FTAI - NASDAQ

Good day, and thank you for standing by. Welcome to the FTAI Aviation Third Quarter 2025 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, Marvin. I would like to welcome you all to the FTAI Aviation third 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. Angela will provide a detailed overview of the numbers. But first, I'd like to highlight a few key updates. #1, we passed a significant milestone this month with the successful close on the final round of equity commitments for SCI, which is strategic capital initiative #1. We've had tremendous interest from institutional investors in the partnership throughout the year. And given this high level of demand, we have upsized the total equity capital of the 2025 partnership to $2 billion. FTAI will co-invest up to approximately $380 million including the $152 million we have invested year-to-date for a 19% minority equity interest compared to our original expectation of 20%. With the $500 million increase in equity capital, our new target is now to deploy over $6 billion in capital through the 2025 partnership, up from our previous target of $4 billion and double the original goal of $3 billion we announced in December of last year when we launched SCI. This expanded partnership corresponds to a larger total portfolio size of approximately 375 aircraft with full deployment of capital now anticipated by mid-2026. Today, we now have over 190 aircraft either closed or under LOI commitment and continue to have confidence and visibility from the SCI investments team on sourcing the remaining aircraft through a combination of lessor counterparties and direct sale-leaseback transactions with airlines. The successful $6 billion launch of this partnership creates significant value and positions FTAI for sustained long-term earnings growth. The MRA agreement, which provides fixed price exchanges for all engines in the SCI portfolio establishes a multiyear contractual pipeline of demand for rebuilt engines within our Aerospace Products segment. Additionally, our role as servicer and 19% minority equity investment is expected to generate attractive returns within our Aviation Leasing segment. For our equity partners, SCI represents a compelling opportunity of enhanced returns relative to the traditional leasing business model. Through the MRE or Maintenance Repair Exchange agreement, LPs benefit from higher, more predictable cash flows combined with lower residual risk across a highly diversified lessee pool. For our airline counterparties, engine exchanges also provide clear meaningful value by eliminating the financial and operational risk and burden of managing engine shop visits. With this significant value proposition to all parties, FTAI, our equity LP partners and airlines, we see strong opportunities -- opportunity to launch additional SCI partnerships each year going forward. Turning now to Q3 results. Aerospace Products delivered another strong performance, generating $180 million in adjusted EBITDA at a 35% margin, up approximately 77% year-over-year. This positive momentum underscores the strong and accelerating global demand for prebuilt engines and modules in the CFM56 and V2500 aftermarket. We continue to see adoption of our aerospace products expanding across both new and existing customers, supplemented by our MRE agreement with the SCI. Airline operators and asset owners increasingly recognize FTAI as the most flexible, cost-efficient alternative to traditional shop visits, which are more expensive, more complex and more time-consuming than a simple and cost-effective exchange with FTAI. A recent example of this is Finnair, with whom we announced a multiyear perpetual power program. Through our scale, asset ownership and extensive in-house maintenance capabilities, FTAI's engine exchanges help Finnair manage their maintenance costs, improve reliability and ultimately deliver a better service to their passengers. The trend toward longer-term partnerships like Finnair is increasing, and we expect to announce additional new airline perpetual power programs in the future. Overall, we're confident our differentiated business model and competitive advantage places FTAI to be the long-term leader in engine aftermarket maintenance for these engine types. We're well positioned to achieve our goal of reaching 25% market share in the years ahead. Moving over to production. We refurbished 207 CFM56 modules this quarter between our 3 facilities in Montreal, Miami and Rome, an increase of 13% versus the last quarter, and we remain on track for our goal of producing 750 modules in 2025. In Montreal, our recently established training academy has also already enrolled over 100 trainees who are graduating significantly faster than traditional methods, thanks to our technology-driven approach using virtual reality and AI technology protocols. Combined with our emphasis on specialization and operational efficiencies, these initiatives are delivering measurable improvements in throughput and productivity. We remain confident in the trajectory of substantial production growth ahead as we scale the Montreal facility to capacity. In Rome, our operations continue to develop at an impressive pace. We have successfully integrated FTAI's MRE operations with the facility and technicians from Rome have conducted extensive training seminars at our Montreal Training Academy to improve skill development and optimize production efficiency. We're also actively investing in upgrading Rome's infrastructure and component repair capability, enabling heavier and more complex module repairs, which will position us to ramp production next year to double our 2025 target. We're also pleased to announce agreement to acquire ATOPS for approximately $15 million, an MRO with extensive CFM56 engine operations, strengthening our presence in Miami. This acquisition will transform our Miami MRE operations by complementing our nearby module and test cell facilities, adding expansion space and adding experienced technical staff to support increased production next year once the integration into our operation is complete. Additionally, the purchase includes an ATOPS facility in Portugal, which will serve as a logistics and field service hub in coordination with our European operations in Rome. We've also made good progress in expanding our component repair capabilities through the launch of a 50-50 joint venture called Prime Engine Accessories with Bauer, Inc. out of Bristol, Connecticut. The Bauer team brings tremendous experience and expertise in accessory test equipment. And together, we're building an industry-leading MRE repair facility for accessory parts. Once operational, which we expect by the end of this year, this facility is expected to deliver up to $75,000 in average savings per shop visit. Our initial $10 million working capital investment will enable us to redirect FTAI volumes to this facility rather than to outside vendors, driving meaningful cost efficiencies and time savings. This investment like Pacific Aero, which we did last quarter, further differentiates our offering and aids us in both expanding productivity and expanding margins. With a substantial activity in enhancing our facilities and the broader MRE ecosystem, we are now targeting growth in production next year to 1,000 CFM56 modules, an increase of 33% compared to this year's production. We also continue to expect Aerospace Products margins to grow to 40% plus next year as we optimize our parts procurement and repair strategies, including the approval of PMA Part #3, which we continue to expect approval of in the very near term. Next, let's talk about adjusted free cash flow. In the third quarter, we generated $268 million, which includes $88 million from the sale of the final 8 aircraft from the 45 aircraft seed portfolio, which were sold to SCI 1. Year-to-date, we have now generated $638 million in positive free cash flow, positioning us on track to our revised goal of $750 million for all of 2025 prior to our expanded contribution to SCI 1. As FTAI pivots to an asset-light model focused on aerospace products and strategic capital, we continue to expect substantial growth in free cash flow in the years ahead. Our primary use for available cash is to pursue investments in high-impact growth initiatives, and we're seeing today a significant number of these opportunities and possibilities. FTAI's targeted disciplined approach is to identify opportunities complementary to our MRE operations in areas where we can accelerate production, expand margins and further differentiate our product offerings to customers worldwide. We do expect surplus cash balance above these investment opportunities, and therefore, we are announcing an increase to the dividend this quarter from $0.30 per quarter to $0.35 per share. The dividend of $0.35 per share will be paid on November 19 based on a shareholder record date of November 10. This marks our 42nd dividend as a public company and our 57th consecutive dividend since inception. Additionally, we will also continue to evaluate future opportunities for capital redistribution to shareholders. And finally, we remain confident in our full year 2025 estimates of $1.25 billion to $1.3 billion business segment EBITDA for all of 2025, comprised of Aerospace Products EBITDA ranging from $650 million to $700 million and Aviation Leasing EBITDA of $600 million. Looking ahead to 2026, for Aerospace Products, we're estimating $1 billion in EBITDA for next year, which represents significant further growth versus the $650 million to $700 million this year and approximately $380 million, which we generated just recently in 2024. For Aviation Leasing, we're estimating $525 million in EBITDA in 2026, which is in line with our expected results for 2025, excluding insurance recoveries and gains on sale. Within the Leasing segment, we estimate the growth in servicing fees and our 19% minority equity investment will offset the decline in on-balance sheet leasing revenues from the seed portfolio sold to the SCI as we continue to pivot to an asset-light growth model. Overall, we now anticipate total business segment EBITDA in 2026 of $1.525 billion, up from our original estimate of $1.4 billion. Based on these projections, we expect to generate $1 billion in adjusted free cash flow next year, representing a 33% increase over the $750 million we are targeting in 2025 prior to our expanded contribution to SEI 1. With that, I'll hand it over to Angela to talk through the numbers in more detail.

Thank you, Joe. The key metric for us is adjusted EBITDA. We maintained our strong momentum this quarter with adjusted EBITDA of $297.4 million in Q3 2025, which is up 28% compared to $232 million in Q3 of 2024 and in line with Q2 2025 results after excluding the onetime benefits from insurance recoveries and seed portfolio gains on sale we recorded last quarter. During the third quarter, the $297.4 million EBITDA number was comprised of $180.4 million from our Aerospace Products segment, $134.4 million from our Leasing segment and a negative $17.4 million from Corporate and Other, including intersegment eliminations. As we have predicted, Aerospace EBITDA is now exceeding leasing's EBITDA. Aerospace Products had yet another great quarter with $180.4 million of EBITDA and an overall EBITDA margin of 35%, which is up 9% compared to $164.9 million in Q2 of 2025 and up 77% compared to $101.8 million in Q3 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 recent acquisition in California and our new joint venture launched in Connecticut. Turning now to leasing. Leasing continued to deliver strong results, posting approximately $134 million of adjusted EBITDA. For gains on sale, we continue the year with $126.8 million of asset sales proceeds, generating a 7% margin gain of $8.3 million as we closed on the final 8 aircraft of the seed portfolio to SCI 1 and divested several noncore assets, including several Pratt & Whitney 4000 and CF680 engines. Overall, the total 45 aircraft seed portfolio contributed an aggregate gains on sale of $50.1 million to 2025 leasing EBITDA at a margin of 10%. The pure leasing component of the $134 million of EBITDA came in at $122 million for Q3 versus $152 million in Q2 of 2025. But included in the $152 million last quarter was a $24 million settlement related to Russian assets written off in 2022 as well as leasing revenue generated from seed portfolio, which we have now sold to the SCI. With that, let me turn the call back over to Alan.

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

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

Congratulations on upsizing of SCI. It looks like great traction from the investor base and sourcing these aircraft, and I think you have now 375 aircraft target or the size of United Airlines CFM fleet. So can you maybe walk us through the financial implications of the upsizing, both from a segment EBITDA and free cash flow perspective?

Sure. So I mean, the way I think about it is we're increasing the number of aircraft that we'll have in SCI by that amount of going up 33%, 250 up to 375. And we'll probably do it a little bit faster than we had expected given the pace of investing activity. So our plan has always been to do -- continue to do additional SCIs every year. So I think it really is -- the main impact is just accelerating the growth under SCI. And we originally said we expected the SCI business for FTAI to represent about 20% of the Aerospace products volume. And probably with this acceleration of the SCI fundraising, that number might go up to 25%. So 20% to 25% going forward. And the important thing is that, that business is 100% of all the engines in those partnerships are dedicated, committed to FTAI Aviation for the duration of the ownership period, which we expect will be 5 to 6 years. So it's locked in volume. We know everything you need to know about the engines we have access to. We can plan our production very efficiently. We can have engines prepositioned -- it's just a great -- there's just so many benefits that come out of us having -- being the manager of these capital pools. It also makes us look a lot bigger to the airline customers. So when you go into a visit an airline and you own a significant chunk of their fleet as a lessor, the ability to get business from them on other engine products that we offer is higher, is bigger. So it has cross-selling opportunities that also will benefit FTAI. But I think the main thing is just faster -- what we're pushing for overall as a company is really just faster market share gains in the MRE business and aerospace products.

Got it. And then maybe, if I could ask one on the ATOPS acquisition, if you could give any color on how that came about, how it adds 150 modules worth of capacity? And similar to Pacific Dynamic, if you could give color on EBITDA contribution as we think about the savings from that?

This is David and I'll take that Sheila. So on our M&A strategy, you're really seeing 2 themes play out, right? We're doing investments to either increase margin or expand our capacity well ahead of our production needs. So ATOPS specifically is the latter, where we're increasing production well ahead of our production needs. ATOPS, as Joe mentioned earlier in the opening remarks, has 2 facilities. The main facility is in Medley, Florida, which is very close to our test cell today. So it immediately creates synergy between our test cell and the facility. It also includes 60 employees, and we have the ability to process 150 modules out of that location. So effectively, that raises our overall production at the company from 1,800 modules to 1,950. Additionally, the second facility is located in Lisbon, Portugal. That has a small team that we expect to grow. Our goal out of that facility is to run our field service, and those are the employees that actually deliver the module exchanges to customers, specifically out of Europe. And we expect to grow that facility because we see a lot of local talent that we could recruit from. So the ATOPS transaction is mostly focused on increasing capacity. We also did announce the Bauer transaction. That represents the first theme, which is we're looking to increase margin and looking to continue to vertically integrate. So that is a 50-50 joint venture, which we call Prime Engine accessories based in Bristol. It is for the engine accessories. So that includes fuel pumps, HMUs, actuator and valves. Those are the components that regulate air, fuel and oil between the engine and the aircraft. It was a repair that we were lacking that now we're able to in-source. And we're very happy to partner up with Bauer, which is a leading manufacturer of a lot of this -- the test and bench equipment. As Joe mentioned, for that investment specifically, we're expecting to capture around $75,000 of savings per shop visit. And we're expecting to do about 350 engines per year, when that starts ramping in 2026.

[Operator Instructions] And our next question comes from the line of Kristine Liwag of Morgan Stanley.

I just want to follow up on SCI. I mean you guys are significant buyers of aircraft engine assets now in a time where that there still seems to be a shortage of assets out there. Can you talk about the availability of assets that you're able to buy, pricing, expected returns? I mean, ultimately, what were your conversations with investors like? What do they like about SCI? And where are areas of potential concern?

Sure. I'll start on that. If you think about the market, there are 2 different sellers of these narrow-body current tech aircraft. 1 is lessors, and they own roughly half of the world's fleet. So if you think about 14,000 aircraft, that are 737NGs and A320ceo family aircraft, about 7,000 are owned by lessors. And as lessors begin to take delivery of new aircraft into their portfolios, they need to sell off older aged equipment. One of the big drivers of that is just to maintain ratings. Those rating agencies and debt investors and lenders look to that metric of average age of your portfolio as one that they track very carefully. So during COVID, I think a lot of lessors were able to hold on to assets longer. They extended the average life of their portfolio, maybe, for example, from 12 years to 14 years. But now people are saying, you got to sell the older stuff. So that portion of the market represents north of probably 1,000 aircraft a year that are sold by lessors. So we're buying from that group. And we have a very significant competitive advantage in that we can do engine exchanges. So we're an advantaged buyer, and we're one of the larger pools of capital that are focused really solely on NGs and ceos. The second source of deals is airlines. And a lot of airlines had deferred as much of the engine maintenance as possible during COVID. They've kicked the can down the road pretty far. But there are a lot of shop visits coming up in the near future and airlines are looking to do sale leasebacks, which allow them to avoid both raise capital today and avoid a shop visit. So that investment in that shop visit can be a significant amount of their capital for an airline, and they're looking at alternatives for how to do that, and we present the perfect alternative, which is an engine exchange. There's no downtime, no shop visit and they're back in service and they totally avoid the capital investment in that engine shop visit. So it's a perfect product. Industry sort of have all cited that airlines in the maintenance world, there's an increasingly heavy orientation on heavier shop visits. The core restoration is the most expensive part. There's more of that, that's going to be needed in the next few years, and that plays perfectly into our strengths because that's what we do in our facilities as we rebuild those. So that's the supply side. In terms of the investors, when we look at this compared to a traditional approach, what we show the investors that we solve problems. MRE, Maintain Repair and Exchange is a better way of doing engine maintenance. And we solve problems and save people money. And so when you solve problems and you save money, that means higher returns for investors and less risk. And it's actually a very simple explanation, people get it immediately. And who in the credit world doesn't want higher returns with lower risk. So we're finding a high receptivity to that. It's relatively -- it's predictable cash flows, relatively short duration, and it's an asset-backed structure that's uncorrelated to public markets. So it really fits in nicely into today's investment world and we have a terrific group of investors, all of whom will -- as I say, if we deliver the returns that we show people, then we'll be able to raise a lot more capital.

That's super helpful color, Joe. And maybe a follow-up question, it could be for Angela. When we look at your 19% equity portion of SCI, I mean, with the upsized amount, this is a pretty sizable leasing income. How do we think about that portion? Is that going to be reflected in the adjusted EBITDA in the leasing segment? Will this be reported in the other line? I mean, ultimately, what's the treatment of SCI in your financials?

Yes. On that 19% specifically, as you mentioned, yes, so it will show up in our equity pickup line. So you'll see that as the equity income line pick up for the 19% that we own from SCI's leasing returns. But in addition to that, as Joe mentioned, as we are the servicer, we'll also pick up servicing revenue, which is currently in other revenue in the Leasing segment. So that will grow with the asset base also growing. And then we'll also see in our aerospace products business, the engine exchanges that are coming through for all the engines that are coming up for exchanges with the SCI at the fixed price that we've already committed to.

We will include that in adjusted EBITDA. 19% will be included in adjusted EBITDA in Leasing.

Good. Super helpful. And look, sorry, there's just so many things going on. So if I could ask a third question here. Look, I want to take a step back on the module facility. I mean, I think sometimes we kind of gloss over the success you've had in the past few years, but ultimately, you're targeting 750 modules by year-end, and you've already gotten 9% of the market share for CFM56 and V2500. I mean 5 years ago, you guys were at 0. And so this has been a fairly astronomical growth and penetration, especially for what was a financing company to really enter into the wrench-turning MRO business. I wanted to ask you, can you share with us some of the secret sauce and how you were able to execute, I mean, fairly seamlessly with this kind of volume that we've never really seen others be able to accomplish?

Thank you. But I would say 2 things that we did. I would -- looking back that were important one was focus, which most people in the business tend to get into this diversification mode, where every -- they're trying to do, [indiscernible] is aircraft or a fleet of -- or different engine types and diversify often to people they equate to less risk. But we consciously decided that with these engines that this was the best opportunity in the industry and that we should do nothing else. And so I would attribute a large part was that decision to say, let's get out of the other engine types. So let's just focus on CFM56 and then ultimately V2500. So that was big. And then the second is really people. You have to attract great people and retain them. And we have a terrific team of people across the entire organization. And everybody -- it is always ultimately about that. And to do that, people have to -- you have to sell the vision and people have to buy into it. And I think people have. When you go out to meet with customers, that's kind of the biggest reinforcement is when people on the buy side are saying, I really -- I'm not that good at doing shop visits. I've had bad experiences. I want to do anything to not have to do a shop visit. So when you show up and you say, I can solve your problem. That really invigorates people because they feel like they're doing something worthwhile.

Our next question comes from the line of Josh Sullivan of JonesTrading.

Congratulations on the quarter. Just on -- a follow-up on ATOPS. $15 million in equity for $150 million -- sorry, 150 modules, fantastic trade. How do we understand the calculus in module capacity potential here? Just looking at maybe like the FTAI USA as an example. What are the gating factors to finding these relatively small investments for such a big yield on module capacity increase? Is there a lot of runway to do these relatively small investments or do we need a larger investment eventually to drive significant module capacity growth?

No, I think it's there's a surprising number of what I refer to them as almost like empty buildings that once upon a time, somebody was in the business and they left their tooling and there's a building and somebody is trying to figure out what to do with it. And that's where we have a unique ability to walk in and say, well, we can deliver engines immediately. And so these opportunities do exist and as you mentioned, the math on them because there is no real vibrant business operating inside of these buildings today, we can acquire them at very low prices and fill them up. And the gating factor is the people. It's the mechanics. That's why we've been talking about the training facility in Montreal is a big initiative because we found we could hire people, but you couldn't make them productive as fast as we wanted. And sometimes you have -- people don't actually ever become productive. So you have to focus on how do you increase your yield and shorten that time to get people into a mode of being a contributor. So that's where a lot of our energy has gone. I think there are more facilities out there that we can find. There don't seem to be a shortage of that. There are people offering us deals all the time now. So it's really going to be trying to find those ones that are the easiest for us to plug-in and have the biggest available pool of mechanics in the nearby area.

Got it. And then I guess similarly, just on the JV of Power, $75,000 cost saving per visit. Is the capability more about improving turnaround times for your customers or margin in-sourcing at FTAI? And I guess, were customers pushing you to add this capability, which might lead to additional new MRE customers. Or is it just a good asset to have in source to drive margin?

There were a multiple choice question I would choose E, all of the above. I mean it's really phenomenal. These -- the engine is so complicated in some ways and so simple in other ways, but these accessories are very complicated and the know-how that people with Bauer have is phenomenal. I mean they make all the test equipment that everyone uses. And so we are partnering with them, and we've already had interactions with our engineers and their engineers and there's a sharing of experiences and we think they'll make us better, and we hope we can contribute and make them a little better. But it's really just widening, expanding circle with people that have specialized knowledge and intellectual property in areas that are incredibly expensive to fix the engine is full of them. It's every time you look at something else that is also a very high cost and very specialized knowledge. So it's -- we feel like we found a phenomenal partner that works -- the math works well for both of us. And we think it's going to continue just to -- as you said, it makes our margins better. It makes our people smarter. It shortens the turnaround time. And if you send an accessories out now to a third party, you're beholding upon that third party to get it back to you so you can keep producing. In this way, we have more control over our -- the whole process.

Our next question comes from the line of Giuliano Bologna of Compass Point.

Congratulations on the continued great execution on all fronts here. As the first question, you mentioned several conferences and on some calls that we should think about FTAI as being in the spread business. Can you expand on that? And as it relates -- and especially as it relates to both weak and strong markets?

Yes. So when you -- increasingly, we think about our business as being really in 2 different areas. 1 is the manufacturing business, where we buy, run out engines, rebuild them and sell them. And the other is the asset management business, which we raised capital and buy airplanes and that gets committed volume to FTAI aviation. So if you think about the 2 businesses that the first business is buying an engine at a price in the market and then rebuilding it and you're adding basically hours and cycles to that engine and then you're selling it for whatever people will pay for hours and cycles on a rebuild basis. And so that's the spread. It's the buy and then the build and we can control the cost of the build and then the sell. And so we're basically, like in the manufacturing business, I say, isn't that what Apple does, when they make an iPhone. They buy parts and people. They put them together and they sell it. So that's our core business. And in a soft market, you're going to buy cheaper on the runout side, and you'll maybe sell a little bit cheaper, but usually not for long. And so I think of the market is very strong. The price of rebuild engine is driven primarily by the OEM list prices on those parts because that's your alternative. And as long as people are flying aircraft, they're going to need to replace hours and cycles on those engines. And so that's what drives it. If we were to hit a period where there's excess availability of engines, and that's happened in the past and other engine types, not this one in recent history. Well, if you go back to COVID. But what happens is I would look at that as a 3- to 6-month window to accelerate market share gains for us because it always rebounds. So if there's an opportunity to pick up some inventory at a lower price or build our capacity then when it rebounds, you'll be in a better position at the end of that. And we've really done that consistently of our entire careers.

That's very helpful. And I appreciate that. Maybe the next question for Angela. I see the new slide on Slide 39 of the supplement data details the way that the cash flow statement would change and the reporting would change using industrial accounting versus lease accounting. Is the right way to think about it that effectively all of the gains on sale or economics that were flowing through cash spread by investing activities would effectively move into operating cash flow when you change the industrial accounting because of a more streamlined methodology there?

Yes. No, that's the right way to think about it. So as you mentioned, we did include the pro forma cash flow statement on Slide 39 of our supplement. And what you will see is that for 9 months ended 9/30, we would essentially be moving about $722 million in cash proceeds from our sales assets from investing to operating activities. And we've outlined the line items that was specifically changed, but you've hit on them where it would include the gain of assets and the proceeds from asset sales. And starting in third quarter, we have classified all of our inventory purchases going through operating. So you will see a transition of that aligning with our GAAP cash flow statement going forward.

Our next question comes from the line of Hillary Cacanando of Deutsche Bank.

Could you unpack the guidance for 2026? What's the upside driven by new customers, repeat customers, new contacts from Finnair or the acquisition of ATOPS and the launch of JV, et cetera. I'm assuming it's a combination of all of those, but if there's anything that stands out, if you take this kind of a detail.

Well, I think if you break it into 2 parts, it's volume and margin. And so on the volume side, the MRE product, as we mentioned, continues to grow. Our production is expected to grow 33% next year. And it's a mix of new customers and existing customers. And I would also highlight that there's bigger volumes coming from existing customers. So where we've gotten the foot in the door, and we've enabled people to try the product and say, this is really how it works. It works terrifically and the experience that then we are seeing customers come back with larger orders for their engines going forward. So that's a great -- that's exactly what we have hoped would happen with those initial orders. So we're seeing continued adding new customers. We highlighted Finnair last quarter and we're seeing existing customers get bigger. On the margin side, we've indicated next year, we expect to see 40% margins, and it's really driven off of the parts acquisitions strategy that we've been implementing and repairs. And so we've highlighted that PMA is one of those contributors where we expect imminently to have approval of the third part. And then we've also had acquisitions of used serviceable material that we've been implementing. And then on the repair side, we've highlighted we have capability in Montreal, which we've been adding, but we also specifically added Pacific Aerodynamic and now Bauer.

Great. That's really helpful. And then just on Finnair, how should we think about the margin impact or EBITDA contribution from that contract? I mean are they market rate? Or how should we think about that?

Hi, Hillary, this is David. Yes, they're in line with a large program that we have with customers. I would say they're largely in line. But just to give you a little more flavor on the Finnair program, we're covering their entire fleet. So 36 engines and we're prepositioning engines ahead of shop visits. We effectively provide them a serviceable engine and then take the unserviceable engine back. So it provides cost savings for the airline. It lowers maintenance costs and then provides more importantly, flexibility for the airline. So we're -- as Joe mentioned earlier, we're focused with airlines on winning large programs that cover their entire maintenance, and this is an example of one that we won, and we expect others to happen soon after.

Our next question comes from the line of Brian Mckenna of Citizens.

Just one more here on SCI. Have you disclosed what FTAI will be earning in terms of management and performance fees for managing the SCI vehicles. I asked this because Leasing assets have declined 30% year-to-date. And that's really just from 1 SCI vehicle that's not even fully deployed yet. So with a couple more vehicles, most or all of these assets will likely move into third-party asset management vehicles that you're managing. Maybe I spend too much time covering alternative asset managers and private credit more broadly, but it would seem like Leasing ultimately turns into an asset management business over time. And if that's the case, you have 2 high multiple earnings streams not 1. So any thoughts here would be appreciated?

Yes, Brian, we think alike. I mean, it's very much what we've been -- how we've been repositioning the business. I would say that first of all, the fees are market-based. And so the asset management fee that FTAI earns is on total assets. So that would be on the $6 million. And 1% or higher is typically market for that type of structure. And then the incentive compensation will be low double digits for provided that the returns exceed a hurdle. But it's meaningful. Those numbers, as we've mentioned, we always try to have an aspiration, and we initially said, why not manage $20 billion in this way in some point. So we started out we were at $3 billion and now we're at $6 billion. So we may -- it may not be that crazy that we get there. And it is a much better way to own assets in a private capital structure, a partnership like this than in a public company. So increasingly, as I said, we look at that we have 2 businesses. 1 is a factory that makes engines and the other is an asset manager that manages the money that owns the aircraft that has the engine on it.

Got it. That's super helpful. And then maybe just a related follow-up. So it's pretty minor, but FTAI's ownership in the first vehicle, SCI vehicle came down to 19% from 20%. I mean if demand remains elevated, and it feels like it's pretty robust here, just given the upsized commitments, et cetera, I mean, is there an opportunity for your ownership or essentially the GP stake to decline to something lower than that? And then essentially, it creates an even more capital-light model. Like I'm just trying to take through that a little bit more moving forward.

Yes, it's possible. I mean, we wanted to make the first -- I mean, as you can imagine, one of the concerns that investors always have is are you aligned? Do you have the same interest that I have as the manager? And obviously, that equity commitment is -- goes a long way to answering that question. But over time, if you demonstrate a track record and you show people repeatedly good numbers, everything is negotiable.

And our next question comes from the line of Andre Madrid of BTIG.

This is Ned Morgan on for Andre this morning. I just wanted to ask, how should we think about the pace of long-term partnerships to materialize in terms of scale, will future deals be more in line with the major U.S. carrier deal or the Finnair deal? I guess -- and also if you're able to comment on the margin impact of these partnerships, what that could look like?

Well, the pace of investing, as I said, we started the first partnership really at the beginning of this year, and we have under LOI or closed about $3.5 billion, and it's next week is November, I guess. So we're -- our original thought was we could invest $4 billion in the first year. And I expect that, that will go up as we get -- we have more of a backlog than we had when we launched the first partnership. So I think the pace of investment, I'm pretty optimistic. This is a $300 billion market that we should be able to deploy that type of capital regularly. And the margins, the SCI is treated like any other third-party customer from a pricing point of view. The only difference is it's contracted. So it is 100% committed. So the margins and the profitability from SCI business for FTAI are very similar to the other third-party customers. And as I indicated next year, we expect an improvement in margins to 40% and we are seeing an increase in larger orders from existing customers. So that trend we expect to continue to get more engines from third-party customers per customer as they experience the benefits of the product.

Our next question comes from the line of Brandon Oglenski of Barclays.

Joe, I guess, can we come back to the $1 billion cash flow outlook for next year? That's pretty impressive just given where this business has been. How much should M&A factor into your outlook for capital deployment looking forward? I think you got asked the question a little bit previously, but do you see like long-term needs for build-out of incremental capacity here?

Well, I would turn it around a little bit differently. We expect to continue to expand our capacity, but we're doing so in a way that's not -- it doesn't cost a lot of money. So if you look at the other -- the deals we've done in Rome or in Miami, we're adding a meaningful amount of capacity, but the total investment is like $20 million or $30 million. So that I have to apologize that it's not bigger, but it's not -- we're not trying to invest more capital. We're trying to get more capacity at the best price. So we will continue to do that. On the M&A repair side, equally, we've -- the deals we've done are fairly -- are extremely accretive and then not a lot of dollars invested to get in the business. And when we look at a part or repair activity, we try to evaluate all the different ways we could get into that. We look at the companies that could be for sale. We look at building it organically in Montreal or Rome. We look at partnering with other people. And we've done all of the above, we just try to find the best way in and the way that has the most accretive effect on our business. So we're sort of very flexible, but thus far, the opportunities we found have been extremely attractive from a return perspective and not require a lot of capital.

Okay. I appreciate that, Joe. And Angela, can you walk us through what you think is like the right sustainable level of maintenance CapEx and maybe reinvestment in the Leasing business as we look forward?

Yes. As mentioned, as you can see, our maintenance CapEx this year is targeted to about $125 million. And going forward, we expect that it will maintain similar levels. And the replacement CapEx, we don't expect that to increase as well. As we've mentioned, most of all of our SCI work that we'll do with the engines are structured as exchanges, where we will give a serviceable engine and get an unserviceable engine back. So the replacement CapEx, we don't expect to be expensive going forward either.

Our next question comes from the line of Ken Herbert of RBC CM.

Joe, maybe to start, can you just provide an update on where you are on the V2500 program? I know you'd initially committed to or procured access to, I think, 100 full performance restoration shop visits? How is that going? And where are you on that pipeline?

Yes. We're about halfway through. And what are we -- 2 years into it now, 2 years in of a 5-year deal and we're about halfway in terms of the volume. And it's going quite well. I mean that engine is -- it's a more expensive engine to do a performance restoration on, as we all know and by design, but the demand is incredible because of the continuing saga of the GTF grounding. So there's been a huge life extension. We have a lot of operators that are very eager to avoid the shop visit, and that's exactly what we delivered to them. So we expect that it will continue and at some point in the next couple of years, we'll talk about an extension or other alternatives, but we're going to stay in that engine.

Okay. That's helpful. And I know the percentage of work that has flown through or the revenues within Aerospace products dedicated to the SCI has bounced around, and I can appreciate timing is a piece of that. But as you think out a couple of years and SCI subsequent versions continue to attract capital how much of the Aerospace Products segment or revenue do you think eventually is SCI related? And how do you view sort of a natural cap on that?

Well, the way you have a natural cap is to continue to grow third-party business because the SCI business will grow, but we're also expanding the third-party business at really a very similar clip. So I expect it to be roughly 20% to 25% of FTAI Aviation's business for the foreseeable future. And the answer is we grow both of them.

This concludes the question-and-answer session. I'll now turn it back to Alan Andreini for closing remarks.

Thank you, Marvin, and thank you all for participating in today's conference call. We look forward to updating you after Q4.