's probably -- it may not be worth the fees that you have to invest to do at the moment, but we obviously definitely will look at that as cost of debt is coming down for us.

Our next question comes from Ken Herbert of RBC CM.

Maybe a question for Joe or David. I'm just curious for the increased throughput and efficiency you saw in the shops in the second quarter. What are you seeing in terms of material availability or lead times on spare parts into the shop? And how much of an improvement was that in the efficiency or productivity?

Ken, I'll take this. This is David. So our inventory strategy is unique to anyone else in the world and where we're procuring parts in advance, and we're not idling for parts to come back from shops. So what that means is that we're effectively kitting modules ahead of time, and then we're providing the replacement kits. And then the off parts go for repair and then they come back into the pool of inventory. So we've been very proactive of buying the right parts at the right time. I'd say moreover, specifically, we've seen a trend where there's a lot of demand for core modules. We see that continuing in the back half of this year into next year. So we've been very opportunistic in the last, I'd say, 3 to 4 years buying specific core LLPs to be able to build engines. So we feel very good about our inventory levels. It's probably going to be -- this is probably the highest it will be. We see that probably coming down over time. But again, we were procuring parts in advance for this core module production that we expect in the back half of this year into next year. A lot of that is because of capabilities that we're adding in the core as well as our PMA that we hope to come online soon. And then...

Go ahead, sorry.

Yes. One thing that I did allude earlier was turnaround time on -- and that also is going to contribute to lower inventory levels. Just to repeat those numbers, we went from 83 days of turnaround time in Q1 to 66 in Q2. So that was a pretty strong improvement quarter-over-quarter.

Was that turnaround time comment specific to Montreal? Or is that across the network?

That's specific to Montreal.

Okay. And if I could, just as a follow-up, one of the primary dynamics of the market over the last few years has been the surge in value of both the new generation and legacy generation engines. As you think about your business model over the next couple of years, as we see value on the CFM56 and the V25, maybe the rate of growth slow or even potentially start to come in a little bit. I can appreciate that will have a lot of impacts on your business. But how are you thinking about value of the legacy engines in particular, over the next 1 to 2 years? And what does that imply for your business as we start to maybe see that rate of growth slow or certainly eventually start to come down?

We fully expect it to the rate of growth to slow and for it to come down. I think that's perfectly normal. And our business is really a spread relative value business. So what we do is we buy run out engines, we rebuild them and then we go to market to sell lease or exchange. And so we don't need an increase in price to keep generating the business and the growth that we're forecasting. It's perfectly normal that, that would happen. There are 2 mitigants to that. One is that OEMs tend to raise prices regularly. So even if you have the same build on an engine, it's going to cost 7% more every succeeding year. So we do have replacement costs of assets tend to go up. And then secondly, what I mentioned is that market share isn't a static number. It goes up as platforms age. So we fully expect parts price increases and market share gains to drive our growth, not price increases in secondary markets.

Our next question comes from Andre Madrid of BTIG.

Could you maybe break out a bit more what you're thinking around the Chinese opportunity through Rome?

Yes. This is David. I'll take that question. So we think that Chinese opportunity for us is a growth market. Just to give you some data around it. So as far as the current 737 and A320ceo fleet, they represent about 20% of the world's fleet. However, if you look at their order book, their order book is around 4% of the total order book today. So what that means is these aircraft are going to operate much longer. And what that means is there's going to be more engine shop visits. So we see this as a growth opportunity. We're very excited about having the license because that allows us to be able to perform engine exchanges within China. And we've already started capturing some customers. So we're very excited about this opportunity. And again, it's a growth market for us.

It's a perfect market for engine exchanges and module exchanges because they're going to want replacements on a regular basis, and there's not the capacity to do those shop visits locally. So it's a perfect setup for our model.

Do you think you can maybe parse out exactly how material this could eventually be? Like are you targeting a specific percentage of mix overall? I mean, are the margins in any way accretive to overall mix? How should we think about that from the numbers?

I think that we probably need another quarter or 2 to be able to intelligently address the market. We've just started doing business this year, and we have a pretty good list of prospects. And so I think that rather than sort of force a number too early, I think we need another quarter or 2 to answer that. I think the margins are fine. I mean, they're going to be great. It's not a price-sensitive market. So I think that that's an easy one. But the size of the market, and I think it would be -- we'd be better served if we have a little more granularity into which customers we think can do what. But there's some very, very big customers there that need lots of engines. So it's not a small number. It's just a question of how big.

Yes. Yes. No, that makes sense. And then if I could squeeze in another. Looking at the margin step down at AP, I mean, it's very clear that this was associated more one-off with a large North American order. But how should we expect the progression moving forward for AP as we go through the second half of '25 and into '26? I mean, are the prior targets that you've outlined in terms of step-up there still in play?

Yes. No, I think that for the rest of this year, I would -- we'll continue to be around the -- I think historically, we've been between 34% and 38%, somewhere in that range for the rest of 2025. And then I think 2026 is what I indicated in my remarks is we expect that margins to go to 40% plus next year and feel very good about that.

I am showing no further questions at this time. I would now like to turn it back to Alan for closing remarks.

Thank you, Brianna, and thank you all for participating in today's conference call. We look forward to updating you after Q3.