Fortress Transportation and Infrastructure Investors LLC
NYSE:FTAI
Earnings Call Analysis
Q4-2023 Analysis
Fortress Transportation and Infrastructure Investors LLC
The company experienced a notable rise in lease rates, attributed to a shortage of CFM and V2500 engines in the market. The demand is expected to drive lease rates higher as the shortage persists. Aided by this economic tailwind, the company is also venturing into the V2500 engine space, expanding its MRO capabilities and expecting a notable addition of $25 million to EBITDA from this new line of business.
The company continues to innovate in its service offering by maintaining robust margins on its modules, averaging gains of about $500,000 per module. These high-margin opportunities arise from strategic purchases and a mix of services tailored to customer urgency and size. The management prides itself on providing flexible, cost-effective alternatives to traditional engine maintenance, greatly enhancing customer experience and invoking strong repeat business.
The company has identified strategies for capital allocation, emphasizing investments in more V2500 engines, expecting to increase ownership from 60 to 150-200 engines by year's end. In addition, strategic divestments include the sale of intervention vessels, including the Pioneer and the Pride, with the aim of recycling cash into the core portfolio and improving EBITDA by $6 million annually from the Pioneer's charter.
Prudent financial management is key to the company's strategy, as highlighted by the significant cash flow available after EBITDA adjustments and capital expenditures. The company is well-positioned, with $300 million-plus available for discretionary investments, stock buybacks, or dividends. It also plans to bolster its strong BB rating while seeking new business opportunities and leveraging its liquidity, which was reported to be around $400 million by year-end.
The company has not observed any significant seasonal trends in its business, which continues to scale, nor any signs of being impacted by regulatory changes at the FAA despite a new administrator coming in and shifts in focus due to the Boeing situation. This stability ensures the business can move forward with confidence in sustaining its growth trajectory.
Cost-saving opportunities arise from various avenues including the potential use of PMA for the V2500 engines and negotiated favorable terms, contributing to an improved cost structure for shop visits. The company claims it can potentially save $2.5 million on each engine restoration, reinforcing its competitive edge in the market.
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Good day, and welcome to the Q4 2023 FTAI Aviation Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.I'd now like to hand the call over to Alan Andreini, Investor Relations. You may begin.
Thank you, Michelle. I would like to welcome you all to the FTAI fourth quarter and full year 2023 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; Angela Nam, our Chief Financial Officer; and David Moreno, our Chief Operating Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also please note that this call is open to the public in listen-only mode and is being webcast.In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earning 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 annual 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 35th dividend as a public company and our 50th consecutive dividend since inception. The dividend of $0.30 per share will be paid on March 20 based on a shareholder record date of March 8.Now let's turn to the numbers. The key metric for us is adjusted EBITDA. We ended the year strongly with adjusted EBITDA of $162.3 million in Q4 2023, which is up just over 5% compared to $154.2 million in Q3 2023 and up 31% compared to $123.5 million in Q4 of 2022. During the fourth quarter, the $162.3 million EBITDA number was comprised of $121.8 million from our leasing segment, $54.6 million from our Aerospace Product segment and negative $14.1 million from Corporate and Other.Now let's look at all of 2023 versus all of 2022. Adjusted EBITDA was $597.3 million in 2023, up 40% versus $428.1 million in 2022. Turning now to leasing. Leasing had another good quarter, posting approximately $122 million of EBITDA. The pure leasing component of $122 million of EBITDA came in at $99 million for Q4 versus $102 million in Q3. Additionally, on the acquisition side, we acquired an attractive prices $229 million in new equipment comprised of 10 aircraft and 33 engines, which will contribute to further growth in future leasing EBITDA.We're very comfortable in producing approximately $425 million of leasing EBITDA for 2024, excluding projected gains on asset sales of approximately $50 million. Part of the $122 million in EBITDA for leasing came from gains on asset sales. We sold $33.5 million book value of assets at a 40% margin for a gain of $22.7 million in the quarter, benefiting from exceptionally strong demand globally for our portfolio of assets and we remain comfortable assuming gains on asset sales, continuing at approximately $12.5 million per quarter or $50 million for all of 2024.Aerospace Products had yet another excellent quarter with $54.6 million of EBITDA and an overall EBITDA margin of 34%. We sold 61 modules in Q4 to 17 unique customers comprised of 6 new customers and 11 repeat customers. We see tremendous potential in Aerospace Products and feel good about generating EBITDA for 2024 towards the middle or higher end of the $200 million to $250 million range.We continue to expect strong growth in Aerospace Products as customers experience the clear benefits of our MRE products and programs. We are both expanding the number of customers and the usage per customer at an accelerating pace. Additionally, we are very pleased with the introduction, acceptance of and demand for our second focus engine, the V2500. With this, we have the ability to become the leading full service aftermarket power provider for all 737NG and A320-NEO aircraft globally.Overall, looking ahead, we continue to expect our 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. Michelle, you may now open the call to questions and answers.
[Operator Instructions] Our first question comes from Kristine Liwag with Morgan Stanley.
Joe, on the leasing portion, we saw a sequential decline in revenue. Can you talk about what drove this slight step-down?
Yes. The biggest driver was we had 4 aircraft, A320s on lease to Bamboo [ Airlines ], which we terminated in the third quarter last year. So they were taken back. They were off leased for Q4 and they'll be off leased for Q1. That represents about $5 million per quarter of EBITDA. And the reason we did that is that the credit wasn't great and we had other opportunities to put those out on lease at higher rates in better terms. And so ultimately it's a very NPV positive for us, but it had a negative impact on revenues in EBITDA in Q4 and will also affect Q1 of 2024.
Joe, saying that you were able to release these assets at a higher monthly lease rate and better terms, can you talk about the overall environment that suggests that it seems like demand continues to outpace supply? So is there a general view when you've got assets up for re-lease? Like how much of a step up in the monthly lease rate are you seeing for those assets?
Well, it depends on when the lease was originally done, but in general lease rates for aircraft are up anywhere from 20% to 40%. So if the operator is either not a great operator or the operator isn't willing to pay market rates, then you move the assets. It's always more expensive to move than to keep it where it is. So you favor extensions over new leases. But in this case, we just didn't have confidence in the company, so we decided it was much better to move them.
Great. And if I could squeeze one last question. In the quarter, you were able to acquire 33 engines and 10 aircrafts. Can you talk about the availability of assets in the market? I guess to some degree you guys are very unique because you're the asset owner and you also have an MRO capability. Does this give you an edge in being able to buy assets that maybe other just pure leasing as assets or operators may not be interested in?
Yes, absolutely. We, particularly on the engine side, if an engine is tagged unserviceable, there're very, very few buyers for that engine other than pure part out companies, which typically pay very low prices. And so we are uniquely positioned because we can take an engine that's tagged unserviceable and repair it. And it could be the best situation is that it's unserviceable because of only one module, in which case we get the other 2 modules at a discount when it's really not, they shouldn't be trading at a discount, but they do because it's coupled with an unserviceable module.So we can buy anything. And so when people put up packages and some buyers like to nitpick and they'll say, I want that one, I want that one, but I don't want that one. The sellers, like, I don't want to deal with that. I want one buyer. And so we're able to acquire, I think much more effectively than other people for that reason. There's nothing we can't digest.
Our next question comes from Josh Sullivan with The Benchmark Company.
So I just wanted to get some color on the market response for lease rents after the FA put in the production cap on the max earlier this year. And I guess maybe it would be helpful to also understand just how lease rents have walked from pre-COVID levels to today.
Sure. David Moreno will take that.
So lease rates typically are $60,000 plus maintenance reserves. During COVID, there were special arrangements made let's say powered by the hour or rates that were $45,000 to $50,000 plus maintenance reserves. Those days are now long gone. Today...
That's for one CFM56 engine.
Yes. That's per engine. Yes. Today, those days are long gone. Lease rates are up $75,000 plus maintenance reserves. And those continue to rise as there's a shortage of CFM and V2500s today in the market.
And the cap, as you mentioned, the cap on the max production means that people are going to keep their NGs and COs longer because they can't meet their growth projections with the new aircraft. So that cap is likely to extend the imbalance between supply and demand for at least a couple of years.
And then secondly, I know you've talked about the parts business averaging around 35% EBITDA margins, obviously $50 million-plus is a good result this quarter in EBITDA, but what are the moving parts around maybe EBITDA per module?
So it's a function of mix of certain modules, we have higher margins on particularly the core. It'll be a function on the size of the customer and it'll be a function on the timing and the urgency which they need the module. So it sort of all goes into the mix on a quarterly basis. And we've been averaging about $500,000 per module in each of the quarters.We've had a couple of times where we've had some positive surprises because another reason is we often can buy things really cheaply, as I mentioned we buy a package of engines, we might end up with a very low basis and a module that produces an outsize gain for that reason. But I would say that the $500,000 has been pretty steady over the last couple of years and is a good assumption going forward until we have more P&A.
Our next question comes from Myles Walton with Wolfe Research.
Joe, could you talk about the V2500 MRO program, where it's being worked, how big could the contribution be? And then in respect to your comment that you, to your vision for FTAI to be the leading full service aftermarket power provider globally for the NG and the CFM and the 56 and the V2500 engine, can you just give us a picture of what does that mean in terms of quantum, who is the leader today?
Sure. So maybe a bit of history. I mean, we have owned the V2500 for several years. So it's not that we just discovered, we've had about 50 to 60 engines in the portfolio for a while. Starting about 6 months ago, we got particularly interested in it with the GTF powder metal issue coming on the scene, it was obvious that many of those V2500 operators who had thought they would be phasing those engines out over the next 3 to 4 years, we're going to end up keeping them much, much longer.And that's the main driver what piqued our interest in that engine. So about 6 months ago we started hiring people, building up our engineering talent, expertise, talking to MRO partners, lining up assets to buy. And it's been very, very successful. It's fallen in place probably a lot better than I would have ever expected.As the demand for shop is extremely high and a lot of operators either don't have the capital or the ability to shop those engines today, so there's a tremendous opportunity for us to step in and do that. We have today about 15 engines in maintenance shops. We're using 2 different shops right now. There's multiple providers that we've discussed and we're sort of -- it's a bit of a test drive right now where we've got some very attractive short-term deals.And ultimately we will select probably a long-term partner on the MRO side or 2 to work with over the next few years. But we haven't done that fully. We also are very close on a large fleet deal where we would take over the management of engines on over 30 aircraft for an airline V2500s and we would then be responsible for engine exchanges. So as we have used the term MRE, we maintain, repair and then exchange.So when an engine is run out and needs a shop visit, the airline gives that back to us and we give them an engine that's been through a performance restoration, has hours and cycles that they need to keep flying. So that we're fairly close on, I expect in the next few weeks. And we have a couple of other deals like that. So the prospects are it's pretty exciting and it does sort of give us a complete offering for anybody that operates a 737NG or an A320CO.We can provide CFM56 or V2500 power and that really is our mission is to provide to airlines flexibility and the power they need. So we always have an engine available if they need it and if they have too many, they give it back to us without a fight over return compensation. So that's very compelling for a lot of airlines. And then we provide them immediate and tangible cost savings because they don't have to manage a shop visit, they don't have to have an engineering department. They don't have to go provision spares and they don't have to find out that the shop visit they thought was going to cost $1 million cost $4 million.So there's a growing recognition that that is an easy thing for airlines to buy into, is we can save them time and money and provide them great flexibility, as we say to them, what don't you like about that? Which part of it is unpalatable? And there isn't a part that's unpalatable. So it's a great sell and that's what we're shooting for as our reason for being as a company is to provide that leading provider of aftermarket power to the global industry for those aircraft.In terms of contribution next year, I mean, I think the V2500 should add $25 million of EBITDA easily with some upside. So we're still early on and as I mentioned, we've got a couple of large deals that could swing it one way or another, but it's off and running and then -- and I think very well received and great timing because of the need for that engine.
Our next question comes from Giuliano Bologna with Compass Point.
Congratulations on the great quarter. For my first question, I'm curious why you think you're seeing accelerated acceptance in the aerospace area?
Well, I think people that have used it have experienced the fact that they've saved time and money and they have a great amount of flexibility and they often come back afterwards and say, I wish I had known about this before. I mean, why wouldn't I want to do this? And so that once people experience the ease with which they can avoid a shop visit which is usually very painful for people. No one I've talked to in the airline industry ever has told me after a shop visit, that was a great experience.So they all have scars and I think what we provide is the easy button and it's caught on. And then word of mouth also helps because once one airline does it and they go to conferences and they have people in their engineering departments and other airlines, they tell them, you should look at this and it worked really well. All of that just keeps building the momentum.
That's great. And then inevitable question. Can you give us an update on the PMA initiatives and program?
Sure. So great progress continues. We're very happy with the development of what we've seen in the test results, which actually speaks to the performance of those underlying parts when they're in operation, which is critical and very important. So all good on that.Obviously on the timing side, the FA runs a very rigorous process. It's been an extremely successful program for them, TMA. They've never had any safety issues, but they are extremely careful and thorough. So it's inherently very difficult to predict when the actual completion of those approval processes are received. But we're very excited. We definitely are a 100% sure it's worth the wait.
That's very helpful. And then one last one. Are you still seeing discounts for off-lease assets? It looks like you bought a lot of off-lease assets in the fourth quarter.
Yes. As I mentioned, if you have an asset that needs maintenance, you immediately -- if it's off-lease and it needs maintenance, you've narrowed the field of buyers down to like a handful of people. And so that dynamic has not yet changed and I'm not sure it will. I think people are still, most of the people we see in the marketplace with capital to invest are looking for assets that are on lease that don't need maintenance. So that's really where we -- and as I said, we can fix anything and we relish fixing things because that's how you add value.
Our next question comes from Frank Galanti with Stifel.
I wanted to talk about sort of FTAI Aviation's competitive positioning in the module swap business. So first on the V2500, do you see not having PMA, a first-party PMA, if you sort of talk about that dynamic relative to the CFM56? And then from a broader perspective, it's my understanding that you can get modular swaps from other people, other MROs, other airlines with MROs to do module swaps and that this is sort of not a new function.And so from my perspective, it feels like PMA is the sort of competitive advantage here. And I don't see that or the modularity on the V2500s relative to the CFM56. That's sort of my perception of it. Can you sort of talk about where I'm misunderstanding that or those dynamics?
Sure. Well, there's a couple of concepts in there that are mixed together, but there is PMA available for the V2500. So that's an option for us to be able to utilize PMA. We don't have the same arrangement where we develop the PMA, so we would be more of a consumer on a commercial basis with the manufacturers if we decided to use that.So that's an opportunity for cost savings on the V2500. There are other opportunities such as used serviceable material and we have a good line of sight to be able to utilize. There are some repairs that we have are working on and our engineering team is working on. Our favorable agreements that we've struck with some of the maintenance shops. And so when you add it all up, it's not the same playbook exactly as the CFM56, but it's the same process of going through the cost of shop visit and figuring out where you can take out costs and where you can do things smarter and better.We think we can perform a full restoration of a V2500, which today has a full list price of about $10 million. We think we can do that for $7.5 million. So it's roughly about a $2.5 million savings available for to be either for us or for our customers or for both of us. If you compare that on the CFM56 to savings with full PMA availability on our favorable terms, a shop visit today is roughly about $6.8 million and we think we can bring that in a little, about $3.25 million or so.So it's dollar amount-wise CFM is better and it's percentage-wise better, but V2500 is still good. The second question was about module availability and there are -- you can find modules on an ad hoc basis from an MRO. We actually buy some, we buy modules from MROs and they buy from us. And because you don't always have the module, you're looking for an inventory and so that is one of the competitive advantages of our module factory is we have in our fleet over 400 CFM engines, that's 1,200 modules.There's no one that has anywhere near that availability that I'm aware of. So inventory is odd modules in a repaired state is a competitive advantage and I say repaired state because we do repair them and we restore them and if they're not repaired, then they're pretty worthless from an airline's point of view. So it's a package.It's all of those things above. And when we say, people say, what are you? And we say, well, we're an MRE. We maintain, repair and exchange which is very different than anybody else in the industry. And then we combine that with the ability to provide power. We have the ability to deliver what I think is our ultimate competitive advantage, which is flexibility and cost savings. That's our pitch.
Okay. That's helpful. Sort of thinking about the customer experience then a little further on the module side. In the last, I guess in 4Q '22, the deck had said that you guys had sold over a 100 modules to 26 customers. And based on this release, it said 178 modules to 30 customers. And if you sort of go through the press releases and look at each sort of quarter, you said, hey, there are new customers, there are 5 or 2 or 6 in this quarter.You sort of add those up in '26, you get to 40. So is that -- so from my understanding then there were 30 customers, 26 customers in 2022, 30 customers in '23, but that sort of leaves 10 customers that didn't come back in '23. Is that the right way to think about those numbers? And can you sort of talk about from their perspective why that would be if you sort of saw that customers going away in a year?
No, I don't think the numbers are exactly right, but there are times where a customer to be a repeat customer has to have a need. So not every customer is a repeat customer every quarter. So in other words, if you don't have a shop visit, you don't need a module.So it's a timing issue. I think what we've said is we have a very, very high level of repeat customer business. But sometimes you might have a customer that goes out of business, so you can't have a 100% repeat customer in every quarter. It just doesn't happen that way. You have to have the need, but it's been very, very high. The customers that have had used our modules have always said that was a great experience and I would like to do that again and they will do it again when they have a need.
Our next question comes from Brian McKenna with Citizens JMP.
So it was great to see another very strong quarter within Aerospace Products. So within the $55 million of adjusted EBITDA in the fourth quarter, was there any year-end seasonality or any one-off benefits? Or is it really just continued strength across the business given just increasing levels of demand for the products and services? And I'm just trying to get a sense of a good jumping off point for the segment to start 2024.
Yes, I think we've mentioned to people there was a one-time $5 million write up in the value of QuickTurn.
That's right. So we made an initial investment in QuickTurn in January and then consolidated and bought the remaining interest in December. But accounting requires you to revalue your initial investment to fair value at the time of consolidation. So that resulted in a one-time, noncash accounting gain of about $5 million.
And I don't think we experienced any seasonality in the fourth quarter. And I don't think we have enough history and market penetration actually to see what seasonality effects there will be on that business yet. It's still growing too fast.
Yes. Got it. Okay. Great. And then just broadly, the business clearly is reaching new levels of scale every quarter here and so if I look out over the next couple of years, cash flow is really going to take another stair step higher. So how should we think about the CapEx needs of the business over time, the absolute level of cash needed for investment back into the business? And again, I'm just trying to get a sense of how you're thinking about the timing of maybe generating some excess cash flow and then what some of the uses of that excess liquidity will be?
Sure. So from a cash flow availability, we think about it as if you start with EBITDA and you strip out gain on sale and then you deduct maintenance CapEx for the engines, which is what you would need to do to keep the engines flying in repair condition, we think that number is about between $60 million and $80 million per annum. So that leaves $300 plus million available capital to do whatever we want with.So therefore, our priorities have been to manage to a strong double B rating. And we think we should achieve that. And we are there with 2 agencies already, but we want to be upgraded, so we want to maintain the strong coverages. Second is to do new deals and obviously we have a new engine now, the V2500, so we will be investing capital in more V2500s. Today, we own about 60.I would expect we will own probably 150 to 200 of those engines by the end of this year. So that's an opportunity for us to invest, but it's discretionary. And then thirdly, when we generate cash, we would look to either stock buybacks or dividends for excess capital. So those are the priorities.I think this year is still a pretty active investing opportunity. So I think we'll see some really good deals, which I think would be accretive and generate very good results for shareholders. So we don't see a lack of investment opportunities at this point.
Our next question comes from David Zazula with Barclays.
First one is cash position a little bit stronger. Could you talk about the near-term kind of working capital needs and near-term working capital intensity, given that you're expanding the products business out, is that changing what you're thinking for working capital and needs of cash and the revolver capacity have in the near-term?
No. I mean, we had -- at year-end, we had $90 million of cash, $300 million undrawn on the revolver, so almost $400 million of available liquidity. I think we have $200 million of LOIs in the pipeline right now for deals. And so we're good. And also we'll generate some more cash by selling assets too throughout the year, so don't see any significant needs or issues at this point.
Great. And then with the FAA, you talked about TMA kind of broadly the process, but specifically with changes of the leadership of the FAA and then with the FAA having kind of new focus around Boeing and having to shift some resources there, do you see either of those events kind of impacting your PMA process over the near medium term?
I think that the main issues that the FAA had from our perspective were during COVID. There was just long turnaround times and they lost -- they had high turnover of personnel, some experienced personnel. So those problems have been addressed and have been largely fixed from what we see. So the other issues that you mentioned, a new administrator and the max have not had -- we have no sign that there's any impact from either of those. But the main thing was the staffing and the people coming into the office thing which has been addressed.
We have time for one last question and that question comes from Sherif Elmaghrabi with BTIG.
So I want to start with the well intervention vessels. It looks like both didn't work during the quarter. How are you thinking about these assets, especially given, well interventions going through a bit of an upcycle and that's cash that could be recycled into the portfolio?
Yes, you're correct. It was a bit of a headwind for us in the fourth quarter in that both vessels were off-hire. The Pioneer, the smaller vessel is now on hire. It started its charter in December, I think. And that should generate about $6 million a year in EBITDA.So that's -- and that's now on a 5-year charter. So it's in good shape and we're actively marketing that vessel for sale. The other vessel, the Pride, they had a breakdown, a maintenance event on the crane. It's still in repair until March and we expect that there's a charter in place for that to go on hire in April which is actually a pretty good charter. So you will see continuing headwinds in the first quarter and then hopefully both vessels will be on hire in the second quarter and onward and we hope to sell both vessels hopefully this year.
That's helpful. And then just on the 2025 notes coming due early next year, are you planning to pay that down and reduce leverage or could we see those refinanced sooner?
It was actually late next year, I think so.
October of next year.
Yes. So that -- we have a lot of time. We have over 18 months and we evaluate the market from time-to-time and think about those, but there's not a real important deadline yet. So we're monitoring it.
That concludes the question-and-answer session. I'd like to turn the call back over to Alan Andreini for any closing remarks.
Thank you, Michelle. And thank you all for participating in today's conference call. We look forward to updating you after Q1.
Thank you for your participation. This does conclude the program and you may now disconnect. Everyone, have a great day.