Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- FTAI Aviation Ltd (FTAI, Financial) announced its 37th dividend as a public company, marking its 52nd consecutive dividend since inception.
- Adjusted EBITDA for Q2 2024 was $213.9 million, up 30% from Q1 2024 and 40% from Q2 2023.
- Leasing segment posted approximately $125 million of EBITDA, with strong demand for assets and a robust summer travel season.
- Aerospace products segment achieved $91.2 million of EBITDA with an overall margin of 37%, showing tremendous growth.
- FTAI Aviation Ltd (FTAI) raised its 2024 EBITDA estimates for aerospace products from $250 million to $325-$350 million.
Negative Points
- Corporate and other segments posted a negative EBITDA of $2.3 million.
- The company faces challenges in the supply chain, which could impact material availability and turn times.
- There is uncertainty regarding the exact timing of PMA part approvals, which could affect future margins.
- The market for older equipment and engines is highly competitive, potentially impacting acquisition costs.
- FTAI Aviation Ltd (FTAI) needs to manage its debt levels carefully to maintain a strong BB rating and leverage ratio.
Q & A Highlights
Q: Good morning, Joe and Angela and David. Within aerospace products, you've historically mentioned that you target EBITDA margin of around 35%. The last couple of quarters that we've seen you surpassed that target. Could you talk about where you see margins going from here as you continue to grow and develop the business? Also, could you speak to how that margin path may differ between both the CFM56 and the V2500 engines? Thank you.
A: Great. Thanks for the question. Yes, we are seeing margins trending up. Our revenues are going up, and our expenses are either flat or down. The revenue side is really demand-based, where equipment is in short supply, and turn times at maintenance shops are getting longer. This puts a premium on having a pre-built engine or module available. At the same time, by controlling costs through our own facilities, we do that by controlling labor costs and increasing specialization. We are also getting smarter about using serviceable material. We expect margins to trend towards 40% and continue to grow as we gain more experience. Regarding Pratt & Whitney V2500, we see very good demand and good turnaround times, so we expect margins to be as good as or better than the CFM side.
Q: Hi team, this is Colin Koliyak on for Sheila. Very nice quarter here and first half really in aero products. Could you drill in on your comments about the Lockheed facility? How are you thinking about the margin opportunity within that facility as that deal's going to close in the second half?
A: We expect about $30 million of savings per annum once we close on the CFM56 overhaul operations, which should add three to four percentage points to the margins. We also expect efficiency improvements similar to what we saw when we took control of the Miami facility. Additionally, we plan to accelerate the development of the piece part repair business, which could generate an incremental $10 million to $15 million of EBITDA starting in 2025. We see continuous improvement opportunities and are optimistic about future growth.
Q: What is the turnaround time for an airline or lease or using the module factory versus the open market at this point?
A: The typical industry turn time is 120 to 180 days. Our turn time on modules is about 30 to 60 days to build a module, and executing a module swap takes anywhere from 5 to 25 days. We have capacity in Montreal and Miami, access to used serviceable material, and flexibility in mixing and matching modules. This positions us well to meet demand and offer faster turnaround times compared to traditional MRO.
Q: You had previously mentioned that savings this year from internalization would be about $30 million. Given that you're raising guidance, does that number change? And how should we think about that number for 2025 and beyond?
A: Yes, the savings will go up as we've increased our expectations for this year and for 2026. We initially indicated $30 million annually, but we now expect that number to grow to $40 million or $50 million in the next couple of years and potentially higher. We are confident that the savings will be better than what we expected a few months ago.
Q: What percentage of the global CFM56 operator universe are you currently working with? And how quickly is that expanding?
A: We now have 50 customers in our module factory, representing about one-sixth of the operator base. We are not yet getting 100% of people's business, but we are aspiring to. The total universe involves roughly 3,000 shop visits a year, translating to 9,000 modules. We are currently handling 400 to 500 modules, which is less than 10% of the market. We have the capacity to handle 1,350 modules, so we are well-positioned to grow. We haven't had any customers who used the product and didn't want to do it again, which is a positive indicator.
Q: How is the industry acceptance going for your first PMA part? And can you talk through what the second PMA part does have in the engine and timing for approval?
A: The timing for the second PMA part is shortly. The first part has been installed in 15 engines and is performing well with no issues. Industry acceptance is growing, and some airlines prefer to wait for more parts to be approved before adopting PMA. The supply chain availability also makes PMA an attractive option, as it provides an alternative when OEM parts are not available in a timely manner.
Q: How are you progressing on the sale of the well intervention vessels? Are there any recent transactions you can point to for valuation?
A: The market for well intervention vessels is improving. We have a handshake deal on both vessels, expected to close by the end of the year. The market has strengthened, and we originally estimated approximately $150 million for the vessels, which is in the expected range. The vessels are generating EBITDA and their values have increased.
Q: Could you provide an update on capital management priorities, especially regarding new investments, deleveraging, strategic M&A, and dividends or buybacks?
A: Our first priority is to achieve and maintain a strong BB rating, with debt to total EBITDA in the 3 to 3.5 times range. The second priority is investments, particularly in acquiring engines. We aim to increase our engine count significantly this year. After achieving our target, the focus will shift to shareholder returns, including dividends and stock buybacks.
Q: Given the business growth, how are you splitting your time between managing the two segments? Is there an opportunity to lean in on hiring to accelerate growth in aerospace products?
A: I spend 100% of my time on FTAI. We view our business as an integrated product offering outsourced engine maintenance. The leasing segment is an important part of this integrated product, providing flexibility to airlines. We aim to save airlines time and money while eliminating negative surprises. We don't see it as two separate businesses but as a cohesive offering.
Q: Could you decompose the $700 million of EBITDA in 2026? Is the PMA contribution the same, and is the remainder from better business elsewhere and the V2500?
A: The PMA and USM contributions are each about $50 million. We have added $100 million to $150 million for the V2500 program, and the rest comes from higher margins and more volume on CFM modules. We expect to increase margins even without PMA, but PMA will further enhance margins.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
