Hello, and welcome to FTAI Aviation Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Alan Andreini, Investor Relations. Sir, you may begin..

Thank you,. I would like to welcome you all to the FTAI Aviation Third Quarter 2023 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer; and Angela Nam, our Chief Financial 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. To start today, I'm pleased to announce our 34th dividend as a public company and our 49th consecutive dividend since inception. The dividend of $0.30 per share will be paid on November 28, based on a shareholder record date of November 14. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA.

We had another strong quarter with adjusted EBITDA of $154.2 million in Q3 2023, which is up 1% compared to $153.1 million in Q2 of 2023 and up 42% compared to $108.9 million in Q3 2022.

During the third quarter, the $154.2 million EBITDA number was comprised of $119.6 million from our Leasing segment, $40.6 million from our Aerospace Products segment and negative $6 million from Corporate and Other. Turning now to Leasing. Leasing had another good quarter posting approximately $120 million of EBITDA.

The pure leasing component of the $120 million of EBITDA came in at $102 million for Q3 versus $94 million in Q2. Additionally, on the acquisition side, we closed on 10 aircraft and 23 engines at attractive prices, which will contribute to further growth in future Leasing EBITDA.

Part of the $120 million in EBITDA for Leasing came from gains on asset sales. We sold $55.4 million book value of assets at a 24% margin for a gain of $17.6 million benefiting from strong demand for assets globally. And we've had more asset sales coming in the final quarter of this year.

Aerospace Products had yet another excellent quarter with $40.6 million of EBITDA and an overall EBITDA margin of 38%. We sold 41 modules in Q3 to 11 unique customers comprised of 2 new customers and 9 repeat customers. We see tremendous potential in Aerospace Products and feel very good about generating consistent EBITDA growth.

As to the balance of 2023, we see FTAI coming in above the high end of the $550 million to $600 million EBITDA range, which we communicated at the beginning of 2023. Looking ahead to 2024, our current expectation is for Leasing EBITDA to total $475 million for the year, including $50 million from gains on asset sales.

Based on a strong backlog and an expanding customer base, we are looking for $200 million to $250 million of Aerospace Products EBITDA in 2024, up from $98 million year-to-date 2023 and $70 million in 2022. Overall, we therefore expect annual aviation EBITDA for 2024 to be between $675 million to $725 million, not including Corporate and Other.

With that, I'll turn the call back to Alan..

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

[Operator Instructions]. Our first question comes from the line of Josh Sullivan, which with The Benchmark Company..

Congratulations on the strong quarter here. Just with the earnings this week, we've had some updates from the large aerospace OEMs. Just wanted to check in on what Fortress has seen on the leasing and module market as these new generation of engines face these ongoing [indiscernible] issues.

And particularly as it relates to the geared turbofan engine versus the GE56 options Fortress is offering?.

Yes.

So as you can imagine, demand for the prior technology equipment is very, very high in light of what is going to be accelerated maintenance on the new technology and some estimates, the company or others are estimating that approximately 600 A320s with GTF engines on them will be grounded in the first half of 2024 and approximately 300 on average through 2026.

So that's a significant amount of assets that are going to be out of service for an extended period of time. And so anybody that has A320ceos just keeping them and is doing the maintenance to refresh the engine. So both of those are very good for us, and that lease rates are trending up. Almost week to week, you can see increases right now.

And so that's positive and it's likely going to continue for some time. And maintenance events, people that we're estimating they were going to take assets out of service or not do another shop visit or might part them out are delaying and deferring that. So there'll be more maintenance and assets will last longer.

So all of those factors are very, very good for the equipment that we maintain and own..

Got it.

And then secondly, just on the 2024 guidance you provided, what are you baking in for PMA assumptions into that number? And then if we get an approval sooner than later, what does the PMA ramp look like from manufacturing to stocking to actually getting a customer check?.

Yes, in that $200 million to $250 million number, we've included about $15 million to $20 million of EBITDA from PMA. And that would come from both the sale of PMA parts as well as modules. And we're not sure on the ramp. It's hard to actually forecast that.

So I would assume that most of that is towards the back end of the year is our current assumption..

[Operator Instructions]. Our next question comes from the line of Myles Walton with Wolfe Research..

It's Lou Raffetto on for Myles.

Maybe just within Aerospace Products, I want to make sure I understand what drove the sequential step-up in sales and EBITDA in the quarter? I mean you did 4 more module swaps, but I'm not sure that equates to the $40 million step-up in sales and obviously, the strong growth in EBITDA as well?.

Yes. So we also had growth in the sale of used service raw material. So USM was higher and is likely going to continue to grow. As we've mentioned previously, we started a number of teardowns in the second quarter, and it generally takes 3 to 6 months for that revenue to show up in EBITDA.

So we're seeing strong demand for USM obviously, with shop visits increasing and that's 1 key way of saving money on a shop visit. So we see the teardown in used service raw material activity growing. And then within the modules, the mix of modules matters in terms of the revenue and the core has more revenue than the fan and the low-pressure turbine.

So it's -- we had more core sales activity in this third quarter than we had in the second quarter. So it's proving -- that's exactly what we've been expecting and what we're selling. It's a harder sell. It's a longer sell to sell core. It's easier to do a fan in 2 days or a low-pressure turbine in a week.

The core is a little bit more complicated, but we've been pitching that for a couple of years now and now we've got a lot of customers there recognizing the substantial savings there..

All right. Great. And so just so I'm clear on the USM. So that's good now.

Does that tied at all to the step-up that we saw, I think, a $40 million step-up in the CFM engine parts inventory? Or is it maybe not linked, but just you're building that inventory to sort of sell? It's not -- again, not necessarily directly linked, but sort of along the same line?.

Yes. This is Angela. As Joe mentioned, the number of teardowns equates to increase of inventory, but you won't see the revenue generation for 3 to 6 months. So we had a lot of teardowns in Q2, Q3, and you'll see that revenue come through Q4 and Q1..

Right.

So that's kind of like a -- almost look at that as a leading indicator to some extent?.

Yes..

Okay.

And then maybe just within Leasing, can you comment on the strong step-up in the maintenance revenue sequentially -- year-over-year and sequentially, while the lease income actually did step down sequentially, and I think year-over-year as well?.

Yes, there's 2 things went on. One is we elected to terminate 4 A320 aircraft leases to a carrier in Southeast Asia. And we did that to get higher rates and better terms. And so we did that intentionally. There's such strong demand for these assets, we've already got multiple parties that are negotiating to get them.

So we had -- when you terminate a lease, you have lease maintenance revenues that you recognize from the prior lease come through. So that's why you see a step up in the maintenance revenue. And then the lease side is a bit of an accounting issue. When we do engine swaps for aircraft that are on lease, we book the difference in value.

When you put a new engine on an aircraft and you take an old engine off, there's generally an increase in the value from the new engine going in. That gets amortized under the rules, the lease accounting rules as a lease incentive. And so that shows up as -- it's a contra revenue, actually, so it reduces your lease revenue, strangely.

But those -- that's why you see it going down. It's a noncash item, too. So it's even more confusing from that point of view..

[Operator Instructions]. Our next question comes from the line of Giuliano Bologna with Compass Point..

Congratulations on a great quarter..

Thanks..

One thing I'm curious about -- asking about is, you obviously mentioned that you're including $15 million to $20 million of PMA contribution in the products outlook. So there's obviously some great confidence about being able to receive approval for PMA in the near term.

What I was curious about asking kind of with that being said is, do you think the PMA approval timeline could be slowed down at all by the issues the FAA is dealing with? At the moment, there's [indiscernible] turbofan issues, [indiscernible] parts, government shutdown concerns.

I'm just curious how you think about that and how you're thinking about the impact of PMA approval timeline?.

Sure. So yes, we've had a very good progress on the parts that are in the works and a very good dialogue. So we haven't seen anything significant on that front. But recognizing that the FAA does have a lot on its plate, probably never more -- more than ever in history, and they now have an administrator. So that's a good thing, and they've added people.

So we see it moving ahead, but it is inherently very difficult to be precise about when you expect things to actually be resolved..

Got it. That's very helpful. And then one more on a topic that kind of came up earlier, but there's obviously a lot of tightening in MRO capacity across the industry.

And I'm curious how you think about that impacting your business and how long that could -- that trend could continue?.

Yes, it's good for us because our pitch to airlines is we can save you time and save you money on maintenance events. And the longer the time you'd have to spend by sending an engine into an MRO, the more savings we provide.

So -- and I think the GTF issue, there's some -- basically, every GTF engine is going to have to go through a shop visit in the next couple of years on an accelerated basis. So that's going to push out what was potentially available capacity is going to be used up by the GTF.

So the market is definitely very -- getting tight and going to get tighter, and that's very good for us because we're essentially just pre-building modules to supply people in a short period of time and have them avoid or skip the agony of a shop visit..

[Operator Instructions]. Our next question comes from the line of Hillary Cacanando with Deutsche Bank..

Congratulations on the great quarter. Just a quick question on the 2024 guidance.

I was wondering if you can also provide how many modules you're expecting to sell? If you kind of -- maybe you could give us some guidance on that as well? And then on the USM side, could you tell us like how much of the EBITDA was attributed to USM for the third quarter? And then for 2024, if you could talk about like how many engines you expect to part out during the year from the USM?.

Okay. I'll take two, and I'll give one to Angela. I think we expect to part out -- I think this year, we're parting out of roughly 40 engines and next year, we're expecting it to go to 50. And we essentially make approximately $1 million per engine from that activity.

On the number of modules next year that we're -- our assumption is in the neighborhood of 200 modules for next year. But there's a wide range on that and there's different mix. So I wouldn't -- that's not terribly precise. But that's sort of order of magnitude where we are.

What was this year -- what would we think this year will be, a 100?.

Yes. 100..

130..

130 this year. So that's sort of the order of magnitude of growth on that.

And then USM, Angela?.

USM for fourth quarter?.

Q3..

Q3. It's about 25% of our aerospace EBITDA from USM..

No, for the third quarter of this year..

Third quarter of this year. Yes, 25% of our EBITDA..

Okay, 25%. So roughly $10 million this quarter..

Okay. Got it. That's really helpful. And then I just have 1 more follow-up question.

So it looks like you sold fewer engines in the third quarter, 8 engines versus 17 engines last quarter and just given the strong environment, just strong demand for engines, I was just wondering why you sold fewer than last quarter? Was that deliberate or just timing?.

We have been selling mostly the non-CFM56 or non-V2500 engines. So those engine sales, we've been signing up in the last few quarters have been a lot of Pratt 4000s, CF6-80s, RB211s, which we now own fewer and fewer of those.

So that's why I think engine sales -- we're not interested in selling a lot of our CFM56 or V2500 assets today because we think they're still going up in value. And we would expect to hold those rather than monetize it. We could actually monetize them today at a very nice gain, but that would probably be short-lived.

I mean they're going to go up in value. So we're -- and that's one of the reasons why we've stepped down gain on sale for next year as we've repositioned our fleet to more CFM56 and increasingly now V2500. And we have fewer assets that we're looking to sell, and we also think they're all going up in value..

Okay.

So your strategy is more towards just leasing the engines rather than selling the CSM, right? You would rather lease them, rather than sell?.

Yes. On that basis, yes. We're also still -- we're effectively selling modules. So we're selling engines for engine shop visits and then rebuilding them. So -- but just outright selling an engine, we don't see that as a big activity..

[Operator Instructions]. Our next question comes from the line of Brian Mckenna with JMP Securities..

So it will be great just to get an update on where you are in the process around insurance claims related to the Russia and Ukraine war? And then is there any updated timeline around selling the ships portfolio? And can you just remind us how much liquidity both of these situations could bring in?.

Yes. I think a good number for the combined proceeds that we would expect to -- I think it's reasonable to get from both of those would be around $300 million. And I would break that out roughly half and half.

So on the insurance side, it's now turned into a negotiation with the airlines who wrongfully took our assets, but they're using Russian money like Aeroflot has done a couple of occasions already. We have 3 separate negotiations that are advancing to settle. So that would avoid the lengthy litigation that is the fallback strategy.

So we're hoping we can resolve 1 or 2 of those possibly fairly soon and the other one by, say, the middle of next year. On the ship side, we also have 2 assets, both of which are being marketed. The macro for that industry is really good. People are not building any new ships and there's very strong demand.

So I would also expect that we could monetize those ships, possibly the smaller one fairly soon, but by the middle of next year would be a reasonable target on that as well..

Helpful. And then just switching gears a little bit. So it's been a few quarters since you acquired QuickTurn. So can you just give us an update on how this acquisition is going so far and then where you are in the integration process? And then just more broadly on M&A.

In this environment, are you seeing any uptick in strategic opportunities that could accelerate the strategy or the growth of the company longer term?.

Yes. So QuickTurn is doing great. We have streamlined the activity focused mostly on engine tests and very light hospital shop visits and module swaps, which was the big driver of why we really were interested in that facility.

We did over 20 engine tests in September and what's our estimate for October?.

20..

About 20. So that's a pretty good run rate. And demand from industry partners, major airlines around the world is good. So we think that is playing out very nicely, and we'll continue to use that for delivering and exchanging modules. So we're very happy with that acquisition. On the broader topic of M&A, there are things happening in the industry.

It's obviously the industry, the aftermarket segment has got people's attention. It's performing very well in a market where not a lot of things are performing well. So that's sort of a bit of a rising sector. And we are seeing things that are being offered for sale. We're very focused on engines and engine maintenance.

So we're not going to get off of that track. But there are segments that have aspects that would be interesting to us that we're looking at. And I mentioned before, engine piece part repair is still a focus for us and we've made progress on that, but I still think that, that is an interesting segment for us to get bigger in..

Great. Congrats on another nice quarter..

Thanks..

[Operator Instructions]. Our next question comes from the line of Sherif Elmaghrabi with BTIG..

So first, you talked about having more core sales in Q3.

Could we see some lumpiness going forward as the mix shift between core and fan? Or is this kind of more of a hockey stick trajectory?.

I think it's moderate. I mean the mix is not going to shift dramatically because, again, you have -- an engine has 3 different modules, so you're going to ultimately move all of them at some point. So it's really just a quarter-to-quarter fluctuation not something that I would say would be that dramatic over a longer measurement period..

Okay.

And then given PMA is sounding more of a 2025 story, and I know you said it's hard to be precise, but can you remind us of the timeline between PMA approval and when we start seeing them show up in the modules? And where do we sit on that timeline for the 4 PMAs going through approval right now?.

So there -- as I said, good progress on all of them. We will -- as soon as those part numbers -- parts are approved, we will put them into our engines. And so they will be available almost immediately. Chromalloy begins production usually ahead of when they submit -- finally submit, so there's inventory available immediately.

What -- the longer lead time will be third-party sales or other airlines who have to go through an approval process and an engineering review and that varies airline to airline, which is why it's always difficult to predict how long that will take and what the ramp period is. But you're talking months, not years..

[Operator Instructions]. Our next question comes from the line of Frank Galanti with Stifel..

Great. I wanted to sort of dig in just sort of a true-up question. Earlier in your comments, you said this year, you expect 130 modules to be sold. That would be something like 10 modules in 4Q. I just want to sort of give an opportunity to correct that number if that number is indeed wrong.

But then on a bigger scale, you sort of -- in the prepared remarks, you mentioned that EBITDA kind of growing sequentially in order to see that, especially around next year, if there's only 200 modules sold, your margins are in the 50-plus percent range, which means a lot more cores.

How do you sort of think about the lumpiness and then the kind of sequential growth of cash flows out of modules sold?.

On the first question, you're right. The 130 is low, we should be in the 150 to 160 for the year total for modules -- for the year for modules. So that is correct. And the second question was margins. I mean we've been talking about blended margins of around 35% for Aerospace Products. the USM margins tend to be lower than module margins.

So it sort of blends out to a mid-30s is what we've been indicating, and there could be some variations. We've had quarters where it was in the 40s. We haven't had any low quarters yet, but we could. And so it's really hard to -- I think -- we're comfortable with the mid-30s range.

But actually, how it plays out each quarter is going to be -- we'll have to talk about it when it happens..

Sure. That's helpful. And switching over to sort of the lease income on the aviation side. You mentioned lease amortization is sort of eats into that lease income number. But looking quarter-over-quarter, that's only a $5 million increase in lease intangible amortization.

So if you back that in, you're only at $41 million, which is still a $7 million lease income for the quarter and that seems like too much relative to utilization increasing.

And really, the question is maybe if there's any comment on that? But then secondly, in the guide for '24, can you sort of break down what your assumptions are from a utilization perspective relative to a portfolio growth perspective?.

Yes. So we indicated that leasing for 2024 would be approximately $425 million, if you exclude gain on sale. And we have put -- we are seeing higher lease rates, and we have added quite a few engines on lease in Q3 and Q4, and we have some acquisitions we're making.

So when you put that together, if you take $100 million run rate currently, $425 million assumes, I think, modest growth going forward for 2024 for Leasing. And certainly, we're seeing a very strong market, which if it continues, it would provide, I think, some potential upside..

Okay. That's helpful. And one more, if I could.

On the PMA side, is there any possibility you can comment on if the engineering work is complete for the 4 modules graining to be approved?.

No, I wouldn't comment on specific parts at this point..

[Operator Instructions]. Our next question comes from the line of Brandon Oglenski with Barclays..

This is David Zazula on for Brandon. Congrats on the real growth in Aerospace Products this quarter. Joe, if I could ask kind of a broad one to start. You guys have done very well, it appeared to us anyway, on the cargo side during the last couple of years, and that market has been under at least a little bit more pressure from what we can tell.

Can you talk a little bit about your exposure there and how you're thinking about the cargo mix, what you're hearing from those type of customers right now?.

Yes. Our cargo exposure is de minimis. We decided, I think starting 18 months ago, to basically get out. It was a very, very strong market sort of driven by COVID and e-commerce, and we didn't see -- we saw a lot more downside than upside. And so we basically got out of the cargo market. I don't see an immediate rebound. So I wouldn't rush to go back in..

And then on the module side, it seems like you had an uptick in repeat customers.

I guess can you talk anything about the composition of those customers and what feedback you're getting there?.

Yes. We're getting great repeat. I mean every customer I think we've had sold a module to has come back for more. So we have a 100% success rate on repeat customers and we actually have a number of those customers who've given us orders for 2024 or indications, they've said, we want 8 fans or we want 6 LPTs or 5 cores next year.

So that helps us because we can position that and plan for the year ahead of time. And people have -- I mean, it really is -- it's an amazingly simple concept that really saves people time and money.

And so people once they do it, they're like, "Wow, I mean, why didn't we do this for years?" So it's -- we haven't -- I don't think we've had a single negative comment from anybody on the customer side indicating they wouldn't do it -- they wouldn't use it more..

Great. And then for Angela, it looks like you drew down the revolver a little bit this quarter, and then Joe was talking about some kind of exciting opportunities down the pike.

Is there anything you can tell us about kind of the incremental capital policy or what you're thinking about at least as you stand right now?.

Yes. We do have some leads for some of the opportunities, the investment opportunities are very attractive right now. And we're looking at several debt financing alternatives of not a huge amount, but some amount. And it may be temporary given the $300 million of potential liquidity we get from the Russia assets and the ship sales.

So we're in good shape. It's really just potentially timing..

[Operator Instructions]. Our next question comes from the line of Ken Herbert with RBC Capital Markets..

Joe, maybe I wanted to see if I could ask a question on an earlier comment you made specifically around just tightness in the CFM56 or more broadly the narrowbody MRO network.

Are you starting to see that reflected yet in quotes for sort of extended turn times as we think about turnaround times on the CFM56, sort of where they are now and where they could go into the first part of the next year?.

Do you want to take that?.

Sure. So broadly speaking, we are starting to see a longer lead time on piece part repair. So one of the key drivers for our turn time on shop visit is going to be piece part repairs. And what we're seeing is a delay in that supply chain side of the business.

Our position on piece parts is we have a program where we're able to carry [indiscernible] material. As we've discussed, the engines that we're tearing down the 40 engines this year, a lot of those engines, we can teardown and use and mitigate a lot of those delays on turn times.

And that's also going to drive a lot of demand for modules because modules, in a way, are a replacement of doing a full shop visit. And you can do a lot of these shop visits outside of a traditional overhaul shop. So the delay in a way is very good for our module program, and we're mitigated through having piece part repairs in our teardown program.

But we are starting to see that delay creep up, and we're expecting that to continue to creep up as the new technology engines are going to take up more capacity in the OEM and MRO space..

Great. Helpful. And just one follow-up.

Are you expecting any incremental pushback from your airline customers on piece part pricing in 2024? As you sort of think about your ability and the demand for USM and maybe even new parts or PMA parts, how was the pricing dynamic playing out? And is that going to continue to be sort of a nice tailwind for the alternative material marketplace?.

It's a great tailwind. I mean the OEMs have taken significant price hikes. And as you -- I'm sure you're aware, it was low double digits in 2022 and that it was a sort of 9% to 10% price hike on parts that was implemented in August of this year, so it wasn't even a full year. So that's sort of the pricing umbrella that USM operates under.

And so to the extent the OEMs continue to raise prices like that, which I believe they will, we will benefit from that. And it also makes the whole engine worth a lot more as basically, the replacement value of that is it goes up with really in lockstep with the piece part prices..

I'm showing no further questions in the queue. I would now like to turn the call back over to Alan for closing remarks..

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

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..