WLFC - NASDAQ

Good day, and welcome to the Willis Lease Finance Corporation First Quarter 2025 Earnings Call. Today’s conference is being recorded. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding our expectations related to financial guidance, outlook for the company and our expected investment and growth initiatives. Please note that these forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect WLFC’s views only as of today. They should not be relied upon as representative of views as of any subsequent date, and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect WLFC’s financial results, please refer to its filings with the SEC, including, without limitation, WLFC’s most recent quarterly report on Form 10-Q, annual report on Form 10-K and other periodic reports. which are available on the Investor Relations section of WLFC’s website at https://www.wlfc.global/investor-relations. At this time, I’d like to turn the conference over to Austin Willis, Chief Executive Officer. Please go ahead.

Thank you, operator, and thank you all for joining us. On our call today, I am joined by Scott Flaherty, our Chief Financial Officer; and Brian Hole, our President. In our first quarter, WLFC continued to deliver strong financial performance, underpinned by the growth of our core leasing business. While average utilization for the quarter was 79.9%, we ended the quarter at over 86%, evidencing our ability to produce revenue from off-lease engine purchases in a timely manner. For the first quarter, our total revenue was $157.7 million and pre-tax income was $25.2 million. Our performance has enabled us to return capital to our shareholders while meaningfully expanding our business. And in April, we paid our fourth consecutive quarterly dividend of $0.25 per share. In a moment, Scott will provide more detail on our results. Following a transformative 2024, we were off to a strong start to the year, particularly as our differentiated flywheel business model enables us to generate premium returns. The macroeconomic concerns over tariffs have created market volatility, but the drivers of our business over the long term remain unchanged. The cost of new engines continues to drive operators towards leasing and our maintenance capabilities and programs aid cost-conscious airlines who would prefer to focus on flying passengers rather than engine maintenance planning. We remain confident in our business model and ability to continue to lead the sector in value creation. To that end, I want to highlight three notable transactions announced during the quarter that advance our strategy to provide efficient solutions to airlines. For those of you on the webcast, we have some accompanying slides. First, in February, we announced that we would exercise purchase rights to buy 30 additional LEAP engines from CFM International, a joint venture between GE Aerospace and Safran Aircraft Engines. The purchase includes LEAP-1A engines for the Airbus A320neo family of aircraft and LEAP-1B engines for the Boeing 737 MAX. These engines represent an important investment that will enable us to provide additional support to operators of these popular engines and aircraft. This purchase aligns with our vision to pioneer services and solutions that drive more sustainable operations and is consistent with our historical strategy of always having the most in-demand assets for our customers. Second, in March, we announced a new ConstantThrust deal with Air India Express for CFM56-7B engines, expected to close in the second quarter, which further builds on our existing partnership with Air India that began with our first transaction back in 2022. To reiterate, ConstantThrust is a product we created over a decade ago, in which we do a sale and leaseback on an airline’s fleet of aircraft or engines. And when an engine becomes unserviceable, we replace it with another from our fleet, managing the unserviceable engine through our maintenance and services businesses. The downtime for an airline is as little as 1 day, which delivers a level of efficiency and cost savings unobtainable through traditional maintenance or leasing arrangements. We value our partnership with Air India and believe that their decision to engage in another ConstantThrust deal with us is indicative of the value that it provides operators compared with alternatives. As discussed on our fourth quarter 2024 earnings call, we believe ConstantThrust will attract heightened demand as airlines look to transition from legacy fleets into neo and MAX aircraft. We look forward to continuing to support the growth of the Indian aviation industry and providing innovative solutions to our global customers. And third, in March, we announced a joint venture to build an engine test facility in West Palm Beach, Florida to address the shortage of similar facilities in North America. The shortage of adequate testing capacity is causing a logjam in the industry, constraining throughput and slowing engine repair turn times. This collaboration with Global Engine Maintenance, an engine MRO, will allow us to test our engines, our customers’ engines, GEM’s customers’ engines as well as third parties who want us to test engines for them. By combining our engine testing needs with that of another MRO, we can offset much of the cost with the baseload provided by the shareholders and seek additional income by offering this service to third parties. The test cell will initially focus on CFM56-5B and 7B engines, but will have the capability to test more modern variants in the future with slight modification. Finally, I want to reiterate the strength and expertise of our team as the aviation industry grapples with ongoing macroeconomic uncertainty. Demand for our products and services remains robust, both domestically and abroad. However, as always, we are prepared for the changes that could come as a result of the volatility experienced over the previous few months. The tariffs present challenges as well as opportunities. We have operated through multiple economic cycles and industry disrupting events in our 45-plus years of operation, and we stand prepared to respond as necessary. Our deep understanding of our customers’ needs and the assets we manage will put us in the best position to prosper in any environment we face going forward. And with that, I’ll hand it over to Scott Flaherty, our CFO, to discuss our financial performance in greater depth.

Thank you, Austin and good morning all. As you can see from our P&L, we are off to a good start in 2025. Q1 produced record quarterly revenues of $157.7 million, driving $25.3 million of earnings before taxes or EBT. Our consolidated revenues of $157.7 million were up 33% from the comparable quarter in 2024 and were driven by our core lease rent revenue and maintenance reserve revenues, which were further enhanced by our vertically integrated services business. Walking through the P&L, as it relates to revenue, core lease rent revenue for the quarter was $67.7 million and interest revenue was $3.9 million, which reflects interest income on long-term loan-like financings. Growth in these line items primarily reflects our increased total portfolio size of $2.82 billion as of March 31. Our total owned portfolio is reflected on our balance sheet as equipment held for operating lease, maintenance rights, notes receivable and investment in sales-type leases. We have seen portfolio utilization grow from 76.7% at year-end 2024 to 86.4% by the end of Q1, an almost 10-point pickup as we were able to quickly deploy on to lease our December 2024 purchase of 9 GTF engines from Pratt & Whitney. Additionally, we continue to see a solid average lease rate factor across the portfolio of 1.0%. Maintenance reserve revenues for the quarter were $54.9 million, up $11 million or 25% from the comparable quarter in 2024. As you peel back the numbers, you can see that $9.6 million of these maintenance reserve revenues were long-term maintenance reserve revenue associated with engines coming off lease and the associated elimination of any maintenance reserve liabilities. $7.7 million of the $9.6 million related to an end of lease payment for which the company has subsequently been paid by a Chinese-based lessee customer. $45.3 million of our maintenance reserve revenues were short-term maintenance reserves compared to $37.6 million in the prior comparable period. This increase in short-term maintenance reserve revenue was influenced by an increase in the number of engines on short-term lease conditions and the systematic contractual increase in the hourly and cyclical usage rates on our engine, and to a lesser extent, in this quarter, the timing of revenue recognition of in-substance fixed payments. Spare parts and equipment sales to third parties increased by $15.0 million or 455% to $18.2 million in Q1 2025 compared to $3.3 million in the comparable quarter. This increase was driven by the demand for surplus material that we are seeing as operators extend the lives of their current generation engine portfolios. In addition, there was a discrete $7.0 million sale in the quarter as well as $2.2 million of equipment sales for which there were none in the comparable period. WASI, our spare parts business provides a valuable outlet for the company to recognize residual values on our engine portfolio while also providing feedstock for our and our customers’ fleets in a tight parts market. The recycling of these spare parts often occurs at 1 of our 2 engine MRO facilities, which are located in Coconut Creek, Florida and Bridgend, Wales. Gain on sale of leased equipment, together with our gain on sale of financial assets, a net revenue metric, aggregated to $4.8 million in the first quarter, down slightly from $9.2 million in the comparable period. This gain was associated with gross equipment sales of $49.8 million, representing an effective 10% margin on such sales. Our trading activity tends to be lumpy and varies from quarter to quarter due to the nature of the business. Trading is an important part of the business and keeps our portfolio relevant. Maintenance service revenue, which represents fleet management, engine and aircraft storage and repair services and revenues related to management of fixed base operator services, was $5.6 million in the first quarter, up slightly from the comparable period in 2024. Gross margins came in at 5%, as we are still in the build-out stages of our fixed-based operator services business, which influences our aggregate margins. We believe that our maintenance service offerings both enhance and create lease opportunities for the business and provide further vertical integration, supporting the full life cycle of the company’s assets. On the expense side of the equation, depreciation in the first quarter was up 11.3% to $25 million for the quarter as we increased the portfolio size as well as put new engines on lease, which starts their depreciation through our P&L. Write-down of equipment was $2.1 million for the quarter, which represent an impairment on 5 engines which were all moved to held-for-sale. G&A was $47.7 million in the first quarter compared to $29.6 million in the comparable period in 2024. Increases in the overall G&A spend were mainly related to $11.4 million in consultant-related fees, which are predominantly related to the company’s sustainable aviation fuel project. Given the stage of this project’s development, GAAP dictates that these costs are expensed rather than capitalized. The company has been awarded a U.K. governmental grant, which will ultimately offset a portion of these charges, but such grant will not be recognized until cash is received. We anticipate that first quarter spend, which represents licensing and engineering fees, represents the bulk of our net anticipated spend inclusive of grant in 2025. In addition, there was $6.9 million of share-based compensation, which was influenced by the rise in the company’s share price relative to Q1 2024 and represented a $3.1 million increase from the comparable period and approximately $1.2 million of wage increases due to additional headcount and general salary escalation as we grow the footprint of the overall business. Technical expense was $6.2 million in the first quarter, slightly down from $8.3 million in the comparable period in 2024. Technical expense generally relates to unplanned maintenance, whereas engine performance restorations tend to be planned capitalized events. Net finance costs were $32.1 million in the first quarter compared to $23.0 million in the comparable period in 2024. The increase in costs was related to an increase in indebtedness as total debt obligations increased from $1.7 billion at March 2024 to $2.2 billion at March 2025 as well as an increase in the quarterly weighted average cost of debt, inclusive of our interest rate hedge positions, which rose from 4.56% in Q1 2024 to 6.16% in Q1 2025. The company also picked up $1.4 million in ratable earnings from our 50% ownership interest in our Willis Mitsui and CASC Willis joint ventures. The company produced $15.5 million of net income attributable to common shareholders, which factors in GAAP taxes and the cost of our preferred equity. Diluted weighted average income per share was $2.21 in Q1 2025. Net cash provided by operating activities was $41.0 million in the first quarter of 2025 as compared to $59.8 million in the first quarter of 2024. The decrease was predominantly related to working capital, where relative changes in accounts payable had a significant influence on the net cash provided by operating activities. Adjusting for working capital or changes in assets and liabilities, net cash provided by operating activities was $13 million higher in the first quarter of 2025 than in the comparable period in 2024. On the financing and capital structure side of the business, the company completed its fourth and fifth JOLCO financings in the first quarter, bringing total JOLCO financings at quarter end to approximately $105 million. Subsequent to quarter end, the company completed its sixth JOLCO, bringing our total JOLCO financings to $125 million. We regularly access the capital markets as we endeavor to source competitively priced capital to continue to grow our balance sheet and P&L. In February of the first quarter, we paid our third regular quarterly dividend of $0.25 per share. Subsequent to quarter end, we declared our fourth consecutive regular quarterly dividend, which is expected to be paid on May 22, 2025 to stockholders of record at the close of business on May 12, 2025. We believe that our ability to pay a recurring dividend speaks to the health of the business and provides our shareholders with a moderate current cash yield on their investment while not degrading the strong cash flow characteristics and equity growth of the business, which supports our overall growth. With respect to leverage, as defined as total debt obligations, net of cash and restricted cash to equity, inclusive of preferred stock, our leverage ticked lower to 3.31x as compared to 3.48x at year-end 2024. We mentioned with our annual results that our leverage had climbed in the fourth quarter as we took advantage of some year-end asset purchase opportunities, and we have now been able to start to work that leverage back down in the first quarter. With that, I will now open the call to questions. Operator?

[Operator Instructions] And we will take our first question from Hillary Cacanando with Deutsche Bank. Please go ahead.

Yes. Hi. Thanks for taking my questions. I just wanted to find out if you are impacted in anyway by – direct impact – directly impacted by tariffs? I guess I wasn’t sure if you import any, like, parts or any materials from overseas for your maintenance services or anything like that, if you would be impacted directly. Thank you.

Thanks Hillary. So, thus far, our impacts have really been de minimis, both on the import side of parts as well as on the leasing side. You got to remember, a lot of our business, at least with our MROs, the parts come from our own parts capability. So, we really haven’t seen too much of an impact there yet. And on the leasing side, by and large, we really haven’t seen very much of an impact. There was a little bit of noise around China early on with respect to the implication of tariffs on lease rent revenue, but it looks like that has largely gone away. So, things are pretty much business as usual.

Okay. So, not too much. I mean so pretty much – I guess minimal impact. Okay. Great. And then I just wanted to get your thoughts on what happens to the value of your existing portfolio in terms of market values and lease rates if tariffs, let’s say, escalate with Europe, let’s say, in 90 days. I would think that newer aircraft gets expensive, so older – maybe older asset values and lease rates go up. But then I don’t know what would happen to the demand side. And like, then what the demand for travel, let’s say, or for aircraft. So, like what the net impact will be on the existing assets. So, just kind of wanted to get your thoughts on what you think the market values on lease rates will be for older maybe like your existing portfolio.

Sure. So, it’s hard to tell. I mean the reality is trying to look at what the future looks like at this point is really nothing more than pure speculation. That being said, I don’t think it’s unreasonable to expect some degree of asset inflation with our existing portfolio. I think when engines coming out of the OEMs are likely to be a bit more expensive because of the tariffs that they incur I think that will drive up values elsewhere. And exactly, to your point, I think there is a reasonable case to be said that incumbent assets in particular jurisdictions are likely to see some level of appreciation as well because obviously they won’t be subject to cross-border tariffs, should reciprocals be put in place. And then finally, I think there is a scenario where less expensive assets could be more attractive even if they do cross borders, just by the nature of the tariff being a percentage on value.

Got it. Great. Thank you very much. Very helpful.

No problem.

[Operator Instructions] We will move next to Louis Raffetto with Wolfe Research. Please go ahead.

Hey. Good morning.

Good morning Louis.

There is a nice step-up in the spare parts sales. I guess maybe you can say what are you seeing in the USM market? It’s been tight for the right assets for a long time, I guess. And many engines were being repaired as opposed to being torn down. Are you seeing a shift there? And how are you balancing the decision to either repair an engine or tear it down?

Yes. So, a lot of the step-up in part sales from the – from our parts business was due to a large transaction that we had where we purchased a portfolio of parts and then subsequently sold them back-to-back. But even taking that into account, we still did have a pretty good step-up in part sales. And I think that is symbolic of the overall demand for used serviceable now, and we expect that to continue for the foreseeable future. As we think about repairing engines ourselves, we run a process. Whenever one of our engines becomes unserviceable, we look at do we part it out and what does that net revenue generate, do we fix that engine and what’s the present value based upon that. And then we will also solicit bids from the third-party market as to determine what that would get in cash for us right now. And ultimately, we look at the three scenarios and just do a present value analysis. And then finally, we also look at, does it make sense to repair engines versus what we can purchase engines for out on the market. And historically, we have been pretty darn good at spot market trading. So, in many cases, we can actually procure engines on a better value on a cost per cycle basis than one can overhauling them.

Alright. Great. Appreciate that. Maybe just two quick clarification questions, the one engine that was sold out of the sort of spare parts and equipment, I will call it portfolio versus the other leased engine portfolio. Just how, like what’s the differentiation between those?

I think – are you referring to the spare parts, yes, the $7 million of spare parts?

I know – just in that paragraph it’s said that it was one engine...

Sure. What you probably saw is if you look at the line item of our financials, its spare parts and equipment sales, right. So, in the comparable period, we did not have any equipment sales. And what equipment sales are is really effectively like a trading. So, it’s not a leased asset, not an asset that was on lease. It’s an engine or a piece of equipment that we bought and ultimately sold and without having it in a lease portfolio. So, really, what you saw in the quarter was a $2 million step-up in that one line item, specifically related to that.

Okay. Great. Appreciate that.

Our next question or comment comes from the line of Will Waller with M3. Please go ahead.

Yes. I just had a couple of questions regarding the utilization rate. It was stated in the press release; it was 76.7% at the end of the year of 2024. You mentioned the average, if I heard it right, it was 79.9% for the quarter and then the quarter ended at 86.4%. Is it safe to assume that the GTF engines that affected that at the end of the year weren’t leased out until pretty close to the end of the first quarter, based on sort of what the average utilization rate was?

Yes. Hey will. How are doing? No, that is a good assumption, right. So, I think that if you kind of go back and look like you said or we talk about quite often average utilization, and then if you also look at the actual at period ends, at the end of the year, we were at 76.67% utilization at the end of Q4, and now we are at 86.4%, and a lot of that was related to some of the GTFs that we picked up late in the fourth quarter. And then over time, we have got that portfolio on to lease. And you are right, they all didn’t go on lease at one point in time and some of those went on lease even late into the month of March.

And what is the going rate for, say, a GTF or a LEAP in today’s market? And how does that compare with, say, six months ago?

So, Will, I appreciate the question, but I hope you appreciate, for competitive reasons we are not going to get into specific lease rates on assets.

Okay. And then as it relates to the long-term maintenance revenues, you kind of walked through a number of numbers, and I might have heard something wrong, but there was $7 million related to a Chinese airline where some engines came back off the lease. Was that during the quarter or after the quarter end?

Sure. So, that was a – so what that was, was in end of lease. So, long-term related. And that was recognized in the quarter and cash was received subsequent to quarter end.

Okay. Sounds good. So, that – but it was counted in the long-term maintenance revenue for the first quarter, that $7 million?

Sure. It’s revenue recognition, correct.

Okay. Prefect. And then when I look at the liability, the maintenance reserve liability, it grew from year-end $97.8 million to about $104.5 million at the end of the first quarter. So, that’s sort of the additional buildup that’s occurring where you are having – there are some probably lease extensions that are going on and so on, but that’s where the buildup is. And then eventually, that’s what will become revenue once the engines are returned, correct?

Correct.

Okay. So, in a sense, that $104.45 million that’s in that maintenance reserve liability, basically, that is the revenue associated with the long-term leases that just haven’t been recognized as income yet, correct? And then it will be recognized once the engines are returned, similar to the seven that the Chinese airline returned?

Sure. So, think about it like this, Will, like the short-term components are the monthly payments that we are getting from the operators for their usage. And those are not maintenance reserves. They are – we would never have to give those back, right. So, those are the monthly payments. The long-term are the payments that come either at the end of a lease or the payments that we have received over the life of the lease that are the payments that are – or are the balance that you see on the balance sheet. And at the end of the lease, where the operator chooses not to shop, visit that engine and return it in the condition in which it was provided to them, they give us the engine back in its current state and then we release those maintenance reserves and recognize them as revenues.

Okay. Great. So, those are sort of building. So, in a way, when we are looking at things, if there are lease extensions going on, which it sounds like in the industry, there is a lot of – a lot higher than normal lease extensions going on, then you are just going to always kind of have a much higher number that’s being deferred and not being recognized as revenue, whereas if it was a short-term lease, you would be recognizing that all along, sort of all the way along the life of the lease. It wouldn’t be one lump sum at the end?

That’s correct.

Okay. And what the utilization rate changed a decent amount. I think historically, dating back three months or six months ago, the last time that you disclosed that about 53% of your leases were long-term leases, 47% were short-term leases. What is that mix at the end of the first quarter?

Yes. So, the mix is pretty similar. It’s – we usually keep it in the neighborhood of 50-50. And that short-term lease capability is really one of the drivers that differentiates us and enables us to do what we do, both on the programmatic side as well as the trading side because that gives us the real-time information on what assets are worth, so we can go out and speculatively buy them and put them out on lease. And a good example of that is with some of the assets we purchased off lease at the end of the year, without having that real-time information, you are not going to be as certain about your ability to get those assets to produce revenue. And that’s why we were able to get those assets on lease quickly.

Great. Thanks both and I appreciate it.

Thanks Will.

[Operator Instructions] We will go next to Eric Gregg with 43 Island Advisory.

It’s Four Tree Island Advisory, but thank you. Great job on the lease rent revenue and maintenance reserve revenue growth this quarter gentlemen. A few questions first for Scott and then one to finish up with you, Austin, the average quarterly gain on sale of flight equipment in 2024 was about $11.3 million. This quarter was less than $5 million. In such a strong environment, just curious why the quarter was so much lower than what you have been averaging in the last four quarters and how you are thinking about likely gains on sale of flight equipment in the coming quarters for 2025?

Sure. Yes, Eric, it’s always – it’s hard to predict, and it’s hard to time exactly the trading component. But we continue to see significant value in the portfolio, and as we have talked about in the past, above and beyond the book value. So, it really depends on how we package in any period assets that we are selling. So, I think that we would really look to a consistent type margin over the longer term and I wouldn’t judge any one specific period to dictate a longer term margin.

Okay. Alright. Moving on to the consultant-related fees, the way the press release reads, it says increase in consultant-related fees predominantly related to the company’s sustainable aviation fuel project. If this was an increase, is that an 11.4% increase off what baseline in the prior year? Is it off of zero, or is it off of some kind of normal kind of consultant fees that are going out the door every quarter? I didn’t find much in historical notes in the financials to be able to determine that.

Yes. So, I would say, we don’t disaggregate that, right. But it’s a lot less material than the aggregate that you are seeing there. And that’s why we specifically highlighted that, kind of given the fact that it does jump out in that one period.

Yes. And if I can add to what Scott is saying – sorry, just to jump in. Yes, the amounts that we have experienced historically are pretty immaterial. The amounts that we are spending right now or that we have spent in this first quarter really represent the lion’s share of what we expect the expense to be for this year.

And you are saying the lion’s share based on the credits you expect to get back from the UK government or whatever body that is on a net basis, correct?

Well, we do expect to get a fair amount back from the UK government when they pay us over the next few quarters.

Yes. Okay. Great. And then finally, this last question is for you, Austin. This is a high-level question. But if you look back to year-end 2022 and go out to year-end 2024, where all this data is available, the owned number of engines that Willis has is up about 4%. The managed engine count is actually down over 14%, but the number of employees is actually up about 60%. So, the question is this, with an asset base in terms of number of assets that hasn’t grown much over the last few years, why is it necessary to have 60% more employees?

Thanks. So, yes, I mean if you look at our portfolio, by and large, it’s considerably larger than it was in 2022. But I get your point on the quantity of assets being owned and managed. A lot of the growth you are seeing in – on the G&A side and headcount is really a function of the people that we have in our services businesses. So, leasing has grown somewhat commensurate, but to a lesser extent than the growth in our balance sheet. But we have grown as we have built out our engine MRO work U.S. in Florida, our engine MRO in the UK and our aircraft MRO in Teesside in the UK as well. So, that’s the predominant factor.

And at this time, we have no further signals. I will turn the floor back to our speakers for any additional or closing remarks.

Yes, I will make one last closing remark. Just to say, we certainly don’t know what the landscape of tariffs is going to look like going forward. But I will say that our platform is remarkably well structured to manage it, because we do have the ability to manage and service our assets through our 145 repair stations, both in the U.S. and the UK, which will work well in the event that the world does become more of a bifurcated system where assets tend to live their lives more in particular regions. So, I just wanted to quickly mention that and thank everybody for taking the time to be with us today.