FTAI Aviation Ltd. (FTAI) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Sheila Kahyaoglu, the Jefferies Aerospace Defense and Airlines Equity Research Team. Thanks so much for being here for our last fireside chat of the day. We have Joe Adams from FTAI Aviation. Joe is going to start with a few minutes of prepared remarks, and then we'll get to Q&A.

Thanks very much, Sheila. Appreciate being here once again. It's a great conference, and it's a great way to kick off the fall season with a lot of energy. Just as a recap, FTAI Aviation is company's mission is to be the largest aftermarket engine power provider in the industry, commercial aviation for today, 2 of the most popular and widely used engines in the industry, which is the V2500 and the CFM56 engine. And we've designed our business to be a full-service provider to owners and airlines in that we prebuild engines and do the maintenance work on engines that we own so that the airline or the lessor doesn't have to do engine maintenance, which is an increasingly complex and difficult part of the engine once that engine is off of its original power-by-the-hour program from the OEM or in the "aftermarket." And so what we do is -- our business is we go acquire run-out engines. We rebuild them in 3 maintenance shops that we own. And then we go to market to offer those as finished products to the owner, and we offer them either for sale, for exchange or for lease. And so when we go to the customer and say we can save you time and money because you never have to do the engine maintenance work yourself. You don't have to have a team of engineers. You don't have to have spare engines. You don't have to ship it around the world or send your team to live out of a hotel in Germany while that's being done. All those costs go away. You have no risk of negative surprise on that engine event costing a lot more than you expected and we'll provide you a great deal of flexibility. If you want an engine for 6 months or 6 years on a lease, we'll provide that, too, and we'll always have a spare engine available for you. So our business model is built around us being the biggest, the best and most efficient provider of that power to the industry so they can outsource that activity to us. And so today, we have wide acceptance from the customer base. It was originally a challenge to get people to accept a different way of doing business. But once people try it and get used to not having a lot of those headaches or downside risk, we found that people love the product, and we have over 100 customers have used our aerospace products and growing out of the universe of probably about 600 total users. Our goal for the company is to achieve about a 25% market share. The industry spends on an annual basis for V2500 and CFM56 engine maintenance annually, about $22 billion a year. So our goal is to achieve a 25% market share. And today, we've increased that from last year, about 5% to about 9% this year. So we still have a lot of room to continue to grow. And as I said to people, a lot of the products that we've developed and have implemented are relatively new. Today, I was saying we celebrated our 1-year anniversary of owning Montreal, which feels like it was actually 5 years, but it was only a year ago. We bought it. It was 50 engine -- 50 modules a quarter of production. And today, it's 100 modules per quarter. We bought Rome -- the facility in Rome in the spring of this year. And we expect to produce 100 modules this year from that facility and 200 next year. So we're on a big ramp in terms of production because the customer acceptance is so high. So that's sort of an overview. And obviously, I know you're going to have a lot of questions.

I have a lot. So let's think about the CFM56 and V2500 overhaul market. If it's $20 billion, you said you've increased the share from 5% last year to 9%, over 100 customers. So how do you think about the incremental customers you brought on, how you convince them to try you out? And what are you seeing going forward?

Yes. So I remember a couple of years ago, when you were -- we were talking to you in the beginning, we said...

I think I called you Fortress Aviation back then.

I know. And Google still does. So can't figure out how to get rid of that. But the -- when we sat down and we created this thing called the module factory, and we discovered like other people that own that engine that, that engine is built in 3 different modules and you can swap them. And it's a brilliant design because each one of those modules gets delivered with a different number of hours and cycles on it. And so you can pick up a lot of efficiency by exchanging those modules. So we started this trademark this company called the module factory up in Montreal. And we started telling people we can do a fan swap and you can avoid putting that engine into a shop or we can do a low-pressure turbine swap. So we created that, and we had 50 customers the first year -- 25 customers the first year, and we were doing like 4 modules per customer and we were making $0.5 million per module. And we said, gee, that seems like very low numbers, let's set the bar higher. And we said, let's double the number of customers from 25 to 50. Let's try to increase the number of modules from 4 to 8 and double the profitability from $0.5 million to $1 million and 2 -- 3 time, 2 cubed is 8x. So 50 will grow to 400. And we've exceeded those numbers based on that early plan. And what our pitch has always been to people is avoid the shop visit, try it out, do an engine exchange do a module exchange. And if you don't like it, don't do another one and people -- obviously, they love it and they've come back and they've done a lot of repeat business. And the word of mouth gets easier to expand and get people to try it. We had success with a company called Lion Air in Southeast Asia, where they had a whole fleet of low-pressure turbines that we're going to time out. We said, do one, and they did in the field. They've videotaped. They've put out on Instagram and started selling it to other people, telling how great it was and we saved them millions and millions of dollars. So it's a lot of individual marketing, get the fleet plan, get people to try it and then use those real-life experiences to get referrals. And so today, a lot of times, we'll go into a customer and they'll say, give me referrals, tell me other airlines I can call. And so we give them 3 names and they call and they say, very good things about it. So it's a lot of different techniques to get people to change from the traditional way to sort of the new way, but they're working and they're working across the entire size from big carriers down to little carriers.

Just curious, how long does it take before they -- like Lion Air as an example, when they were flying that in the -- like test deal, does it take a week or a month before they give you additional opportunities?

Well, it was -- it took us probably 3 to 4 months to get them to do the first one. And then once the first one was done, they turn out and said, okay, we have 14 more we want to do next year. So it was literally that fast.

And do you think that the typical agreement is for 1 to 10 modules or engines as you bring on customers?

Usually, what happens is we'll get the next -- we try to get from the airline in the next 12 to 18 months of expected shop visits. So that we can start making proposals back on a specific engine specific serial number, a specific module back to them. And that's usually the way the dialogue gets going after the first one.

You have 3 facilities, Montreal, Rome and Miami. I've been to one, so I'm waiting for the other 2. They have capability, capacity for 600 engines or 1,800 modules per year. How do you think about the capacity filling up at those sites?

So this year, if you think about 1,800 modules, this year, our goal is to do about 750 modules in production across the 3 facilities. And then next year, roughly 1,000. So about a 33% growth rate. As I mentioned, Rome is the newest facility. We expect this year to go from 100 to 200. We expect to add probably about 150 to the Montreal production and about 50 from Miami. So the real -- they're all increasing and moving in the right direction. It takes 2 things to overhaul an engine, which is parts and people. Parts, we did a lot of investing in inventory starting about a year ago. And so we are very well supplied with inventory for parts to manage. And now it's really training and making new hires productive as soon as possible. And we should have an Investor Day in November up in Montreal, and we can showcase our training academy, some of the things we're doing with augmented reality to increase the speed by which people become productive and well trained. But we're doing a lot to do that because, obviously, this market, there's a lot of demand and the more we can produce, the more we can sell.

Some folks might not know this, but your margins are quite good, and a lot has been said about the sustainability of your margins this year. You're targeting 40-plus percent in '26 compared to 34% at the start of this year. Can you talk about the composition those margins and what drives further upside?

Yes. So we -- one of the key differences that we have is we own both the asset and the maintenance facility together. So we actually go buy assets and we buy maintenance facilities. And so therefore, everything we do in our own shops is an asset that we own. So when you break down the margins the way we think about it, there's probably a 15% margin that anybody in the industry would get paid for fixing something for someone else, more or less a service of if you're a mechanic and you fix somebody's car, you charge 15% markup. Then we make money by optimizing green time. And we have a very good slide in our deck that we laid out how we buy 3 different engines, and we do maintenance on those -- some of those engines, some of the modules and recombine them into 2 uniform build engines and a runout engine and we generate $6 million -- we invest $10 million and we generate $16 million of value. And that green time observation contributes another 15% to 20% margins. And then lastly, our part strategy has been very focused on how do we acquire parts, buy used life-limited parts, teardown engines that we own and recycle those parts back and then importantly, PMA. And that combination generates another 5 to 10 percentage points of margin that we keep because we own both the inventory and the facility. So when you add it all up, we started the business, we were generating about 35% margins. We see the potential to grow that to 50%, full potential.

So it used to be super easy to model the business out because we would take the modules sold times by the number of customers and come up with an EBITDA per module, which was around $500,000. Now it's closer to $750,000 last year, but you've had Aerospace Products EBITDA up more than 80% year-over-year. So how do we think about growing volumes, growing economics and how the 2 trend from here and the difference between modules produced and modules sold?

Yes. Right now, modules produced and sold are pretty close to the same number. And we started to focus people more on the production as opposed to the profitability for margins per sale for competitive reasons and also for customer reasons. So we think that proxy is a better way to gauge how much we can produce and how much we can grow our revenues. And as I said, I expect next year to increase the production of modules by about 3% year-over-year. So -- and then profitability that's reflective of -- as we obtain more benefit from the acquisition of Life Limited Parts and PMA importantly, we will see those margins increase, and we indicated next year to 40% or higher. So we'll start to see that be a material contributor in 2026 and to some extent, maybe in the fourth quarter this year. But that's how we kind of think about it. And then just directly growing the production volume will result in additional continuing growth.

Maybe just taking a step back, the EBITDA per module story from $500,000 to $750,000 last year to $800,000 this year is sort of what we're modeling. How do we think about what's driven that and where it could go?

So I think a lot of it is off of the doubling of production in the facilities where we've been doing the work and the acquisition of use of material that we've acquired and -- from used serviceable material and from the secondary market. And so we've become -- I always say this is very much a scale business that as you get bigger, you get better and you develop more ways of acquiring material, more ways of being efficient in the assembly and the building of those and then also in the acquisition of the Parts and the PMA and the optimization you can do with the modules across all those. So all of those are basically contributing to making us better and more efficient as we get bigger.

Let's talk about PMA because we just presented with how you and somebody accidentally took one their bushels. So they didn't realize how expensive PMA...

$50,000, right?

Yes, actually are...

I just saw a picture outside.

Your strategy is 5 PMA parts within your modules to say, $500,000 in total. The first 2 PMA parts have been approved. What would you say adoption is? Is it really showing up in the EBITDA per module number? And how do we think about the third turbine blade certification, which we estimate on our own estimates is about half that $500,000 savings.

Yes. So the way I would describe the total savings per shop visit instead of module is that the total savings with all 5 parts is over $2 million, $2.2 million, $2.4 million. And the first 2 parts are -- the next part that's coming is the most valuable part and most expensive part of the shop visit. And that's the one we expect in the next month or so, that is about 60% of the savings. So a lot of what the first 2 parts have been, we've been installing in our engines that we have in our lease pool and there's other airlines that are installing and flying in their fleets. But most of the participants in the industry have been waiting for this third part because that is a significant needle mover in terms of savings before they commit to sort of PMA'ing a hot section of an engine. So that will drive further expansion of the market, it will drive us to put those into engines that we put into SCI and then also engines that ultimately get sold into the third-party market following the performance data that will be available once those engines start flying a significant number of hours. So it will happen in a sort of a step function over the next few years, but a lot of the participants want to see how that next part is going to perform.

Before adopting the first 2 as well?

Yes.

Okay. What would you say adoption currently is?

Well, we put it into a significant percentage of our lease fleet. I don't think there's a material adoption across the rest of the industry. So I don't think it's a material number.

Can we talk about -- you produced 322 modules in the first half of the year, your full year guidance is 750, implying, I think, 30% sequential pickup in the second half. So how do you think about optimization of the playbook and what you've put across those sites?

Well, the biggest -- I mean, we didn't -- we had 29 modules produced in Rome in Q2, which wasn't in Q1 at all, and we're saying 100 for the year. So there's a pretty big material contraction from the Rome facility, which has been terrific and it's been a great addition to see that ramp up that quickly. And then obviously, we were, I think, 90 so modules in 70-something, 77, I think, in Q1 in Montreal and 92 in Q2. I might be off by a little bit, but ramping up probably closer to around 125 or so by the end of the year. So it's a steady -- it's a significant increase from beginning to end. So the run rate production is going to put us on a good trajectory to achieving the 1,000 that we are targeting for next year.

You talked earlier this year that you're seeing growing interest in full engine swaps versus individual. First off, why would anybody have done an individual module to begin with? And just talk about that trend a little bit more if you can.

Yes. So we do both. When a customer needs only to -- they have an engine that might be hitting limiters on the fan or the low-pressure turbine. The easiest thing to do is do a module swap on those modules, either fan or low-pressure turbine, and you can actually do those in the field. So you're going to totally avoid taking that engine inducting it for a shop visit. So most of the module swaps are done with fans or low-pressure turbines. Usually, when an airline has limiters on the core, then it's more complicated for an airline to have to take off their fan and their low-pressure turbine have us supply a new core and then reattach the fan and the LPT and run it through a test cell. So when people think about that, they say, "Oh, well, just give me a whole engine." So we put it together, we will then run it through the test cell and deliver the finished product because in the end, you need an engine that has run through a test cell before you can put that on wing. So it's really module by module is what drives that decision or customer preference. They could do it if they want. They can buy a core from us, but most people like not to. And so that's kind of the -- and if you think about a fan has 30,000 cycles when delivered new core 20,000 cycles and a low-pressure turbine 25,000 cycles. The core is going to hit the limiter more time -- more frequently than the fan of the LPT.

How do you think about the time for just a module versus a whole engine swap, how long it takes and the profitability profile for each?

So a fan -- or a fan, you can do in 1 to 2 days in the field, a low-pressure turbine you can do a week in the field. A core will be -- turnaround time on a core would be like 60, 80 days to rebuild it. But when you talk about the time to do it, what we're really doing is immediate engine swap. So if an airline says, I want to do an exchange, we'll say, well, okay, we'll deliver an engine to you in XYZ city, and then we'll buy back your runout engine and it's done immediately. So there's literally no downtime for that operator. And that's really the key of this product is it's an immediate -- there is no downtime. Whatever our turnaround time is in rebuilding it is irrelevant to the customer. Having said that, we're running probably 60 to 80 days to do a full performance restoration of a core.

And how do you think about the profit profile of each?

They're all good. I mean I think that you're going to see the profitability of each one is a good contributor. Obviously, the core has bigger dollars, it's more valued, but the margins -- their margins are similar.

Maybe if we could talk -- we all love the CFM56, but I think most folks don't even realize you have a V2500 partnership. So if you could talk about that.

Yes. So we had looked at -- we had owned these for many years. And then when the powder metal issue came out and grounded a lot of the geared turbofan engines. A lot of operators realize they were going to use and need the V2500 for much longer than they originally thought. They thought they'd be retiring sooner, but then they got a huge life expansion. So we got a lot of calls from airlines saying, we need these desperately. And so we decided at that point that was a perfect time to get into that market in a bigger way. And then we called -- we had our own network of maintenance shops that we use with Chromalloy's PMA. And then we also called Pratt and said we could also do full overhauls with you, but we need to make the math work. And so after a series of 6 months of back and forth, we had a proposal from Pratt that was very attractive. There's many things they can do on that engine that no one else can do, and they rebuild that engine to 20,000 cycles, upgrade the thrust, provide, in some cases, you can convert from a preselect to a select one, different things they can do that are very, very valuable. So we chose to put it in a large order with Pratt to do that. What we do is we go buy the runout engines. We acquire those. We send them to Pratt and they put them in the network, they rebuild them, and then we go back to market, as I said, with a sale exchange or lease option to the customer. So the biggest difference is they're putting all new parts in and they're managing the overall process instead of us doing it. But in the end, it's just math. If you can get the price that we wanted and which we did, then it's a great way for us to rebuild those engines.

So you're essentially a placement agent for those engines? And how does the margin profile differ?

I don't know if I'd call us a placement agent...

Okay. Sorry, I made it sound as a little simpler than it is.

We aggregate the engines and then we manage the rebuild and then go to market. I mean we've always said that the margins are not dilutive. However, we did point out that there was a customer in the first -- second quarter this year, where we did some significant material amount of the V2500 sales that was slightly dilutive to margins. But we're doing that in the context of looking for a bigger opportunity with that customer, which most probably would involve CFM56 engines.

Got it. Maybe if you could just refresh us on your 2026 targets, which you've kind of almost reached anyway. If you could talk about that a bit and how SCI factors into it?

Yes. So what we did say is that the targets that we put out there, we're going to revise upward, but we would do it at the end of the third quarter when we had better information on next year. So we raised the 2025 numbers, but we didn't adjust 2026 at this point. What we said about SCI is that we're -- our goal for the year was to acquire into that partnership, 250 aircraft, which is a private partnership that we set up at the end of last year. And those -- we were -- at the July 31, we had about 145 aircraft either committed or closed. So we're on track for our goal of investing and acquiring 250 for the year. And the process has gone quite well. We're very happy with the deals. We've been able to line up. And the expectation is that we will be, if not done very close to done on the 250 by the end of this year. And we've said is we want to -- we would like to do one of those every year. So if there's 2 things you need to do the next one, which is good results on the last one and an investment pipeline. So what we expect to see is by the fourth quarter this year, we will know how far we've gotten on investing, what we've got in front of us and what the results are from the current portfolio, at which point we -- based on today's results, expect that we will launch a second one for next year in 2026. It's not a sure thing because we're 3/4 of the way through, but we're on a very, very good track to be able to complete that and then launch another one.

Maybe if you could talk about just 20% of Aerospace Products will be sales into the SCI. So how that filters into the revenue and EBITDA recognition both within your Aerospace Products segment, but also leasing?

Yes. So the way SCI contracts with FTAI Aviation for all the engine maintenance events is that the partnership SCIs sells a runout engine to FTAI Aviation and FTAI Aviation sells a rebuilt engine to SCI on a formula basis, it's based on hours and cycles on that engine that's predetermined and contractual. When that happens, it's booked as any third-party sale would be with one exception in that because FTAI Aviation owns 20% of SCI, there will be a deferral of that 20% on that. You'll see it on the top line, but then you'll see a deferral of the EBITDA for that 20% of those sales. And you saw that in the last 2 quarters where it was deferred. So other than that, it's treated like any third-party customer. We did have, in the first half of this year, approximately about 20% of the sales from Aerospace Products into -- from Aerospace Products were to SCI, and we expected that to be a good estimate of what the future will be as we both grow Aerospace Products and grow SCI.

Can you talk about also on the cash flow statement, how SCI relieves impact of working capital usage for you?

Yes. So on the cash flow, we -- as part of the setup we took all of the aircraft that were on the FTAI Aviation balance sheet that fit the criteria for SCI and sold those 45 aircraft to SCI. And that generated roughly about $500 million of asset sale proceeds and some gains on sale. At the same time, we've also invested the 20% ownership which our estimate is if we -- total equity of SCI is about $1.2 billion and 20% of that is about $240 million. So we've taken roughly the $240 million of that, and we'll put it back into the equity of SCI. And so we've made the asset balance sheet of FTAI Aviation more asset-light and at the same time, had a net cash positive that. And we're continuing -- our goal has been over the years to make FTAI Aviation more capital -- less capital intensive, more asset light. And we see that as a first step of continuing that trend so that we grow the Aerospace Products business, we don't -- are not investing in sort of leasing assets on the balance sheet, and we generate a significant amount of free cash flow.

So leasing assets are down to [$375 million, I believe, from $420 million] at the end of 2024. How should we think about modeling the leasing segment going forward?

Yes. So the leasing, what we said is roughly assuming no further investment in other SCIs is basically not a growing business. So it's roughly $550 million of EBITDA. And what would change that is if we decide to do another SCI 2, then we would have another investment next year and then you can look at growing the leasing business going forward. But since we haven't made that decision yet, which I think will happen in the fourth quarter, I think at this point, we're assuming that the leasing business today is just a basically steady state.

And you've announced that financing Deutsche and ATLAS on the first equity tranche with OneIM. So as we think about Q4, we'll see debt come in first and then equity in '26?

Well, you won't actually see that on FTAI aviation balance sheet. It will show up as our equity investment will be the only thing you'll see. That debt is all nonrecourse in a private partnership. So you won't see that, but it is committed. And so that's part of what's used to acquire those 250 aircraft.

Can we talk about free cash flow in -- this was a big focus item in Q1, and you ensured that in Q2, it would be -- you raised it essentially proving investors wrong. So 2025 free cash was raised by $100 million to $750 million after $370 million in the first half. Can you talk about the puts and takes to this and how you think about that trending?

Yes. So there was -- growth in EBITDA is a big contributor. And as I mentioned, we have taken some assets and sold them into the SCI partnership and invested in the equity. And then we also bought some additional engines to replace some of the engines that we moved over with that. And so that's -- that's basically taken away what was -- in the past, we always had a lot of investment in leased assets that we added -- that we put together in co-mingled, which is, I think, what caused some of the confusion because we're running a leasing company, which is divesting as well as a manufacturing business, which is operating. So we've streamlined that and eliminated as much of the investing activity as possible. And as I said, our goal is to keep the leasing business sort of as a status quo, so we're not going to need to do any significant investing in that. So EBITDA should generate -- incremental EBITDA should generate significant amount of additional free cash flow going forward.

I think Angela must be one of the busiest CFOs at this conference because you acquired Pacific Aerodynamic, you have PMA JVs going, you have SCI, you've delevered. How do we think about what's next with the balance sheet and what you do from here?

Well, we're always trying to keep moving. And as I said, we keep widening the moat. And I think one of the things that SCI, to my mind, has also done is added another dimension and that we now have the potential to grow that and to become one of the largest owners of narrow-body assets in the industry and have all of that committed to FTAI Aviation, which is a significant increase in our sort of presence with both aviation maintenance in general as well as all the airline customers we deal with. So I think that's been a -- and if you think about how do you do what FTI does, now that there's another jump up in that we're going to be a significant manager -- asset manager as well. So -- we think of these things is how do they integrate, how they keep producing more. And so on that level, I think it's a huge strategic achievement and it's a big increase in our competitive advantage to be able to convert those immediately into long-term FTAI Aviation customers. And then on the other side, we look at -- we're always looking at the cost of a shop visit and how can you keep driving that down? How do you save more money and repairs has been something we've been talking about, as you know, for like 2 years. And we've started to see the results of that effort to either grow it organically or buy it. And I think there's still a lot of potential in the piece part repair business and repair of things that are connected to the engine that we've just started to -- really started to grow and explore. And the Pacific Aerodynamic is a great company, has a terrific technology. It's protected IP. They develop this on their own. And there's other parts of that engine, which we can take their knowledge and expand that to increase our own repair capability using their knowledge. So it just keeps -- it's sort of a virtuous circle. It keeps getting better and better.

Sounds good. Well, thank you so much, Joe. Thanks, everyone.

Thanks.